GLNG - Golar LNG: Opportunities Of The FLNG Business

2023-04-19 06:49:35 ET

Summary

• During the past two years, Golar expanded its FLNG business and almost terminated its midstream and downstream operations.
• The strong LNG market, driven by tight supply and high demand from European countries is consistent with the company’s capital expenditures.
• In 2022, the company successfully managed the financial risks of the FLNG business through different financial derivatives.
• In 2023, Golar’s FLNG cash break-even is estimated to be $5/MMBtu, which is significantly lower than TTF forward prices.
• In 2023, the distributable adjusted EBITDA from FLNG Hilli is expected to be $335 million.

In the past two years, Golar LNG ( GLNG ) sold its LNG carriers and FSRUs (LNG storage ships) and ended its downstream operations. Now, Golar is known for its marine infrastructure that turns natural gas into LNG and vice versa. The company's FLNG Hilli has produced more than 5 million tons of LNF so far, and a large part of the company's cash generation ability and profitability is now dependent on its operations at FLNG Hilli. Also, the company's FLNG Gimi infrastructure is under construction and is expected to be completed soon. The LNG market is favorable and Golar can make huge profits in 2023 and 2024. The stock is a buy.

Financial results

As the company sold assets of a total combined enterprise value of $7 billion in the past two years, its financial results and revenue sources are now so much different. In its fourth quarter and full-year financial results, Golar LNG reported total operating revenues of $268 million, up 3% YoY, driven by higher vessel management fees and other revenues, almost offset by the lower time and voyage charter revenues, and decreased liquefication services revenues. GLNG's operating expenses increased from $158 million in 2021 to $249 million in 2022, driven by the impairment of long-term assets of $76 million in 2022. Despite almost flat operating revenues in 2022 compared with 2021, Golar LNG's higher total other operating income, caused its operating income to jump in 2022. Due to a realized and unrealized gain on oil and gas derivative instruments of $521 million in 2022 (compared with $206 million in 2021), the company's operating income increased from $307 million in 2021 to $5224 million in 2022.

Furthermore, as Golar's realized and unrealized mark-to-market losses (on investment in listed equity securities) of $296 million in 2021, changed into a mark-to-mark gain of $401 million in 2022, its total other non-operating losses of $361 million in 2021 turned into a total other non-operating income of $413 million in 2022. Thus, the company's net income attributable to shareholders increased by 90% YoY to $788 million. The company's adjusted EBITDA increased from $182 million in 2021 to $363 million in 2022.

Also, Golar's share of contractual debt dropped by 62% YoY to $843 million in 2022, as its total contractual debt (total debt, net of deferred finance charges) dropped from $2758 million in 2021 to $1362 million in 2022. The company's total cash increased from $321 million in 2021 to $991 million in 2022. It is worth noting that Golar's net income from continuing operations in 2022 was $1016 million, compared with a net loss from continuing operations of $65 million. In 2022, the company reported the disposal of the Disposal Group (eight TFDE LNG carriers, Cool Pool Limited, and Golar's shipping and FSRU management organization) to CoolCo. As a result, Golar's net income from discontinued operations of $625 million in 2021, turned into a net loss from discontinued operations of $76 million in 2022.

In 2022 Golar exited New Fortress Energy ( NFE ) investment, by selling 8.3 million shares in NFE for net proceeds of $418 million, and by agreeing to acquire NFE's interest in Golar Hilli LLC for its remaining 4.1 million NFE shares and $100 million in cash. On 15 March 2023, the company announced that the acquisition of the NFE stake in FLNG Hilli has closed. Moreover, in the fourth quarter of 2022, Golar LNG started exiting CoolCo investment by selling 8 million shares for net proceeds of $98 million. On 28 February 2022, Golar LNG sold a further 4.5 million shares, which are expected to raise net proceeds of $56 million.

"Golar's streamlined focus on FLNG positions the company to take advantage of the most profitable segment of the LNG value chain. The recently announced Hilli transaction, the upcoming commencement of the 20-year Gimi contract, and cash flows locked in through the TTF hedges secure strong growth in free cash flow from operations," the company explained. "The board and management are exploring alternatives to commence a dividend and/or a new share buyback program," the management announced.

LNG market and FLNG business

As a result of the war in Ukraine, and Russia reduced the export of its natural gas to the European Union, the imports of LNG into the European countries jumped. European countries are trying to move toward more reliable and secure energy sources. However, the truth is that this is not going to happen in just a few years. Thus, I expect the European Union's LNG demand in the next few years to remain relatively high. As a result, GLNG can benefit from the favorable LNG market condition that is supported by increased demand from European countries and tight supply. However, you should know that a wave of new KNG export capacity is expected to come online after 2025, which can hurt the cash generation ability of the company's FLNG operations.

In 2022, due to upstream technical issues, and FLNG Hilli maintenance, the LNG production of FLNG Hilli was 3.5% below the annual contracted production of 1.4 million tons. But, in the fourth quarter of 2022, the issues were resolved and now, the LNG production in FLNG Hilli is according to the plans. On 6 February 2023, Golar agreed to acquire NFE's interest in FLNG Hilli. According to TTF and Brent crude oil forward prices of $16.6/MMBtu and $81.3/bbl, respectively, Golar expects its adjusted EBITDA from FLNG Hilli to be $335 million in 2023. Figure 1 shows Dutch TTF natural gas front month futures. We can see that on 17 April, TTF natural gas settled price for May 2023 contract was $13.185/MMBtu, and TTF natural gas settled price for December 2023 contract was $18.7/MMBtu. Golar's FLNG business can deliver LNG below $5/MMBtu, which is significantly lower than the TTF natural gas futures. Figure 2 shows that in 2023 and 2024, Golar can take huge profits from its FLNG business, which makes the management able to expand the operations and reward the shareholders.

Furthermore, the FLNG Gimi which is on track for a 2Q 2023 sail away, is expected to increase Golar's annual adjusted EBITDA by $151 million. The expiry date for FLNG Hilli's current contract is 2Q 2026. Also, the expiry date for the FLNG Gimi chartering contract with BP ( BP ) which is expected to start operating soon, is 4Q 2043. FLNG Hilli has a capacity of 2.4 million tons per annum, and its current contracted output is 1.4 million tons per annum. FLNG Gimi has a capacity of 2.45 million tons per annum and is expected to produce at full capacity. Based on the demand for LNG and Golar's expanding FLNG business, the company can experience significant growth in the following years.

Figure 1 - Dutch TTF natural gas front month futures

Figure 2 - Golar's FLNG cash break-even

GLNG performance

To analyze Golar LNG's performance outlook, I investigated the company's free cash flow trend during the previous years. After an increase in the company's free cash flow in 2021 to $40.4 million from a negative amount of $(152) million in 2020, the free cash flow amount decreased back to $(49) million at the end of 2022. In 2022, their cash operation fell by 13% to $218 million versus $254 million in 2021, while capital expenditures increased by 25% and sat at $267 million as compared to $213 million at the end of 2021. As a result, Golar LNG's free cash flow dropped (see Figure 3).

Figure 3 - GLNG's cash structure (in millions)

Moreover, I investigated the leverage condition of Golar LNG. Leverage ratios are insightful to show how the company is financing its assets and business operations. In other words, does it use debt or equity financing for most of its operations? I used some common leverage ratios that have significant comparability to its debt. The ratios are calculated in comparison with previous years to be more helpful.

The net debt-to-assets ratio is one of the significant calculations that measure the company's debt capacity. This ratio indicates the proportion of assets that are being financed with debt. Thereby, the higher the ratio, the greater the degree of leverage and financial risks. The net debt-to-asset ratio of Golar LNG dropped considerably to 0.02x in 20222 compared with the previous level of 0.2x in 2021. Also, the company's net debt-to-EBITDA level dropped astonishingly to only 0.14x in 2022, while it was over 2.6x in 2021 and far higher in previous years. Net debt-to-EBITDA determines the probability of defaulting on debt. Finally, their asset-to-equity ratio was on a downward path in recent years and sat at 1.48x versus its previous amount of 2.27x in 2021. The decreasing assets-to-equity ratio indicates that the company uses lower debt to finance its assets. As a result, the leverage ratios of Golar LNG prospect the company's solvency and its ability to meet its current and future obligations (see Figure 4).

Figure 4 - GLNG's leverage ratio

Risks

Despite the strong LNG market outlook for at least a few years, and Golar's expanded FLNG operations that have made the company able to take further benefit from the market condition, some risks should be considered. In July 2022, the current customer of FLNG Hilli exercised its options to increase the annual capacity utilization of FLNG Hilli to 1.4 million tons per annum from January 20223 to July 2026. However, in 2022, due to upstream technical issues and maintenance works, FLNG Hilli had a production shortfall. Golar agreed to compensate for this shortfall by overproduction in the 2023 contract year. But, we cannot be sure of it, and with another year of a production shortfall, Golar's cash flow generation may hurt significantly, and the company may get into a situation to recognize considerable contract liabilities.

Also, as of 17 March 2023, the Gimi conversion project was technically 92.5% complete and was scheduled to sail away from the shipyard in 2023. However, there might be issues that can delay the conversion, which can hurt Golar's expected cash flow. Thus, FLNG Gimi may not meet its anticipated profitability. Also, significant delays to contracted deliveries can result in incremental costs to Golar LNG. Furthermore, Golar has a limited number of customers. Thus, a loss of any of them can hurt its financial results seriously. Also, Golar's concentrated customers may fail to make payments due to their financial instability, which can result in significant costs for its FLNG business. Besides, we know that Golar LNG manages its commodity and financial risks through derivative instruments. In 2022, Golar was able to take benefit from derivative instruments. However, the management may not be able to address the sudden changes in the commodities prices and the market condition and face various financial risks. It is important to know that in January 2023, the company effectively unwound its 2023 and 2024 TTF hedges. Thus, the company is now on full market exposure to its TTF-linked production.

Summary

GLNG's leverage condition improved considerably in 2022. Specifically, the company's net debt-to-EBITDA declined to 0.14x in 2022. GLNG's cash operation declined while the CapEx level increased. Thus, the company's free cash flow dropped to $(49) million in 2022. However, in 2023, I expect the company's free cash flow to be positive. The LNG market is favorable and based on its FLNG operations, the company's financial results in the next few years can improve in a significant way. The stock is a buy.

For further details see: