Golar LNG Energy preliminary fourth quarter and financial year 2009 results
Highlights
- Golar LNG Energy reports net income of $1.0 million and operating income before depreciation and amortisation of $8.1 million
- Spot traded vessel earnings improved with higher utilisation and rates
- Sale of LNG Limited shares results in net gain of $8.4 million
- Floating regas projects taking shape; Golar LNG Energy well positioned for next contract(s)
- Restructuring of Gladstone LNG Fisherman's Landing project
Financial Review
Golar LNG Energy Limited ('Golar Energy' or the 'Company') reports net income of $1.0 million and operating income before depreciation and amortisation of $8.1 million for the quarter to December 31, 2009 (the 'fourth quarter').
Revenues in the fourth quarter of 2009 (the 'fourth quarter') were $22.6 million as compared to $11.3 million for the third quarter of 2009 (the 'third quarter'), which effectively represents trading from August 12, 2009 until September 30, 2009. Earnings from vessels operating in the spot market continued to slowly improve from the position in the first half of 2009. Average utilisation for the fourth quarter was 90%, with average daily time charter equivalent rates ('TCEs') at $36,480 per day as compared to $35,616 for the third quarter.
Voyage expenses, principally fuel costs whilst the vessels are not on time charter, were $3.0 million for the fourth quarter and operating expenses were $6.8 million as compared to $0.8 million and $3.8 million respectively for the third quarter. The increase was due to the short actual trading period recorded in Golar Energy's books for the third quarter. Administrative expenses were particularly high in the fourth quarter at $4.7 million ($1.7 million in the third quarter) largely due to high project development costs and are expected to be lower moving forward.
Net interest expense was $4.0 million for the fourth quarter as compared to $2.8 million in the third quarter. Other financial items gain of $0.7 million arose principally due to a gain on the valuation of interest rate swaps as a result of the increase in long-term interest rates.
Financing, corporate and other matters
During the fourth quarter the Company issued share options to directors and employees totalling 3,940,000 at a strike price $2.20. The grant date was October 23, 2009 and all options vest over a period of two years and eight months.
In November 2009, Golar Energy sold a block of 9.6 million LNG Limited shares which reduces its shareholding to approximately 6.3% of LNG Limited's issued share capital. The sale realised funds of approximately $11 million and resulted in an accounting profit of $8.4 million.
Operational Review
Shipping
Available tonnage in the Atlantic Basin was fairly tight although limited opportunities existed for those vessels that were not cold and load-ready for spot activity. Vessel charter rates were also up but still have some room for improvement. Low gas prices supported last quarter's increased activity and, with available (albeit tightening) ship supply, LNG suppliers have managed to secure transport at low rates and secure positive netbacks. The market in the second half of 2009 was further supported by a relatively steep seasonal contango in the gas market.
Regasification
The outlook for new floating storage and regasification projects remains encouraging. Many LNG import terminal developers are taking the necessary and material steps to support the next wave of floating regasification contracts after the hiatus in 2009 following the global financial crisis. Pre-qualification ('PQ')/Request for Proposal ('RFP') activity is on the rise; regas developers are engaging technical consultants to scope new projects; and interestingly inquiry among oil and gas majors has increased. Recent and notable public market activity includes:
- Indonesia (West Java): Golar Energy has recently received a PQ from the Indonesian national oil and gas company, Pertamina and national gas transmission company, PT Perusahaan Gas Negara (Persero) Tbk ('PGN') for a ~3 MTA/year offshore LNG receiving terminal, targeted for a 4Q2011 start-up in West Java. Golar Energy will submit a PQ. Contract award is targeted for 3Q2010.
- Indonesia (Sumatra): Golar Energy has responded with interest in PGNs solicitation of interest for a ~1-2 MTA/year floating storage and regasification terminal, targeted for a 1H2012 start-up in North Sumatra. The PQ is expected to be launched within 1Q2010 with contract award targeted for 4Q2010.
- Jamaica: Golar Energy has recently submitted a proposal of interest in response to the Petroleum Corporation of Jamaica's RFP for a ~2 MTA/year offshore LNG receiving terminal, targeted for a 2012 start-up.
- Israel: Golar Energy has submitted the qualification documents for the Government of Israel ('GOI') LNG Import Terminal PQ process for a ~3 MTA/year offshore LNG receiving terminal offshore, targeted for a 2H2013 start-up. Site selection is still underway. The GOI is finalizing the qualification process for eligible participants.
- Uruguay: The governments of Uruguay and Argentina have agreed to build an LNG regasification terminal to be located in Uruguay to supply natural gas to both countries. Foster Wheeler Iberia has been retained to develop the tender basis. Golar Energy is closely monitoring activities with strong interest.
The Board remains committed to and confident in delivering the next FSRU contracts and is taking pro-active steps to position and ensure coverage of the full market. Company calculations show that floating terminals can be significantly cheaper and are more flexible than land based alternatives. In addition floating terminals benefit from a significantly faster time to start up.
Liquefaction
As reported last quarter the Gladstone LNG Fisherman's Landing Project continues to move forward positively.
However, during the 4th quarter it became clear that the upstream gas producing wells would not obtain full environmental approval needed for financial close until well past March 2010. However, for the project to maintain the start up target date of end 2012 it would be necessary to take a firm investment decision (FID) by March 2010. This would result in the need for equity financing over at least a 12 month period. It became apparent that under the above circumstances and given the reported capital costs, that the project would not progress under the original HOA's and, as a result, all parties were not prepared to move forward with them.
With the objective of achieving project FID by March 2010 and to provide increased certainty of the project's first LNG shipment in late 2012, Arrow and LNG Ltd agreed in February 2010 that Arrow will acquire the LNG Ltd subsidiary Gladstone LNG that holds the rights to develop the Fisherman's Landing site, all approvals and the pre-development work. LNG Ltd as the 100% owner of Gladstone LNG had undertaken all the prefunding requirements for the work in Gladstone LNG, Golar Energy has not had any money at risk and Golar Energy will not receive any consideration from the acquisition by Arrow.
As a result of the aforementioned restructuring Golar Energy has entered into a HOA on the Shipping and Marketing with Arrow for the sale of LNG from the project. Golar Energy will provide marketing services to Arrow and Golar Energy will receive a royalty for these services based on the LNG sales price and quantity. In addition Golar will time charter two LNG carriers to Arrow to transport the LNG to the end customer. There are significant condition's precedent to the HOA agreement which relate to the successful conclusion of a LNG sales and purchase agreement ('SPA'). If these are not met there is no guarantee that Golar will have any role in the project. Golar Energy currently has a HOA with Toyota Tsusho Corporation as buyer of the LNG from the first train.
This restructuring is clearly a departure from the position originally planned. However, assuming Golar Energy is successful in securing this revised role, the restructuring is positive in that it removes any risk associated with upstream approvals or capital cost increases and would lock in the employment for two LNG carriers and provide a minimum royalty with upside related to oil price. Whilst the absolute cash returns would be lower than previously anticipated there is also a significantly reduced equity requirement, including no equity support that Golar Energy was required to provide LNG Limited under the pre-existing arrangements.
Golar Energy and PTTEP announced in January 2010 the joint termination of the Heads of Agreement and Joint Study Agreement governing their joint development of a floating liquefied natural gas (FLNG) project based on the gas fields in North West Australia owned by PTTEP. The two Companies also announced their termination of a Memorandum of Understanding covering their global cooperation to identify and develop FLNG projects.
Golar Energy will continue to actively pursue FLNG projects which fit with its financial objectives and best captures its technical capabilities. Golar Energy's FLNG strategy will be expanded to include the development of low capital cost, rapid deployment floating facilities utilising the conversion of high quality existing LNG carriers, floating technologies for the liquefaction of pipeline quality gas or associated gas (requiring minimal processing) and seek other innovative LNG solutions. This strategy complements Golar Energy's industry leadership position in floating LNG regasification facilities development. In an era of intense competition in the LNG industry and the high cost and long lead time of land based LNG facilities, Golar Energy believes highly cost efficient approaches based on floating LNG liquefaction, storage and offtake, shipping and regasification facilities of the types now being developed by the company will be key to substantial additional growth opportunities.
Market
In addition cold weather across the Northern Hemisphere spurred stronger gas demand in December with consumption reaching new record highs in parts of Europe. However enough spare capacity existed throughout the supply chain to prevent large price spikes.
Last year witnessed a nearly worldwide crash in industrial gas demand, which in the US pushed gas prices so low that the fuel began backing out coal in many parts of the electricity sector, thus preventing a complete collapse in prices
Prices remained lower than a year previous however.
The 2010 number may well shift if Qatar's last train is completed by September, as now scheduled, or the Peruvian LNG project slips into early 2011, as many expect. Nonetheless uncommitted LNG is set to double in 2010 to 60 million tons. In addition, 2009 saw two final investment decisions with Chevron's 15 million tonne Gorgon project and Exxon's 6.6 million PNG LNG project. Both projects are expected to be operational by 2014.
Outlook
The LNG sector has suffered as a result of the global recession and the successful development of shale gas in the US. This, in combination with new LNG supply coming on stream has resulted in downward pressure on LNG prices. Several LNG trains around the world are running at reduced capacity and with the new capacity it could take some time before we see a balance in the demand and supply situation. However, this oversupply and increased flexible supply might also create some arbitrage opportunities which would benefit an over supplied spot shipping market as well as making more regasification projects realistic.
There are clear similarities between the more flexible structure of the LNG market which is now emerging and the opening of the crude oil market in the 1970's. There is increased activity by traders and spot cargoes are still at a limited level.
The break even cost for Mid. East LNG production is supported by the value of associated crude and condensate production and makes it highly likely that LNG will be a competitive and growing commodity, also in an environment influenced by increased US shale gas production. The strong gas demand coming out of China further supports this case.
By end of 2010 there is a significant decline in the rate of growth of the fleet and with no new buildings ordered during 2009. The Company believes that we will begin to see a tightening of the shipping market over the next twelve to eighteen months. Based on the long term demand for LNG the capacity of the LNG fleet will have to be increased, also taking into account that a number of the old vessels will be scrapped or converted into regasification or floating liquefaction vessels.
The floating regasification market is looking more and more promising with increased interest in floating regasification from all over the world. With the uncertainties in the global market of the past eighteen months slowly being overcome project developers in this market seem to be much more focused and serious and the Company believes that there will be a few new FSRU contracts awarded during 2010. New players are trying to enter the market, however the Company believes it is in a good position to secure contracts based on its previous experience in this market.
The Company has gained valuable floating liquefaction (FLNG) experience through the work done with PTTEP and other studies. The Company is extremely cognizant of the significant challenges to undertake a large scale FLNG project as conceived by some market participants, both from a technical, commercial and financing point of view. The Company believes that there are alternative niche markets to be developed in this sector and during the last 6 months has developed a FLNG concept for a 1 million ton per annum unit which could liquefy pre-treated/pipe gas/coal-seam gas at a very competitive capital cost per ton. The company will selectively continue to pursue the FLNG market. The Company also believes that further worldwide opportunities exist in solutions which integrate power production and regas projects.
Golar Energy will also use the current weak freight market to seek much needed consolidation opportunities.
Operating results for the first quarter of 2010 are likely to be significantly negatively impacted by the seasonal decline in utilisation of the Company's vessels operating in the spot market. The Company has relatively low financial gearing, a healthy cash position and competitive cash break even rates. There are strong reasons for expecting a good improvement in shipping rates in the medium to long term; however shareholders should be aware that the next few quarters will be challenging to keep utilisation and rates of the spot ships at financially rewarding levels.
Forward Looking Statements
This press release contains forward looking statements. These statements are based upon various assumptions, many of which are based, in turn, upon further assumptions, including examination of historical operating trends made by the management of Golar LNG Energy. Although Golar LNG Energy believes that these assumptions were reasonable when made, because assumptions are inherently subject to significant uncertainties and contingencies, which are difficult or impossible to predict and are beyond its control, Golar LNG Energy cannot give assurance that it will achieve or accomplish these expectations, beliefs or intentions.
February 25, 2010
The Board of Directors
Golar LNG Energy Limited
Hamilton, Bermuda
Questions should be directed to:
Golar Energy Management Ltd
Oscar Spieler: CEO - +65 6296 5518
Golar Management Ltd - +44 207 063 7900:
HUG#1388918
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