Description

Golar LNG (GLNG) has been written up 3x on VIC. A promotional chairman created unrealistic expectations in the past, but now I believe reality is catching up and continued share appreciation will occur as the market fully recognizes the FCF potential of the existing assets and new BP project starting up. Additionally, there’s optionality for new floating LNG (FLNG) projects and corporate actions (i.e. spin-off or sale of the LNG carrier business).

As the world transitions to renewables, LNG should become an increasing portion of the energy mix (3% in 2020 to 5% in 2030E), both as a bridge fuel and as a back-up to the intermittent nature of solar and wind power. This is evidenced by reduced renewable supply currently causing a pull on fossil fuels in Europe and elsewhere. Relative to diesel, residual fuel and low-sulphur coal, natural gas is lower in CO2, NOx, SOx and particulate matter.

Part of the thesis here is that New Fortress Energy (NFE) is oversold on fears of a short gas position. Unfortunately, the company dispelled that concern this past week and the NFE stock rallied. I still believe those shares are undervalued.

While the write-up focuses on the GLNG shares, the 7% senior unsecured bonds due 2025 are also attractive. These bonds are in the 99.5 area for a yield of 7.1% (+651 bps). The company is a first-time (unrated) issuer and the $300 million of bonds were placed last week by DnB and Clarkson’s so they are likely off-the-radar of many US investors. The use of proceeds is to refinance the 2.75% converts. They’re non-call 2.5yrs and the plan is to refinance them shortly after the Gimi project starts up in 4Q 2023. I think it’s a good yield for somewhat short duration bonds with decent covenants (at least relative to the garbage masquerading as covenants in other recent HY deals).

Let’s start with an explanation of the assets. I will tie the earnings power of each segment afterwards.

 1.       Shipping - LNG carriers:

This is the LNG shipping segment consisting of 9 LNG carriers (8 TDFEs / 1 steamer) and 1 FSRU (floating storage regasification unit). GLNG contracted (>70%) most of 2H 2021 at fixed (below market) prices but the company is more open in 2022 (~50% days at fixed prices) and largely open starting in 2023. This contracted position is higher now as GLNG announced a 1yr TC for $100k/d yesterday.

LTM EBITDA is $119 million and this assumes an average TCE of $48.7k/day. Every $10,000/day TCE adds $32 million of EBITDA. At current market rates, this implies total EBITDA of $262 MM if the fleet was completely open. Total debt at this entity is $1,076 million which is highly levered on LTM EBITDA but more manageable at 1yr forward rates, or something in between LTM and current market rates. Recent transactions (Teekay LNG and GasLog) at 8.5x-9.5x EBITDA.

The backdrop here is favorable as LNG demand is expected to grow 27% from 2020 to 2026. New orders should be somewhat offset by EEXI /CII regulations which will result in the retirement or slow steaming of older vessels (165 pre-2000 vessels exist vs 153 new builds). GLNG only has 1 operating vessel that would potentially retire or slow steam. Separately, new build prices are also up significantly. 

Previously, GLNG planned on spinning off this entity and/or merging it with another player to create more scale. They were very close to completing a transaction but it fell through. I expect a deal within the next 12 months as the outlook for these assets has improved markedly. In 2021, Hoegh LNG was privatized by Morgan Stanley, GasLog by BlackRock and Teekay by Stonepeak. A spin-off or sale of this entity is a positive catalyst as ~50% of debt resides here and there’s an expectation that the remainco would see a re-rating due to the more stable cash flow dynamics at the FLNG segment. 

2.       Floating LNG is comprised of Hilli (operating) and Gimi – BP Tortue (under construction):

Hilli

Hilli was the first LNG carrier to FLNG vessel conversion. The unit operates in Cameroon with a base liquefaction capacity of ~2.4mtpa via 4 trains and is under contract with Perenco and SNH until 2026. Currently only 50% of its capacity is utilized by Perenco but this is expected to change as Perenco drills additional wells. In 2022, the added production increases the fixed tariff and provides a link to a European natgas benchmark (TTF) whereby each $1/mmbtu adds $3.2 million. This sensitivity is slightly lower now as the company hedged part (~50%) of its 1Q22 exposure at $28/mmbtu. Similar options exist for 2023-2026, although the commodity exposure increases (each $1 move in TTF gas = $6.5 million).

Besides the fixed tariff and natgas links above, Hilli benefits when Brent oil prices exceed $60/bbl. Every $1 above $60 adds $2.7 million of EBITDA (w/ no corresponding deduction for prices below $60).

LTM EBITDA (based on GLNG’s ownership) is $84 million with $332 million of debt. This is before capturing the commodity price upside.

Gimi

The BP-Tortue FLNG project under construction is the crown jewel of GLNG. Base liquefaction capacity is ~2.45mtpa. The field is located in Senegal/Mauritania and BP credit risk (A2/A-) is about as good as it gets within the oil space. The contract is 20 years. The project is a “copy-paste” of Hilli and is being built by the same yard. 

Keppel Shipyard (Singapore) is the builder and 30% owner so incentives are well-aligned. The project is 74% technically completed. Engineering and procurement is nearly 100% complete. The target sail-away date is 1Q 2023 and the contract is scheduled to start up in October. GLNG’s share of remaining costs are $424 million, of which equity contributions represent $221 million. BP delayed this project by 11 months due to the pandemic but with natgas spot and futures prices at current levels, BP is heavily incentivized to bring this field on asap. Furthermore, BP/Kosmos already expressed interest in increasing capacity to 5mtpa. GLNG has the Gandria vessel which could be retrofitted for this project, or other designs (e.g. Mark).

Once this project is brought online, the company will refinance its existing debt and cash flows should improve materially. GLNG’s share of annual EBITDA is $151 million. 

3.       New Fortress Energy:

After its postponed IPO last year, Golar and Stonepeak sold Hygo to NFE in April in exchange for equity. Since the transaction, the shares declined significantly. Golar nonetheless owns an 8.9% stake. At current prices, I believe they are attractive. The company went to great lengths to show that it is not short natgas and there is interesting hydrogen and FastLNG optionality. Additionally, the drought in Brazil should help highlight the value of the Hygo acquisition.

According to NFE management’s slide presentations, the shares are undervalued :). Per the 2Q presentation, the stock is worth $61-$90/sh in FY2023 or $82-$120/sh if you reference the July investor day. So you can create them at a discount through GLNG.

4.       Other 

Integrated FLNG projects (Mark I and Mark III designs). These are potential integrated projects to monetize stranded or uneconomic gas fields cheaply. The math breaks down as follows: sourcing costs ($1.00/mmbtu) + liquefaction costs ($2/mmbtu) and shipping ($1.50/mmbtu) for a total of $4.50/mmbtu. The idea is that GLNG would have both fixed tariffs and market exposure to commodity prices. 

Avenir LNG is a JV between GLNG, Stolt-Nielsen and Hoegh LNG. The company provides small scale LNG vessels. This asset is no longer strategic to GLNG post the Hygo divestiture. The company’s 23.5% ownership interest is worth nearly $40 million per the CEO.

The pro forma capital structure is not as clean as I’d like but that’s part of the upside here. There are 4 sources of debt – shipping debt ($1.1 billion), Hilli debt ($0.3 billion), Gimi debt ($0.5 billion – at completion) and corporate debt. Pro forma for the convert paydown, corporate debt consists of the $300 million 7% bond and a $200 million margin loan on the NFE shares.

Pro Forma FCF (2024):

I use 2024 because that is the 1st full year of the Gimi project. 

1. Shipping: 

GLNG signed a 1yr TC yesterday at $100k/d. For 2024, I assume this declines to $75k/d as the forward TTF gas markets calm down and new supply additions offset retirements (from EEXI / CII regulations focused on energy efficiency and CO2 emissions). Similarly, I exclude GLNG’s old steam vessel from this calculation. As a bridge fuel, I expect strong LNG  demand in Europe, India, China and Brazil which is suffering from a 100 year drought. Any Nord Stream 2 delays would also be supportive as are increasing new build prices (+15%-20%). With my estimates for drydocking, cash interest and principal payments, I calculate ~$0.50/sh of FCF.

2. Hilli: 

Hilli EBITDA captures the fixed charter rate and I add the Brent/TTF links based on the forward (backwardated) strip. I assume Perenco exercises the option for incremental gas volumes. Net of cash interest and principal payments, I calculate ~$0.75/sh of FCF.

3. Gimi:

Gimi EBITDA of $151 million is for 20yrs. For simplicity, I assume GLNG finances its remaining equity payments with debt and then refinances the entire slug post project commencement. This results in ~$0.75/sh of FCF. Management will likely lever up this project even more to release cash which will reduce corporate debt and fund additional investments.

4. New Fortress:

NFE can be captured either by calculating the market-implied price per GLNG stake of ~$6/sh or ~$4/sh (ex-margin debt) or by making an estimate of NFE’s FCF/sh in 2024 and applying GLNG’s 8.9% ownership stake. If you believe management’s guidance, this could theoretically imply $0.70/sh+ of incremental FCF to GLNG. Since I need to do more work on NFE FCF potential, I used the market value of GLNG’s stake in NFE for this analysis.

5. Other: 

Corporate overhead and parent debt. This detracts $0.50/sh of FCF. 

6. Cash: 

Pro forma cash on hand theoretically adds $2/sh to the valuation. This is after deducting the HRMC tax liability and factoring in the various capital raises, the convert paydown and other cats and dogs. To be conservative, I do not include this asset. The FLNG vessels should also maintain value over time as debt is reduced so there’s also incremental equity built there, or flexibility to accept lower rates to maintain FCF levels.

The summation of these calculations aggregates to roughly $1.50/sh of FCF. Using the share price of $13.67 results in a multiple of <10x, or <7x after stripping out NFE shares. Again, this is before capturing cash, Avenir or option value from new FLNG projects.

Risks:

-Delays to BP Tortue project

-Declining day rates for the LNG carrier business

-Perenco is unsuccessful drilling and no volume increase in 2023-2026

-Uncertainty of Hilli renewal in 2026 / redeployment

-The Chairman (more below)

I would be remiss if I didn’t spend some time on the Chairman of GLNG. I think he is part of the reason why the shares are undervalued. He over-promises and under-delivers and runs too much leverage. As it relates to Golar (see Borr Drilling for more), the much-hyped OneLNG JV with Schlumberger was disbanded, the initial LNG carrier spin failed, the promised Hilli trains 3/4 usage haven’t materialized, the Hygo IPO in Brazil was postponed a day before pricing because of a bribery probe, the Gimi Tortue project was delayed 11 months and a series of CEOs/CFOs departed.

Additionally, he hasn’t managed the capital structure well. Most of this is a function of the perpetual belief that the shares are undervalued. A TRS on the stock resulted in share repurchases using borrowings at prices far above the prevailing market price. The losses here were substantial. More recently, with solvency a concern post the Hypo IPO postponement, the company issued shares at $8.75 only to start buying them back later at higher prices when financing had not yet been arranged for a current convert maturity. See GMLP for more examples.

With that said, I do believe the new CEO Karl Fredrik Staubo has brought more conservatism and practicality to the mix. He knows the business cold and describes it well. He also spearheaded the recent high bond capital raise.

Catalyst

Spin-off of LNG carriers (GasLog, Hoegh, Teekay LNG - all privatized) 

Gimi start-up

Cash flow from Hilli commodity options

New project announcements 

NFE share appreciation