Golar LNG Ltd. Earnings Call Insights: Financing Details and Carriers

Golar LNG, Ltd. (NASDAQ:GLNG) recently reported its second quarter earnings and discussed the following topics in its earnings conference call.

Financing Details

Mike Webber – Wells Fargo: There’s lot going on and you guys said in a number of releases that kind of came out ahead of the quarter the financing efforts that are used. So I kind of wanted to zero in on liquefaction to start and maybe start with Douglas Channel. Can you maybe give kind of an updated timeframe around FID? And then, you mentioned a couple key commercial and shareholder issues, if you can give a little bit more color there around where that stands? And I think, Doug, you also mentioned, you guys had actually looked at a loan intra-quarter and maybe some more color around whether or not that was finalized, that you guys will make 25% at once? And then maybe, could you give, like, what the financing stands for that project?

Doug Arnell – CEO: Yeah. So in terms of timing, I think that the final investment decision will certainly depend on the FEED work being completed for both the production facility and on the onshore facilities. We’re running really hard to try and get those done by the end of September. That’s our goal. I’d say that there’s a bit of a risk that that slips a little bit into the fourth quarter, but that’s kind of the timing we’re working on now. The issues that we’re working around with shareholders and commercial, it’s a lot to do with just having to put a lot of details together in a short amount of time, and hence the original structure is still holding together, but it takes a lot of details. There’s a fair number of commercial agreements for gas supply, structuring the shareholder agreements around the various parts of the asset structuring the off-take sale. So it’s just a matter of getting through all of that which is quite a complex set of agreements, nothing more than that. But I just – we just don’t want anybody to get ahead of themselves, there is work to be done and commercial issues to be resolved before the final investment decision can take place. The loan I was referring to was actually the funding that went into the project. I believe this was described in some form in the release we made about – I believe, we included something about Douglas Channel in the first quarter results release. But the loan that I was referring to was the loan that went into the project in order to provide funds to take the project to FID, not beyond…

Mike Webber – Wells Fargo: Okay, okay.

Doug Arnell – CEO: So that was a loan. We probably put around $14 million to $15 million in play on this project both in internal costs and that loan. The loan is the vast majority of those dollars. And that loan is collateralized by the project assets, obviously, which include the export license and the pipeline capacity and the engineering work and stuff like that…

Mike Webber – Wells Fargo: Yeah, that makes sense. I interpreted that and then I thought (up) you’re talking about (indiscernible) projects. That makes sense. Maybe just then to switching gears to the mass tank conversions; I mean, to think kind of question around timetable for that FEED study, and then – I mean, you guys have been talking about this for a couple of quarters, and it seems like there is fair amount of progress being made. At what point do you start taking more serious indications of interest from potential charters, and maybe – kind of how does that conversation kind of overlay itself with the FEED study.

Doug Arnell – CEO: Well, I would say that we are beyond getting readings from charters on the concept. We have several development discussions underway with counterparties. I would say four to five serious ones. Not ready for a press release as yet, or not able to kind of talk about details and things. But I guess we had – subject to the FEED results, we had a decent idea how the facility or the vessel should look post conversion in terms of cost and how long it was going to take to construction time. So, we’ve been able to go and have those discussions with potential charters and potential partners because the structure may not be always just a charter for those vessels, but we’ve been able to go and have those discussions. And with the tooling, we can go down to the size we’re talking about, reserve size of 0.5t, up to 2t, 3ts, that kind of size. You get a lot of interest when you can bring a toll of $3 to $4 because that’s kind of what the mega projects are effectively costing. It’s been really successful so far. But again, if you imagine a field in West Africa in a country there and what it takes to kind of get the political interest on board, interest in exporting their gas, all the kind of work they have to go on structuring the whole thing, it’s going to take some time. But the economics are so attractive that we just think it’s worth putting a good focus on it. What we haven’t come out with or completed our planning for yet is how we will structure the financing for when this venture is going to need some serious – or more serious dollars to take forward. We’ve talked about launch of a separate entity. That’s certainly still a possibility. But again, we haven’t done anything on that front. We’re in the planning stages, and, of course, we’ll be letting people know how that’s going to work as and when. Timing-wise, the FEED engineering work and cost estimates is effectively done. It’s one or two weeks of work left. But then, to actually tie down the contracts to going ahead and do the conversion will take some more time after that. That could take as much as a month or so. So that’s the kind of the timeframe we’re in before we could actually trigger going forward. Again, going forward can take a lot of forms depending on how we look around and see it, how positive we’re at the market. It could be a full sprint to getting it one built as quickly as we can. It could be all the way to the other side of the range, which would be – let’s get these projects developed a little bit further and get them solidified a bit more before we start off, and, of course, there’s shades of gray in between.

Mike Webber – Wells Fargo: One or two more from me, I’ll turn it over. Around the FSRU market, and you get put up with new releases, kind of heading into earnings, and you mentioned that Tundra is – the delivery date pushed back and fully converting that slot to an FSRU candidate. Is the window to convert additional slots into FSRUs through your existing order book – is that closed at this point? And how does that – if it is, how does that impact your ability – your tendering ability for future FSRU projects? I guess the question is how long would the runway be to go out and place another FSRU order if need be, if you’re successful in the other tender?

Doug Arnell – CEO: Right. The window isn’t totally closed to convert those slots into an FSRU, but that’s just a theoretical case really now. We are still looking at one of the late carriers to convert. It’s not – of course, you can always do it, but it becomes a case where having Samsung go to an area becomes possibly uneconomic depending on how late you are at the window, and we can just as easily convert – take delivery of the carrier and convert it ourselves if we wanted to put it into a tender. And so that’s actually the strategy we would follow. I would say that looking around we focused pretty heavily on three projects over the last year. We focused heavily on the Mubadala FSRU in Abu Dhabi, we focused hard on Kuwait and we focused hard on Jordan. Because those clearly were the more firm projects and we felt that it was important to take a good run. Obviously, we lost one of those and we were successful on the other two. We are of the view that we are in too bad a shape actually with the Tundra being the next newbuild FSRU coming out in 2015. We don’t think there is an avalanche of new FSRU awards coming before that time. There could be some and we might if it’s a real prompt one – we might be caught out on it. But that was the price to pay to get the two. Kuwait was, obviously, going to be firm. It’s already a project in Jordan we just start; always look for the good. So, yeah, we ended up with a gap. That came together all at the same time. We didn’t want to have more than two open-spec FSRUs out there. So, this is where we ended up. But we don’t really believe we’re going to be in bad shape. We can get a conversion done in 18 months; 16 months if we hustle. And that gives pretty good visibility for us. So, we think we’ll be competitive and not too concerned with our FSRU delivery schedule at the moment.

Mike Webber – Wells Fargo: Last one from me. I guess the Kuwaiti FSRU contract for the Igloo; it seems at least pretty unique in terms of the kind of spot trading window. Obviously, this would be a bit different, but I am just curious as to whether or not there is an opportunity to structure similar contract around a carrier maybe within their window. They’re kind of coming at that from kind of an MLP angle in terms of making ability to kind of meet some cargo requirements for a counterparty also having some optionality and finding a way to get more coverage in this fairly volatile and this softer environment. Basically, is that a contract actually that’s replicable on the carrier side?

Doug Arnell – CEO: Yes. Well, in fact, you probably know. I mean, there have been some of those kinds of deals done, not with us, between owner and charter over the past few months. It’s a multi-year contract, but the vessel is only (indiscernible) on to the charter for a certain number of months per year. Yeah, I mean, we have lots of spot exposure on the vessels. So, if we’re moving to enter into charters, that wouldn’t be the goal to try and leave some spot. But certainly, I think just because we have the MLP drive there, that’s true. But we’ve also got, I would say, the most flexibility across the fleet in terms of being able to optimize what we get for these vessels because of the financing we’ve been able to put in place. So, if there’s a deal like that, that would be great, but as long as it’s attractive. We wouldn’t do it at this point just because we feel we have to have to an MLP at this point. So, we think the MLP deals will come. They could come sooner than we think. There will be portfolio players that at some point here will start looking on into 2015 and ’16 and decide that it’s time to pull the trigger. That’s kind of how it went for a lot of the vessels that – the original fleet that went into partners. You’ve got a perception. While the perception was reality, the market was starting to tighten up, and usually it was portfolio players that decided they better put some structural position in place, and we ended up chartering to them and we ended up dropping those vessels down into the MLP. And I think that’s how it’s going to go again. I wouldn’t be surprised to start seeing some of that in the near term. It could be maybe not in ’13 but through ’14, I wouldn’t be surprised if some of those portfolio players aren’t – start to look – to add structuring to their portfolios, and that’s I think where the MLP deals will come on the carriers.

Mike Webber – Wells Fargo: Got you. And that should be in the next six to 12, 18 months?

Doug Arnell – CEO: Yes.

Carriers

Urs Dur – Clarkson Capital Markets: A follow-on on the carrier question and restructure of the market – just the new modern 160 cubic dry fuel ships are doing. Well, as you guys point out in your presentation and spot rates grant if it’s still a small portion of the market have been stronger than a lot of people had forecast over the course of this summer and ticking up lately, as well as term rates, at least what’s quoted and knowing it’s not specifically too liquid, have also remained pretty resilient and moved and ticking up as well. The approach, obviously, you mentioned is, so you get some ships on charter for the MLP, so you’re going to need a length of charter there. But what’s going to happen with the ships coming in ’13. Do you want to run them spot or very short term, or are you going to try to push them back in delivery date, or are you going to lock them up for longer period of time, or is it just going to be a mix?

Doug Arnell – CEO: It’s kind of a lawful answer, but I think it’s going to be a mix. I mean, to say you want to – your goal is to trade LNG vessels spot, I think would be a little bit disingenuous. We just have taken the approach – if you look back at the approach that we’ve taken, the typical mid-to-high 70s deal, low-80s deal for term contracts haven’t been attractive to us, and we haven’t needed to do them. And we prefer to let a lot of the order book go out on to those kind of deals in those ships that have owners who possibly were looking to firm charters in order to raise financing, and that’s fine. So, we just believe that the fundamentals of their market are more strong than that. And so, what we have is the ability to trade the mark, trade the vessels on a shorter-term basis, without having to delay deliveries. Hopefully do well on earnings; I’m sure we will do fine, but we’d like to make sure our vessels are open and available to respond to what everybody knows is the large way of new production coming on to the market starting in 2015; and it’s a nice broad range of supply. We’ve got the Australian supply coming on. Now we’ve got U.S. really building up and East Africa with our monster project. So we just think that we would be remise, if we didn’t do our best to take advantage of what is the real increase in demand for ships which is coming which is created by that production increase.

Urs Dur – Clarkson Capital Markets: To what do you attribute the freight rates where we are heading into the winter season? Can you tell us a little bit about market, and what do you attribute the relative strength of the market compared to say where we were in June? I wasn’t saying delay the ships, I’m just wondering it doesn’t seem to make sense in this market to delay a ’13 shift when the market is as strong as it is just to get a ’14 stamp. But I was just wondering what your thoughts were there and you answered that. But can you talk a little bit about what this nearer-term market is because whether we like it or not, it does seem like investors do react very positively to improving freight rates as well as the other positive announcements you’ve had like the debt facility and the contracts but also to just what the general freight market is like? Can you tell us what you expect in the next two quarters maybe on our chartering outlook?