Golar LNG Ltd (GLNG) 2007 Q2 法說會逐字稿

Welcome to the Golar Q2 2007 results presentation. At this time, all participants are in a listen-only mode. There will be a presentation followed by question-and-answer session. (OPERATOR INSTRUCTIONS). I must advise you the conference is being recorded today, Thursday, 23 of August, year 2007.

I would now like to hand the conference over to your speaker today, Gary Smith. Please go ahead, sir.

Thank you very much, and again welcome, everybody, to Golar's second-quarter results presentation.

The agenda is familiar to those who have joined us previously. I will lead off with some highlights for the quarter and then hand over to Graham Robjohns, our Chief Financial Officer, to run through the financials. Then I will return toward the end to give a brief summary of what's been happening in the markets, to update you on the Golar portfolio of assets, some feedback from the fleet, and then finally finishing up with a summary of projects and where we are with our restructuring agenda.

So, I will move to Slide number 3. In terms of our highlights for the quarter, it's pleasing to again report our highest-ever quarterly net income, although I guess we should acknowledge that it's been because of some one-off factors but nonetheless very pleasing to report.

The revenue for the quarter is up as a result of improved utilization of the vessels that trade spot. The quarter has been significantly impacted by the sale of the Korea Line shares that we had. We've also gained in respect of the Company's equity swap, and as a result of the strong financial performance out of the quarter, we are again pleased to announce a further dividend of $0.50.

I will hand over to Graham, who will now take you through the financials in a bit more detail.

Thank you, Gary, and good afternoon, everybody.

As Gary just highlighted, there's much to celebrate this quarter in terms of gains on transactions with of course the Korea Line and equity swap gains in particular. However, I think we are also pretty pleased with the development in the LNG shipping market over the last few months. Q2 and Q3 tend historically to be weaker quarters than the winter quarters of Q1 and Q2 over the summer period. But with recent market developments, which Gary will talk a little bit more about later, Q2 is actually better than Q1, and the fundamentals moving forward over the next few months look good as well.

So if you move over to Slide 4, which is entitled "financial revenue", this slide I think sort illustrates that point, so that you can see that TCE for the second quarter of 2007 is up on last quarter. It's also up on the same quarter in 2006. You can see, historically, Q2 is never a particularly good quarter. That comparison with Q2 '06 takes into account or should take into account that the Golar Spirit was trading on a rather lucrative long-term time [chart] with (inaudible) last year which came to an end at the end of 2006. So in actual fact, if you compared like with like, Q2 '07 is better than it otherwise seems.

Then moving over to Slide 5, key financials, revenue of course I've just talked about. EBITDA number is up on last quarter if you add back the effect in Q1 '07 of the sale of the new building of $41.4 million. There is a slight increase in EBITDA, and that would have, in actual practice, been a bigger increase had it not been for some increased administrative costs related to share option charged during the period, and also an (inaudible) provision which I will come on to talk a little bit more about later.

Net financial expenses are actually slightly positive this quarter. That's mainly -- well, entirely as a result of the gains on interest rate swaps. We've seen long-term interest rates move upwards during the quarter. Up to June, they have in fact reversed so we're back now, actually pretty much back to where we were at the beginning of Q2. Also the gain on our equity swap, which we terminated and bought back shares during the quarter, which again I will talk a little bit more about later.

Then of course the huge leap in the equity investment earnings, minority interest line -- $69.9 million as opposed to $11.9 million last quarter is of course entirely driven by the $73.5 million gain on sale of the Korea Line investment.

Moving over to Slide 5, the income statement, picking up on some of the particular line items, the OpEx line you can see is up fairly dramatically in comparison to the same period last year. A fair proportion of that is because we've added a vessel during the period, the [Granoza] was delivered in the letter part of 2006. But it's also fair to say that we've had some pressure on operating expenses, in particularly Korean costs over the last year.

Administrative expenses, as I mentioned earlier, are up this quarter because of a charge in respect of share options. The impairment of long-term assets is as we explained in the press release. We've made a provision against assets that are not now required to the [FSLU], the conversion work for the Spirit for the Petrobras contract. These are parts that were originally ordered back in 2005 when we first contracted (inaudible) but the design and requirements are slightly different for Petrobras. Therefore, these parts are no longer used. They could well be used in other projects that we have in the pipeline and/or projects that third parties may have, so they could be used internally or they could be sold outside. The provision of course represents management's prudent best estimate of the potential loss that could be realized on those assets as we move forward.

While interest income and interest expense are both up on last year, that's of course primarily the result of increasing interest rates. But interest income in particular also because of the dramatic increase in cash balance this year -- again referring back to the sale of the Korea Line shares.

Other financial items of course is again, as I mentioned earlier, because of interest rate swap gains and the gain recognized on the termination of our equity swap.

Yet again, as I mentioned it too many times, equity net earnings is (inaudible) so it gives us a net income of $89.6 million, and on an earnings per share basis, $1.37.

Turning over to the balance sheet, I mentioned the jump in cash. Of course, you can see $65 million to $219.6 million at the end of June 2007. That is, I would point out, prior to the payment of the third dividend of 2007 that we declared a few months ago that was paid in July of $49 million and of course the reduction in the book value of equity and associates, which is Korea Line.

Turning over to Page 8, balance sheet liabilities, not too much has particularly changed here. You'll see we have retained a percentage of fixed interest debt at around sort of 56%, 57%, 58%.

One other point to mention is that we have, post quarter end, refinanced the debt related to the Gracilis, which raised a little but additional finance but principally improved terms on that financing.

Turning over to Page 9, the cash flow, as we said in the press release, we paid $1.75 in dividends to date. As I've just mentioned, not all of that is actually reflected in cash. In this cash-flow statement, there is 32.8, which is a $0.50 dividend recognized in the quarter down there in the financing activities, cash dividends paid. The year-to-date number of 65.6 is of course a $1 dividend, a $0.75 dividend take it up to $1.75 is paid in July.

Just below the number of cash dividends paid, you can see payments to repurchase equity, $22 million. That's the gross cost of the shares that we bought back, 1.2 million shares that we bought back during the quarter. The actual cost-effective cost to us is net of the cash gain on termination of $7.9 million, which you can see is proceeds from termination of equity swap just above net cash used in investing activities. We've of course already booked 1.4 million on a mark-to-market basis. That gain (inaudible) March, which is why the P&L and the cash number is slightly different.

The number of shares that buyback creates at 30 June 2007 is 64.3 million, a slight drop. In total, therefore, we've paid, repaid cash to shareholders over the period, including of course the dividend that we have just declared in this quarter. The total amount that we will have repaid is $170 million, which is $147 million in dividends adding -- if and you add in the 23 million share buyback.

Okay, that concludes the brief summary of the financials. There is actually one further slide, which is financial expenses and analysis on Slide 10. There you can see the analysis to yourselves, the split of lease interest, debt interest, the gain on interest rate swaps and the equity swap gain that I've just been talking about.

Finally, moving over to Page 11, the industry and market overview, I will hand back to Gary.

Thank you, Graham. Okay, I will pick up on Slide 11 entitled industry market overview. To begin, we will talk a little bit about liquefaction, which is really the indicator of how the industry as a whole, the LNG industry that is, as a whole, is moving. We are seeing continued strong growth, some 13.7 million tons of new capacity due to come onstream this year. Equatorial Guinea has started already, and we know that the Snohvit project in Norway is at the moment going through commissioning and I think, just in the last week or so, has taken gas into the plant.

In terms of new projects coming forward, during the quarter, Pluto, a (inaudible) sponsored project in the Northwest of Australia has taken FID, and there are still some four projects to our knowledge that anticipate to take FID between now and the end of the year. But the sort of backdrop of projects struggling, due to spiraling costs and in some cases local political issues, continues. But it's good to see projects like Pluto still going ahead, still indicating a strong confidence in the future of the industry.

Looking a little bit more closely at our segment of the LNG industry, if I move to Page 12, the number of ships trading has increased slightly over the quarter to now 232 ships with another 15 ships due to deliver between now and the end of the year. The orderbook has stayed relatively static at 132 ships on order, so the de-escalation in orders that we've seen over recent years has quieted down and that's in part due to the fact that the new projects being announced has slowed up to some extent. Also I think the other sign is taking speculative positions right at the moment.

(inaudible) capacity remains strong and more than sufficient to cover the anticipated forward demand. We still ought to see the introduction into the fleet of new technology, the larger Q-flex diesel-propelled ships, which we should see around the end of the year.

If I move to Page 13, and we try and get a better understanding as to what the freight market might look like for shipping, you might recall, during the summer of last year, several participants, including ourselves, sought to gain by floating LNG cargoes over the summer in anticipation of rising prices in the winter. It proved to be very popular strategy and a very lucrative strategy for us last year. The forward curve for gas at the moment doesn't quite support that strategy at the moment, but several people are looking at it. We continue to field inquiries from various [charters] who are considering that as a possibility moving into the winter.

Perhaps more importantly though, the spot market has tightened as a result of an earthquake which damaged a nuclear power station in Tokyo -- a power station of Tokyo Electric's. Our understanding is that power station, which is a very large power station, will stay out of action for up to about a year. The result of that is a lot of cargoes now are being diverted east; cargoes that were originally intended for trading around the Atlantic Basin are going east, and we are seeing cargoes from places like Trinidad, which originally were destined for the U.S. Gulf, now traveling all the way to the Far East and in particular Japan. This longer distance to market has absorbed pretty much all of the available tonnage in the market as of today. We've seen rates (inaudible) as a result, both in the spot single-voyage market but also in the sort of medium-term one-year market as a result.

If I move to Page 14, a familiar slide on these presentations. It's an update of the Golar portfolio. It's starting to change a little bit quarter by quarter. You can now see mobiles (inaudible) to the right with Golar Spirit and Golar Winter now contracted to Petrobras' [FSIUs]. You can see Golar Freeze also out to the end of the period. I should point out, that's a project which is not yet firm. It's pending FID or pending final investment decision, but it's really another (inaudible) storage and regas project which we are actively engaged in at the moment. You can see at the bottom Gracilis, Grandis and [Grenosa], the three ships we have (inaudible) which are currently exposed to the spot market.

If I move to Page 15 -- just an update from the fleet. It's been a busy year for us in terms of drydocking. We've had now three drydockings year-to-date. I'm pleased to announce that the [Gimmi] drydock, which in fact straddled the quarter end, will be the last of the drydockings for this year.

Below, on the second (inaudible) point, we note that Golar Spirit will be withdrawn from service 1 of October when she goes into the shipyard to commence conversion to a floating storage and regas unit, and she will come out to late Quarter 1 to go on charter to Petrobras or (inaudible) contract.

The fleet continues to operate well with (inaudible) reliability and it's pleasing to sort of report that we see the advantages of that reflected back in our (inaudible) charts, so it's not a huge number but it's a sort of strong indication as to the way the fleet is being managed and very pleasing.

Graham mentioned in his financial summary that we are coming under some pressures on the operating cost arena. That's particularly to do with pressure on crew costs as the fleet expands and as I guess there's somewhat of a scramble to secure experienced LNG shipping people, particularly some of the new entrants into the industry.

I move to Page 16, let me talk a little bit in more detail about where we are with some of the projects. I kick off with Petrobras. That's been very much a source of activity for us over the last quarter. It's pleasing to report that we now have fully mobilized a very large team of design engineers and naval architects which are now working based in Oslo. The conversion of both the Golar Spirit and the Golar Winter, plus doing some front-end work on some other [FSRU] projects which we are progressing.

All of the long delivery items for the conversion of both Golar Spirit and Golar Winter have now been ordered. We are finalizing arrangements with the shipyard for the conversion contracts for both vessels. We had previously announced the intention to convert Golar Spirit at Keppel and that still is the case and we are now just tying Golar Winter in with that.

Another large piece of activity over the quarter has been finalizing a rather large suite of contracts associated with the [hire] with Petrobras. It's very pleasing to report that now is finished and those documents are all now ready for execution.

Just quickly looking through some of the other projects, on Page 17 of the slide pack, (inaudible) continues to work its way forward. We reported, in the last quarter, that Saipem had been issued what we termed a limited notice to proceed with regard to the EPC, engineering [procurement] and construct contract. That work has been ongoing.

Over the course of the quarter, there was a requirement to increase capital into the project to cover the somewhat longer than anticipated timeframe it's taking us to get to FID. That capital increase was borne by the two off-takers from the project, [Endesso] and [Irida], with the minor shareholders (inaudible) SA oil somewhat slightly reducing their equity in the project.

Project FID in its final investment decision is now scheduled for October. We're getting pretty close to the end of what's been a fairly long path.

Cyprus, not a lot really to report over the quarter. Our application is currently before the government and we are awaiting their response. This is the final (inaudible) that we need, which is to import and store LNG.

With LNG Limited, quite some activity there on two projects. [Again], we're very conscious of what are the press reports in the last few days regarding the announcement of that project being awarded to another party. Our advice is that's not final and that perhaps there's still some way to go. But we will wait and see. Also, LNG Limited announced an issue, they approved feasibility study for the [Gadsden] project, which is east coast Australian coalbed [methane] project. That's quite an exciting prospect. That's still some way to go before we can give somewhat concrete feedback on that.

Then finally, (inaudible) also been a busy quarter for (inaudible). The floating terminal technology has an application to install one of their terminals in the Gulf of Mexico off the coast of Alabama. Their draft environmental impact statement was published during the quarter, and a public hearing, which was (inaudible) was very balanced, was held in Mobile, Alabama. They're working towards that project being permitted around year-end.

Which brings me to the end of the project portfolio and to the last slide, Slide 18, where I just briefly want to touch on the restructuring which we had flagged in the previous two quarter-end presentations. We've been through now quite a lengthy process and a fairly detailed study as to how we should structure this company going forward. We've been doing quite some work also in terms of tidying up the balance sheet I guess and strengthening the balance sheet, (inaudible) career (inaudible) has been part of that. But also we've been looking at how we should best structure the company going forward. We basically looked at dividing the Company in a couple of different options. The first option which we've considered was separation between the what I would call conventional shipping part of the business from the project new business development area, such that those who wanted to invest in a pure shipping company could do so; those with the appetite to participate in a more project development and new business vehicle could do so.

The other assets which we've considered in terms of restructuring the Company is basically break the Company between long-term, steady income assets, regardless of asset type, and more short-term spot market shipping and project development activities. The results of our studies and deliberations I would say now are strongly leaning us towards the latter of those two options, that is separation of the long-term, secure income assets -- those assets on long-term charter to creditworthy [players] (inaudible) [variability] in those earnings, and then keeping separate in a different vehicle the short-term spot earnings from the short-term ships and also the various project (inaudible) activities which we have within the Company.

I think, at that point, I will stop and throw the conference call over to questions. So if I can hand back to Sabrina and she will take (inaudible) from here.

Thank you. We will now begin the question-and-answer session. (OPERATOR INSTRUCTIONS). Phil Dodge, The Stanford Group.

Yes, good afternoon. Thanks for the comments. First, could you provide us with some details on the sources of supply for the Brazilian FSRUs and potentially for [LaGorno]?

Sure. I mean, I probably can't speak with authority on either, but let me give you my understanding as to what the position is. Firstly, in the two Petrobras vessels, it's important to understand that the mode of operation for those vessels as we understand it is slightly different. Golar Spirit will operate in the north of the country serving more baseload requirement and so for there, they will need a more longer-term, steady supply scenario.

For Golar Winter, she will be primarily located in Rio, where the demand for gas is more variable. Rio depends to a large extent on hydro for their power and to some extent Golar Winter provides security against or insurance against low hydro production. So she has more flexibility and could trade as a ship for the periods that she's not required to be on station providing gas.

My understanding is that Petrobras are talking with several of the larger suppliers and have in place [performer] contracts with various suppliers to provide on a more intermittent basis. I'm unable to provide any information as to what they are doing with regard the more (inaudible) supply that they need in the north.

Turning to [LaGorno], again as the terminal -- as a participant in the terminal project, we are not exposed to nor have responsibility for arranging supply of LNG to the terminal. That's in the hands of the capacity holders, Endesa and [Irida]. I am aware of the fact that they are talking to suppliers but it would be improper for me to comment further.

All right. My other question is, in the thought process for the change in structure of the Company, why you prefer option 2 to option 1.

Phil, it's Graham. I mean, obviously, as you heard in the press release, we can see benefits to both, but when it comes down to it, as an example, a vessel that's converted as an FSRU and that's on a long-term contract, once the project has been developed, conversion work has been done, technical work in the yard has been done, she comes out and she is on hire. Is there not that much difference in terms of business from [charging] an LNG ship long-term as the regular (inaudible). I mean I guess the answer is probably not that much.

I think, in terms of investor risk choice, it seems to us more appropriate to split the profiles, if you like, as we suggested in option 2, as opposed to option 1 because we fear that it is a more appropriate and clearer divide.

All right. How do you see the timetable to put this into place?

Our hope is that we would be having something firm to announce before year-end. That's the timetable we're working to.

All right, thank you very much.

Rachid Bendriss, Carnegie.

A bit of a follow-up on this restructuring study you're doing -- any thoughts so far on what's been happening in the credit markets, and to what extent that could kind of alter or disturb the plan you're looking at?

Yes, well, to some extent, markets have been a little bit turbulent, but we don't at the minute think that there is going to be any significant impact. Energy to some extent has been slightly removed or protected from the turbulence, and we haven't seen any sort of adverse reactions from our bankers.

Okay. Another question -- on the shipping market or the spot markets, how do you see now the balance between vessels coming out of the yards and start-up of LNG projects over the next two or four quarters?

I think this has been a sort of fairly constant phenomenon now for more than a year. For example, we've had the ships that were intended for use in the Snohvit project trading spot for the last year. Those ships are now, I'm assuming, sitting up somewhere close to Norway ready to receive their first cargoes. They have been removed from the spot market in anticipation of that project starting up.

At the same time, the ships ordered for Sakhalin and coincidentally there were four ships for both projects -- so we've had four ships removed from the spot market to service. You should know that, that at the same time as four ships for Sakhalin coming onto the market. So my take on this is that this is going to be a fairly constant phenomenon going forward. So as projects call upon the ships which have been trading spot to serve their intended purpose, other ships will be delivering and filling that gap. I mean, there's some imperfection and that's an approximation, but that's generally how I would characterize it.

Okay, if I can take one final question on (inaudible) opportunities. There was an article right before this summer that Petrobras had asked for tenders on the fast-track solution and tenders to be delivered in by the end of June '07 for a third vessel following your two vessels. Anything you can say about that?

Petrobras has launched a tender for their third FSRU, so that's something that's in play right at the moment.

Okay, thanks a lot, guys.

[Roland Glind], [ABGSC].

My question is also about the structure or the potential split up. You say that you want to put the vessels with the long-term contracts in the company that will be spun off or partly spun off. What do you mean by long-term contract coverage? As far as I can see, it's primarily the vessels (inaudible) FSRU projects which really have long-term contracts.

Well, there are other projects -- I'm sorry, other vessels within the portfolio that do have a longer-term contract (inaudible) if I can draw you toward Golar [Matsu] and (inaudible) Princess, they are both conventional ships as opposed to FSRUs, which have long-term contracts.

(multiple speakers)

Sorry?

The BG vessels will not qualify as long-term contracts, right?

It's a moot point and it's obviously part of work in progress. My guess is it's going to be somewhere around sort of five years plus is kind of where the line will be drawn.

I think what we're really trying to do here is separate long-term secure income sources from more volatile income sources.

So the shallow vessels on contracts, like the vessels on the Shell contract, would that be considered suitable for this set-up, or would that be in the shorter term project (inaudible)?

My suggestion there is that they wouldn't fit on two counts. The term is probably on a short side, but also their earnings are quite volatile because those ships are in particular are exposed to the spot market.

Could you also say something more about Golar Freeze? You hinted to a terminal project in the third quarter as well without giving any more details about it. Could you give some more indications in any way or --?

I'm a little bit constrained by the confidentiality requirement. All I can really say at the moment is we are working aggressively towards securing a further FSRU opportunity for that.

Would that be at similar terms to the contracts in Brazil? Would it be sort of on a day-rate basis, or are there any other earnings structures on that vessel potentially?

At this stage, it's too early to comment.

[Chris O'Neill], [Steinberg] Asset Management.

Just a quick question on the industry, if you would? The TEPCO situation, if that goes on for a while longer, well into '08, do you think that absorbs larger spot cargoes that would be going into the U.S. during that period, for that period, maybe into the middle half of '08?

I have no particular or privileged information about the TEPCO situation. What's been reported in the press is that they have a requirement for another 60 cargoes over the next 12 months, in addition to their normal fairly [hire] requirement. A lot of those cargoes are being sourced out of the U.S. So the U.S. to some extent is a bit of a put option for LNG traders. They are now diverting those cargoes east to cover the TEPCO. I mean, TEPCO also has options with regard to other sources of energy, so coal and oil also feature in the energy mix here. But a (inaudible) falling towards LNG.

(OPERATOR INSTRUCTIONS). There are no further questions. Please continue.

Okay, well if there is no further questions, then we would thank everyone for their participation and we look forward to sharing with you again at the end of the next quarter. Cheers for now.

Okay, Bye-bye!

That does conclude our conference for today. Thank you for participating. You may all disconnect.