Golar LNG Limited on Friday reported a net income of $11.9 million and operating income of $1.9 million for the three months ended June 30, 2009 (the "second quarter"). Net income has been positively impacted by other financial items gain of $24.8 million largely relating to non-cash interest rate and equity swap valuation gains.
Operating income is decreased from the first quarter of 2009 (the "first quarter") mainly as a result of reduced revenue due to Golar Arctic and Ebisu being idle for virtually the entire quarter, offset to some extent by reduced operating expenses. Net income for the second quarter at $11.9 million is improved from the first quarter loss of $5.1 million largely as a result of other financial items gain of $24.8 million as noted above.
Results for the three months to June 30, 2009
Revenues in the second quarter were $46.8 million decreased from $52.5 million for the second quarter of 2008. Average utilization decreased to 69% in the second quarter of 2009 from 78% for the same quarter in 2008. Second quarter average daily time charter equivalent rates ("TCEs") in 2009 fell to $37,600 per day as compared to $39,900 per day for the second quarter of 2008. The Golar Spirit was on hire for the whole of the second quarter of 2009 but not for the second quarter of 2008 and the Khannur was drydocked in the second quarter of 2008 and there were no drydockings in the second quarter of 2009. However, these improvements in revenue in the second quarter of 2009 have been offset by the fact that; Golar Winter was not on hire for the second quarter of 2009, Golar Arctic was idle in 2009 but similar to Golar Winter on hire in 2008, the Golar Freeze completed its long-term charter at the end of May 2009 and a general decrease in earnings from vessels trading in the spot market in the second quarter of 2009 as compared to the second quarter of 2008.
Voyage expenses increased marginally from $10.4 million in the second quarter of 2008 to $11.3 million for the second quarter. Vessel operating expenses were lower at $14.0 million for the second quarter in 2009 as compared to $15.8 million for the second quarter of 2008 whilst administrative expenses for the second quarter in 2009 remained in line with the same quarter in the prior year at $4.5 million.
Net interest expense of $11.5 million for the quarter to June 30, 2009 is down from $12.8 million for the second quarter of 2008. The decrease is as a result of the reduction of interest rates in respect of floating rate debt not swapped to a fixed rate and due to slightly lower levels of debt.
Other financial items show a considerable gain in the second quarter of 2009 of $24.8 as opposed to $19.5 million for the same period in 2008. The increase is mainly attributable to increased gains in respect of mark-to-market gains on equity swaps, some of which were not in place for the second quarter of 2008. In addition gains in respect of foreign currency retranslations and mark-to-market gains on foreign currency forward contracts were increased partly offset by reduced interest rate swap mark-to-market gains.
Results for the six months to June 30, 2009
Golar reports net income of $6.8 million and operating income of $8.6 million for the six months ended June 30, 2009.
Revenues in the first six months were $100.7 million as compared to $111.2 million for the first six months of 2008. The average daily time charter equivalent rates ("TCEs") also declined to $41,274 per day for the first six months of 2009 from $46,550 per day for the similar period in 2008 with the average utilization of 74% and 85% respectively.
Voyage expenses increased to $22.7 million for the first six months of 2009 from $11.9 million for the first six months of 2008, largely due to the charter in expense related to Golar Frost and Ebisu. Ebisu was chartered in September 2008 and Golar Frost was sold and chartered back in July 2008.
Vessel operating expenses at $30.0 million for the first six months have decreased from $31.3 million for the same period in 2008. Administrative expenses were slightly less at $8.7 million as compared to $8.9 million for the first half of 2008.
Net interest expense for the first six months was $21.9 million down from $27.3 million for the first six months of 2008 quarter as a result of lower Libor interest rate in respect of floating rate debt.
Other financial items were a gain of $26.7 million in the first six months of 2009 as compared to a loss of $1.95 million for the same period of 2008. The gain resulted primarily from the non-cash gain on interest rate swap valuations.
Financing, corporate and other matters
In June 2009, the Company entered into a revolving credit facility with World Shipholding, the Company's major shareholder, to provide short-term bridge financing, please refer to note 3 for further information.
Consistent with the announcement made in Golar's first quarter report the Company recently announced that it had incorporated Golar LNG Energy Limited ("Energy") in Bermuda for the purpose of transferring the part of its asset portfolio not employed on long term charters. The transfer included the following assets and activities:
- the ownership of 4 modern LNG carriers ("Gracilis", "Grandis", "Granosa" and "Golar Arctic")
- the ownership of 3 1970's built LNG carriers ("Khannur", "Gimi" and "Hilli")
- a 50 % ownership interest in another 1970's build LNG carrier ("Gandria")
- a 13,6 % ownership interest in the Australian listed company LNG Ltd.
- Golar's current project portfolio
- certain financial obligations, notably swap arrangements.
In addition, Energy has acquired the subsidiary owning the 1970 built LNG carrier "Golar Freeze" which is scheduled to be converted to an FSRU vessel. The purchase of the "Golar Freeze" was financed by way of a seller's credit. Golar has been granted an option to reacquire "Golar Freeze" from Energy when its conversion to FSRU vessel is completed. Energy will have an identical option to sell "Golar Freeze" to Golar. The price to be paid by Golar in this transaction shall equal the aggregate of the seller's credit and the conversion cost of the vessel.
Subsequent to the restructure Golar was pleased to announce that Energy had completed an equity offering. A total of 55 million shares (USD 110 million) were issued mainly to International and Norwegian institutional investors. Attached to the offering is a 'green shoe' option. The managers were therefore granted an over allotment option, exercisable for 30 days for an additional 5 million shares (USD 10 million). Energy shares are currently trading on the Oslo OTC market, but the process to move to a full listing on the Oslo Stock Exchange is well underway.
The underlying rationale for the restructuring was to create an aggressive, well funded high growth, mid stream LNG Company with a focus on regasification projects, liquefaction and transport and trading of LNG.
The remaining Golar LNG business will have a low risk profile with a focus on long term charters. Golar will have a fleet of 5 LNG carriers (including "Golar Freeze") and a controlling interest in Energy.
When Golar Freeze commences its charter in Q2 2010, assuming Golar effects its option to reacquire Golar Freeze, the Company will have five vessels ("LNGC's" and "FSRU's") on long term charter agreements at attractive rates. The total contract value of these charters is approximately $1.9 billion and the five vessels will, when Golar Freeze commences its charter in 2010 have an EBITDA of approximately $155 million per annum.
Based on current debt amortization plus an assumed increase in debt associated with Golar Freeze to a level of approximately $125 million together with assumed rates of interest, the five ships will generate approximately $75 million per annum in free cash after debt service and net of minority interests once the Golar Freeze is on hire, which is expected to be in the second quarter of 2010.
It is the Company's intention to distribute the significant majority of its cash generation to shareholders by way of dividend. As noted above when Golar Freeze commences its charter in the second quarter of 2010, the five vessels will generate approximately $75 million in free cash flow after debt service. In 2013 the debt in respect of Golar Mazo will be fully paid down and the increase in free cash flow will be approximately $15 million p.a. (after minority interests). The Company expects dividend payments to commence from no later than the second quarter of 2010. The commencement of dividend payments will however be dependant, in particular, upon raising the required debt financing in respect of the Golar Freeze. Golar intends, in addition, to distribute some of its shares in Energy as a special dividend to shareholders in second half of 2009.
Trading performance of the Company's vessels operating in the spot/short term market weakened over the quarter as was expected. Rates have been depressed due to a reduction in demand for LNG (especially in the Far East) and an oversupply of LNG Shipping tonnage due to project delays and LNG plant outages.
However, there are some demonstrable signs of improvement with a number of FOB cargoes soaking up spot market tonnage in the Atlantic basin, new LNG production ramping-up or coming to market over the next few months and increasing use of floating storage. This should ease the vessel over-supply, especially the growing disparity in demand for shipping between the East & West markets which has become evident over the last month or two. With an already limited amount of tradable tonnage in the West any vessels employed to load Atlantic Basin cargoes will change the scenery of the market and should provide (along with Terminal compatibility issues and an increased need for economic and efficient vessels due to eroding commodity margins) an upward price push as we move into the Autumn and Winter period.
Indeed, two of the Company's vessels, Golar Arctic and Ebisu, have recently been fixed on short-term charters from mid-August after prolonged periods of idle time at rates above those seen in the second quarter.
The longer term LNG Shipping market is becoming interesting with Australian developments on both East and West coast leading the way and BG currently in the market for up to two vessels for between 2 and 8 years. Additionally there have been no orders so far this year for LNG tankers (and only six placed in 2008). Furthermore, only two tankers are scheduled for delivery in 2012 and there are indications are that some new supply projects are also considering employing existing tonnage rather than ordering new vessels.
Positive progress continues on Golar's strategy to be a world leader in floating regasification solutions and the recent restructuring of the Company and establishment of Golar LNG Energy creates the platform to grow this business. Golar LNG Energy places a high priority on securing additional floating regasification commitments.
Global market inquiry for new floating regasification projects remains strong, particularly in non-OECD countries. During 2Q09, Israel issued an Prequalification Document ("PQ") to be followed by an Invitation to Bid in 1Q10 for an offshore LNG Receiving Terminal. Additionally, market reports suggest Indonesia and Uruguay ITBs will follow in the coming months. In addition to formal tenders, Golar LNG Energy is developing numerous other projects directly with interested parties.
Golar LNG Energy is aggressively pursuing new business and is well positioned to deliver 'fast track' projects to market. With new liquefaction plants now coming on-stream against weaker short and mid-term pricing fundamentals, new developers should have a 'window of opportunity' to fast track their projects.
After departure from Keppel shipyard in Singapore Golar Winter collected a cargo of LNG in Trinidad en-route to Petrobras's Pecem Terminal, Brazil. Initial commissioning and testing commenced in Pecem before the vessel departed for Petrobras's Rio Terminal for a further period of testing. The vessel then left Rio and together with Golar Spirit has split load a full cargo brought to Pecem by another LNG carrier. Golar Winter is now returning to Rio to complete testing and commissioning in September. During the testing period some minor modification work has been required to the vessel and the vessel is expected to commence its long term charter agreement in September.
Detailed engineering for the Golar Freeze FSRU project is now well advanced and the site team are now being mobilized to supervise the vessel conversion process at Keppel Shipyard. Construction of the regas-skids is well underway, and Keppel have commenced prefabrication for the conversion. Golar Freeze will enter the shipyard early September and is scheduled to commence operations with the Dubai Supply Authority in the second quarter of 2010.
Good progress continues to be made on the Gladstone LNG project. In addition to the milestones reported in last quarter's report the Company is encouraged by positive results from technical reviews carried out by Foster Wheeler and SK Engineering of the technology to be used in the project; good progress on final FEED; acceptance of the membrane tank technology by the Queensland approving authorities and progress towards the selection of an LNG industry experienced/proven Project Management Consultant.
Golar has in parallel with the project development activity continued a dialogue with prospective LNG buyers. Discussions with the short listed buyers are progressing positively and the Company anticipates the satisfactory conclusion of an HOA in the fourth quarter.
PTTEP Floating LNG Projects
Golar recently announced that it had signed agreements to jointly enter into FEED ("Front End Engineering and Design") with PTTEP in relation to developing a floating LNG project offshore North Western Australia in respect of the Coogee Resources oil and gas fields recently acquired by PTTEP. Golar's agreement with PTTEP provides for an option for Golar to farm into the gas reserves held by PTTEP resulting from its acquisition of Coogee Resources on a 50:50 basis.
The FEED study will involve the complete scope of the project including the development of the upstream gas fields as well as the floating liquefaction unit ("FLNG unit"). Both new buildings and conversion of existing assets will be considered for the FLNG unit. The FEED studies have commenced and the next milestone will be the completion of the PRE FEED studies in the first half of 2010.
In addition to the Coogee project Golar and PTTEP are also looking at other potential FLNG opportunities.
The first half of 2009 has seen a significant amount of liquefaction plant outages. Although outages are a normal part of the commissioning process at new LNG trains, most of this year's closures have been unscheduled and extended.
Recent closures have been seen at Sakhalin-T2, Tangguh T1 and Qatargas-2 T4. Snohvit is also planning another three-month outage from mid-August at the end of which the plant will be operating at full capacity. North West Shelf and Atlantic LNG also plan maintenance this quarter. The security situation continues to hamper output from Nigeria and in Algeria exports have also been reduced due to feed-gas supply problems.
Nonetheless confidence remains high that these plants will resume capacity production in the near term and with new start-ups, further floating storage, new trade routes and diversions, which should all be positive for LNG Shipping and trading.
Additionally new start-ups continue to bring more product to the market with Sakhalin-2's 4.8 MTPA T2 now producing. The second 3.8 MTPA Tangguh train will begin operating in September and Yemen LNG's 3.35 MTPA Train 1 is undergoing commissioning. Further, Qatar's Rasgas Train 6 officially started production in mid August and another 15 MTPA from Qatargas-2 T 5 and RasGas T7 is also due on line by end-year.
Following the creation of Golar LNG Energy the mission of Golar LNG Limited's has been reduced to the following objectives:
- Operate its five vessels in a safe, professional and cost efficient way.
- Be an active shareholder and maximize the value of the Company's share holding in Golar LNG Energy
- Organize the Company's financing with the purpose of optimizing cash flow in order to be able to sustain the highest possible long-term dividend payment to shareholders.
Whilst the short-term LNG shipping sector has been depressed during the first half of 2009 there are discernable signs of improvement and the overall outlook for the LNG sector looks positive. Spot vessel earnings are expected to be somewhat improved in the third quarter. It is further anticipated that the utilization of the LNG fleet will improve over the next three to five year period. Increased LNG production, lower vessel supply growth and a focus on clean cheap energy will be the major contributors.
The results for Q3 will influenced by a termination of the Company's equity swap in respect of Arrow Energy realizing income of approximately $9 million, of which approximately $7.8 million will be booked as income in the third quarter of 2009.
The creation of Golar LNG Energy provides a platform for growth within the mid-stream of the LNG supply chain and Energy plans to aggressively pursue the development of its regasification and liquefaction projects as well as shipping and trading opportunities.
The creation of Energy has also paved the way for the transformation of Golar LNG Ltd, into a high paying dividend stock with significant growth opportunity linked to its investment as major shareholder in Golar LNG Energy.