Golar LNG Ltd (GLNG) 2019 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and thank you for standing by.

Welcome to today's Golar LNG Limited Q1 2019 Results Presentation.

(Operator Instructions) I must advise you, the conference is being recorded today.

I would now like to turn the conference over to your first speaker today, Iain Ross.

Please go ahead.

Thank you, operator.

Good morning, good afternoon, everyone, and welcome to Golar's Q1 2019 Earnings Call.

Today, I'm joined by CFO Graham Robjohns; Head of IR Stuart Buchanan, and we're pleased to advise our Chairman Tor Olav Trøim is also on the call.

Turning to Slide 3. We have had a lot of feedback over the last few months about the things we can do to try and make the Golar story most simple, more appealing to some of the longer-term investors that we are trying to attract and we hope to cover some of that today.

Our vision is to participate competitively, sustainably, and of course, safely in the owning and operating of LNG infrastructure assets, which we believe are part of what the world needs to move towards cleaner energy.

Slide 3 is a reminder of our current assets.

Let me move to Slide 4, just cover the highlights before handing over to Graham for him to go through the numbers.

The main achievements were during the quarter, but clearly to conclude all of the contractual agreements in order to get going on the Gimi FLNG conversion project for BP, which is now up and running and progressing to plan.

As a reminder, the vessel should be on station and producing LNG in 2022 at which point it will start earning down an EBITDA backlog of over $4 billion associated with the project.

A $700 million debt facility is in place, partner in this development capital has subscribed to 30% share in the project.

The second project that we made final investment decision on is the Viking conversion from a carrier to an FSRU for LNG Croatia and that project will commence next year.

And whilst we grew the EBITDA backlog, the amount of EBITDA that we generated during the quarter was about half of the Q4 2018 number largely due to seasonally reduced shipping rates, which still was well above the first quarter last year.

And importantly subject to the shipping market improving, as we think it will, we're getting closer to a spin-off of the TFDE fleet having received approval from the Board to move forward on that basis.

Spinning off the ships will create 2 separate businesses that should be more appealing to investors individually than as a combined group.

I'll now hand it over to Graham to take you through the numbers in more detail before coming back to talk through the business segments.

Thank you, Iain, and good day, everybody.

Starting on Slide 5 and our income statement, net operating revenues were down this quarter at $97.8 million from $141.8 million last quarter, primarily as guided as a result of a weak Q1 spot shipping market, which was largely driven by seasonality as well as early Chinese LNG buying in Q4 leading to weaker Asian LNG prices in Q1 which removed inter-basin trading opportunities.

As a result, fleet utilization fell to 51% and TCEs to $39,300 per day.

The reduction in shipping revenues was the key driver behind the adjusted EBITDA of $62.9 million, although realized earnings from the Brent-linked element of the Hilli Episeyo contract were also reduced at $2.2 million for the quarter.

The fair market value of the Hilli Episeyo linked oil contract i.e.

the unrealized elements recorded a gain of $28.4 million in Q1 as oil prices recovered from year-end.

This of course compared to the very large loss of $196 million for Q4.

We recorded a $34.3 million impairment in the quarter in respect of the steam LNG carrier Golar Viking, the vessel being converted for our Croatian FSRU project.

Although the sale is not expected to close until Q4 2020, the transaction triggered an immediate impairment test.

As the current carrying value of the vessel exceeds the price a market participant would pay for it as an LNG carrier today, a noncash impairment charge of $34.3 million has been recognized.

A profit is, however, expected to be recorded when the sale actually closes along with the net cash inflow of approximately $40 million.

And finally equity in losses of associates was significantly reduced this quarter due to the impairment of our holding in Golar LNG Partners that was recorded in Q4.

Turning over to the balance sheet.

On the next slide, our unrestricted cash balance was $213 million as of March 31 as compared to $217 million at year-end.

Included in our total restricted cash of $478 million is $175 million relating to the Hilli Episeyo Letter of Credit facility, approximately $29 million of which is expected to be released to free cash in Q2 2019 with a further $85 million scheduled to be released by May 2021.

Turning over to Slide 7. Our last 12 months further adjusted EBITDA, which is adjusted for nonrecurring items in Golar LNG partner share of Hilli, annualized for the full year was $186 million, which would expect to increase as a function of an improving shipping market.

Though this is -- as I say, after the deduction of a one-off gain associated with the Golar Tundra contract and also the Golar partner share of Hilli, but does not include distributions that we received from Golar LNG Partners, which is currently approximately $37 million per annum.

Moving over to Slide 8 and staying with EBITDA.

Our cash generation from our FLNG and downstream assets and contracts will now start to ramp up.

We also expect our current base level adjusted EBITDA will improve as a function of an improving shipping market given that the $186 million for the last 12 months numbers equates to an average TCE of only $44,000 per day.

Cash generation will increase significantly over the next 2 years as a function of the startup with the Sergipe power station together with Nanook FSRU, expected increase in utilization of the Hilli, and of course, the new Gimi FLNG contract, and this will bring us to over $500 million a year.

These numbers, as I say again, exclude any contribution from Golar LNG Partners in the form of dividends.

Third slide on EBITDA, on Slide 9, you can see that even without the assumption of the proposed shipping spin-off, our earnings will become far more predictable as fixed contract start to demonstrate -- dominate and we move from fixed element of contract 23% currently to over 70% once the Gimi is operational.

Turning over to Slide 10.

Here we show a breakdown of our debt.

Our adjusted net debt position as of 31st of March, including 100% of Hilli's $894 million debt was $2.2 billion or 1.5 -- $1.75 billion, if you exclude Golar Partners' share of Hilli's debt.

We've also set out on this slide the split between short-term and long-term contractual debt, which as you see differs markedly from the balance sheet position as a result of their requirement to consolidate the Chinese bank's leasing companies, so-called BIEs.

An important part of the proposed shipping spin-off is, of course, debt reduction from our balance sheet.

The debt associated with the vessel earmarked for the proposed shipping spin-off equates to approximately $1.17 billion.

In terms of new debt, as Iain has mentioned and as reported in earnings release, on April 16th, Gimi MS Corp, our 70% subsidiary, which owns the vessel Gimi received a firm $700 million fully underwritten financing commitment.

The [subsi] will be available during construction at the tenure of 7 years and has an amortization of 12 years.

We also expect that as we get nearer to commercial operations, this level of debt will increase as was the case with Hilli.

In terms of other debt facilities, we have agreed to 2-year extension on the Golar Tundra leaseback facility and a 5-year amended facility in respect of the Golar Arctic got credit approval during the quarter.

Okay.

Thank you.

And I will now hand back to Iain to carry on with the presentation.

Thanks, Graham.

So I'm on Slide 11 taking the business sectors in turn, firstly FLNG.

Hilli is going well, currently offloading cargo #20 this week and is -- we recently achieved a contractual milestone of 1.2 million tons of LNG produced that led the LC to be reduced as Graham mentioned.

On the back of our continued satisfactory performance, discussions with Perenco are in progress with a view to increasing the production volume beyond the first 3 trains and potentially extending the overall duration of the contract.

We expect to conclude these discussions well before the year-end, and I'm sure that you will understand if you don't go into any further details at this time, but we will update you fully when we concluded the agreements.

The Gimi conversion project for BP is being kicked off as mentioned.

We recently cut the first steel on the sponsons and as the project progresses, we are making sure that anything that we can learn from the Hilli operation is built into the design and operations of Gimi.

It's this recent and relevant operations experience is making our discussion with other potential FLNG customers so constructive.

Our pipeline of prospects remains very healthy, but it should be noted that these deals are complex and take time to conclude.

And although we're confident that FLNG economics and risk profiles will result in readily refinanceable assets post-startup, one of the key challenges for Golar is our ability to commit our portion of the equity required during construction phase of a project, payment terms are a key component of this and we continue to work with yards and suppliers to try and optimize the commercial model, which will allow us to make this business more scalable.

Turning to shipping on Slide 12.

So the shipping market did experience a seasonal decline with the TCE effectively halving from the fourth quarter.

And as usual, it was a combination of factors that led to the swing in rates.

With a mild Asian winter despite continued growth in China we saw some nuclear restarts in Japan and Korea that largely offset that Chinese demand.

The harb closed and the Atlantic basin cargoes from the U.S. and Russia into Europe doubled by volume compared to the first quarter 2018.

With these additional volumes remaining in Europe ton miles and the shipping rates continue to fold throughout the quarter leaving spot TFDE and steam rates at 40,000 and 24,000, respectively, by the end of March.

And of course, with rate reductions, we also experienced reduced utilization, which in a down cycle has a greater effect of TCE.

Although the rates softened further in Q2, we recently seen the low point and shipping rates are now into their seasonal recovery.

Forward gas prices of $9 per MMBTu being quoted for December gives solid support to the improved shipping market and our view on the coming structural shortage in shipping remains unchanged.

Leading brokers continue to forecast a 10-plus vessel shortage at the end of 2019 increasing to more than 20 at the end of 2020.

Rates are expected to reflect this from the second half of this year onwards and remains strong for the next 2 years.

This has resulted in an increasing request for medium- to long-term charters.

We have a couple of deals already concluded and several more under discussion based on index-linked rates, which will secure full utilization of the chartered vessels.

These deals will provide some support to the fleet TCE moving forward.

As mentioned in the introduction, at our recent Board meeting in Bermuda, a decision was made to proceed with a spin-off of the company's TFDE LNG carriers into separate business subject to satisfactory market conditions, which will allow us to focus the company's future activities around FLNG, Golar Power and the downstream assets.

We believe this spin-off will allow LNG shipping investors more direct exposure to the LNG carrier market without having to consider the longer-term CapEx projects.

Golar is also in talks with other owners of similar tonnage to potentially join the new shipping company.

And under the new arrangement, it should be noted that management of Golar's vessels will remain with Golar management Norway.

Turning briefly to the FSRU business on Slide 13.

Viking conversion project has taken FID with long-lead equipment now in order.

She will enter the conversion yard at Hudong at the beginning of next year and will trade as a carrier until then.

This conversion contract will not consume any material amounts of cash due to the milestone payment structure agreed under the contract.

Other FSRU prospects are being pursued, but the approval process remains slow and the returns are less attractive than other parts of the business can be.

Turning to Slide 14, Sergipe power station.

Construction remains on track for commencement of operations on January 1, 2020.

Power station is now near mechanical completion and pre-commissioning of selected systems has commenced in anticipation of first firing of the gas turbines currently scheduled for early July.

Transmission lines from the substation to the grid were connected on the 3rd of May and the FSRU Nanook with its commissioning cargo is ready for hookup to the mooring.

And as a reminder, Golar's share of the earnings from this project are around $99 million per year for 25 years regardless of whether power is dispatched or not.

As discussed on the last call, Golar Power commenced a strategic review, which focused on how we can ramp up the business now that Sergipe power plant is nearing COD.

We had a progress update a couple of weeks ago, and there are a number of ways that we can build the power business.

Of course, we can continue to pursue Brazilian power options to underpin further development like Sergipe and we do have a couple locations already permitted and with well developed business plans, one at Barcarena in the North and the other at Santa Catarina in the South.

We will continue to pursue these projects because the problem is that we have the time frame between now and when we see cash flow is quite long, between 4 and 6 years away.

So thinking about smaller amounts of CapEx and shorter payback times, we've been closely examining the downstream distribution market for some time and the clear conclusion of the review is that the immediate focus of Golar Power will be to utilize the strategic position of the Nanook FSRU to access the downstream small scale LNG market in Brazil.

If we turn to Slide 15, we have tried to illustrate there are several ways the Brazilian energy market is being serviced.

We included current reference price for the different forms.

For example, the industry is paying about $15 per MMBtu for piped gas, isolated communities are paying about $14 for HFO- generated power, domestic consumers are paying about $20 per MMBtu for piped gas and diesel for transport costs about $26 per MMBtu.

And in this slide, we are attempting to show that we have a small scale rollout solution for gas-fired remote thermal power or domestic gas consumption and remote LNG transport.

In all modes, we can generally beat the reference price for supply of LNG versus the current field.

And if you consider that 95% of the cities in Brazil are not connected to pipeline gas, this is an opportunity to displace expensive diesel and other fuels.

The market in Brazil is large with diesel consumption across the whole country equivalent to approximately 40 million tons per annum of LNG demand.

So the key to this plan is to use the FSRU Nanook.

We've already invested $300 million to $400 million in the vessel, the pipeline, and the mooring and that expenditure is justified and supported by the Sergipe power station project.

But when the Sergipe power station is running at full capacity, it will only require a fraction of the volume of the FSRU.

We, therefore, have access to around 200 million MMBtu per year spare capacity.

If you turn to Slide 16.

The model we're developing involves breaking bulk from Nanook and transporting LNG to other coastal locations before transferring to storage tanks, secondary terminals or truck loading stations for the further transport to the destination.

We have had detailed discussions with many of the small cities that can be served from Nanook FSRU and have received such strong interest in these communities combined with the strong drive from the Brazilian government that we're moving ahead with the detailed planning and costing.

The key will be to understand not only the cost of conversions for the consumer, but how we can make it as easy as possible for them to take advantage of the lower costs and improve environmental performance.

The Nanook is a strategic asset, and creates very high barriers to entry.

By means of example, if we use all of the excess capacity of the Nanook and assume, let's say, $1 per MMBtu can be captured, this is equivalent to around $100 million per annum additional EBITDA for Golar Power.

Importantly, the time between investment and cash flow is relatively short with returns commencing in 12 to 18 months.

We believe this model is replicable at other locations such as Barcarena and Santa Catarina and importantly it can accelerate the positioning of strategic FSRUs in those locations in advance of a power station contract being awarded.

Turning to Slide 17 shows another example, this time transportation.

Diesel for transport costs $26 per MMBtu as illustrated by the petrol pump -- or the diesel pump price that you can see in this slide.

It can probably be delivered in the form of LNG for about half the cost and interestingly LNG trucks cost about the same as diesel ones and right now there are around 2 million trucks on the road in Brazil using about 32 million tons per annum equivalent of LNG in the form of diesel.

LNG cuts CO2 and nitrous oxide emissions by 30%, particulates by 70% and it basically takes out any sulfur.

It's cleaner and much cheaper to use LNG for transport than diesel and infrastructure is relatively cheap and fast to rollout.

Moving now to Slide 18.

This summarizes our contract earnings backlog, which is around $6.6 billion versus the current market capitalization of $2 billion and an enterprise value of $4 billion.

We continue to look to build a strong and sustainable business with some high-quality customers.

And this seems like a good time to hand it over to Golar's Chairman, Tor Olav Trøim, for his views and some closing outlook comments.

First of all, I want to thank all of you for listening into the call.

The reason why I wanted to participate in today's call was to give an unfiltered message from the Board to the company's shareholder and prospective investors about the strategy at the outset and the focus that Board will have for the company going forward.

To build a great company is never easy.

I have had pleasure of being in part of the group, which historically built some great companies, made a lot of money for shareholders and nearly all of them went through some tough times before the shareholders ultimately got their reward.

Even our vision to sell cheap and healthy fuel to reconsolidate [the salmon] industry ended with big losses no investor confidence on market capitalization of $1.2 billion in 2012 before the investors saw the value of cheap and healthy fuel and today the price of the company is $11 billion after they paid out another $3 billion.

I'm proud about our employees in Golar have done and have achieved over the last year.

We delivered the world's first FSRU.

We delivered the world's first FLNG and we delivered it under budget and on time.

We have 100% up time of operation in the first year of operation.

We started the construction of the second one after BP had spent 3 years in our offices vetting the vessels.

We are seen as a top class operator of LNG carriers and we are in the process of completing construction of South America's largest thermal power plant, which will generate $1 million in EBITDA every day for the next 25 years.

We have altogether gathered backlog of more than $10 billion for the group with a very good margin not bad for the company with the market capitalization of $2 billion.

However, we are as Board also ultimately responsible for giving return to shareholders.

That is the most important thing you have in mind running a company and we have not delivered over the last 5 years.

I have to admit that it feels tough to announce a 20-year deal with BP with an unleveraged return of 13.5% at the same time see the share price fall.

Particularly, it's hard when we are approached by pension firm out there, which would be happy to see a half of that return for a 20-year deal to an oil major.

We can't blame it on the market.

The LNG market is the fastest growing energy market in the world outside renewables and growing more than 10% a year.

It's a great history, as Iain said, has a significant pollution reduction.

CO2 down 30%, SOX 100%, and particulates down 60%.

It is really an ESG case.

The biggest real challenge we have had probably been, and ultimately, have been the hurdle in developing this company over the last years, has been the slowness of the decision-making in this industry, the time it takes to execute from project, to planning, to permitting, to construction and completion and then a lack of developed financing for LNG industry, which is a new industry.

We will (inaudible) and let Nanook pick up cargo from Hilli, use the FRSU capacity and send the gas into our power station in Brazil and let another new ship which comes in the end of the year start the distribution of small scale LNG in Brazil from Nanook.

It represents 10 years of hard work in permitting, negotiating, financing and executing on a very firm conviction.

LNG is cheap and clean energy that's why it in percentage term, grows close to 10x more than oil.

I dare to say that the biggest value in Golar today is not the contracted cash flow which all the analysts estimate on a quarterly basis.

It's the execution experience we have gained and the strategic value of that infrastructure we have built which is (inaudible).

There is only Golar and Petrobras today, who can deliver LNG into Brazil, and it cost hundreds of million dollars for anybody else and years to challenge us.

The main target for the company now going forward as Iain said, is the field day production capacity of Hilli for a longer-term than initial contracts.

It is to increase the trip to Nanook and it is to produce merchant power in Brazil in the periods we may not dispatch.

It to replace diesel in the downstream market.

It's all incremental revenue and EBITDA on a CapEx which we already had been taken by the Golar shareholders.

It is to use the entry points we know.

The further points we know are permitted in Brazil to deliver further LNG into the customer.

The pump price for diesel in the (inaudible) was yesterday equal to $26 LNG prices.

At the same time LNG price in the U.S. market was yesterday $3.85; in Europe, it was for $4.24 and JKM price was $5.32 in Asia.

They are all prices, which are equal to or less than $30 oil.

Gas, LNG is significantly cheaper.

What we need, in addition to, Nanook, to go after this Brazilian market is a small scale vessel, it's some LNG storage tanks, typically costing $500,000.

There are some ISO containers typically costing $110,000, it's filling stations for trucks costing about $0.5 million and some trucks costing around $100,000.

We're talking about less than

(technical difficulty)

$100 million to make a short case for energy revolution in what is the fifth most populated country, a country which last year had these rights.

I have never seen a more obvious and stronger and more profitable ESG investment case.

This is what Golar ultimately is about cheaper and cleaner energy solution.

In order to streamline the company for long-term task (inaudible), the Board has decided to spin-off the carrier business.

We will remain operators of the ship, we think the volatility we have seen in the shipping industry makes it difficult for investors to really understand what Golar is about.

At the same time, we know we are heading into some interesting time in shipping.

We saw rates cross $200,000 per year, last year.

We did come in the first part of the year, but they already seen clear signs of recovery.

For the next 2 years, we know that LNG production coming on will outstrip the amount of new shipping capacity coming from the yard and thereby should lead to a tighter market in the 2 years to come.

It is time now, if any time, to grade the pure play LNG shipping company.

We have invested more on $5 billion to get to where we are today.

From here on, it's much more a story about capital discipline, increased utilization of existing asset.

It's all about return on asset with limited investor -- with limited investment materially in order to create significant value for the company.

We know we have the permit to build for instance, an FSRU terminal in Barcarena.

We know the group has an (inaudible).

We know that through these assets can establish what normally is a $400 million terminal at the marginal cost of probably $50 million to $100 million.

If we after couple of years can get $1 in tariff on that throughput capacity, we're talking about an earning potential of $180 million from having throughput capacity on that.

It does illustrate the economics of going downstream.

Talking about downstream, we typically payback in 2 to 3 years if not at least they come quickly compared to FLNG.

They also create a very strong relationship to our customers long-term.

We are often asked why we haven't completed more FLNG.

People stating, asking us are there enough opportunities.

I'll tell you that's wrong.

We had 3 guys from Golar visit with one of the biggest energy companies in the world last week.

The company showed up with 40 people and presented us with 10 opportunities for FLNG development.

It's just an example.

The reason we haven't concluded more FLNG are twofold.

The time to take for oil companies and governmental institutions to get the FID and the ability to get debt financing in the period between FID and startup.

When they start production, you can usually leverage the contracts to leave no equity.

We had wanted to protect upside for existing shareholders in what we've already created by not diluting the capital.

My friend Wes Edens, who runs New Fortress, and I share a vision.

The biggest energy company 10 years from now might not exist today.

I mean, no way saying that it would be off, but I think as Wes and I say because what we do is we give customers cheaper and cleaner energy and we can make a lot of money in between.

I think this is generally a fantastic business model.

I hope that in the next year with that capital discipline and increased utilization of our assets and some of these unique downstream assets I'm talking about can give back a higher return again and can complete our integration energy company.

We can increase both short- and long-term earnings and maybe even can make Golar great again.

Between 2002 and 2014, we were the second-best performing stock in the OSEAX index, and we were up 1500%.

We have the history to take care of and we need to get back there.

With $10 billion of the group's backlog and $6 billion in order backlog in Golar itself and a significantly reduced debt load that comes from spinning of the shipping and a mission to lower energy cost for everybody, I think, we are on the right track.

I'm very confident about the future with the team we have put together and the assets we have and I'm excited.

Thank you.

Thanks, Tor.

And with that, I'd like to hand back to the operator for questions.

(Operator Instructions) First question today is from the line of John Chappell from Evercore.

I want to ask about the key growth focus.

The final bullet point was additional FLNG awards.

I understand you can't really say much on Hilli.

So I'll ask about the other 2 that are kind of in the probability tree.

Any update on a second potential asset for BP or just any thoughts about the timing of how that may transpire?

And then also you've introduced in the press release this comment about Delfin term sheet expected basis of shareholders agreement.

You can just explain a little bit of what that means and how that project is developing?

Thanks, John.

So there's no further update on the BP second vessel.

BP still retained that right and we've had no formal communication back on that.

In terms of Delfin, we just wanted to update everyone that we have made a bit of progress in revising our term sheet from the previous agreement that we had.

The challenge of that project remains and the focus of that project remains on trying to link an off-taker and the supplier to allow that project to proceed because that will be key to the financing of the opportunity.

We've made good progress on the technical aspects of the project that are happening in the background, but we are still trying to push and make some progress on the off-take.

So that's the critical path as it has been for the last 12 to 18 months.

Okay.

So no real change on timing?

No.

Okay.

The second question has to do with the shipping business.

And it's just comment that you made in the release and also in your comments about the recently concluded charters.

I get that their index links so that's both good and bad exposure to the market.

But obviously locking down the utilization is a huge positive if you remove one of the 2 variables from your net TCE.

So can you provide a little bit more clarity as to how many of those -- how many of your ships have been contracted on these index links?

And also the durations for those contracts?

Is it just bridging it to the winter?

Or is it a multi-year period?

So I'm not going to give specific details, but it's -- we hope to end up basically with a large handful of ships that have got some degree of contract in that order.

And the duration that we're talking about is north of 12 months for anything up to 5 years.

So there's quite a wide range, but there is a flavor coming through of a trade-off between us getting utilization and relating it to the market.

In my view, there are positive developments for the shipment fleet.

Okay.

And is that something you think you disclose ahead of the spin-off or not?

I don't think we did ever disclose that amount of detail for shipping contracts.

The next question is from the line of Michael Webber from Wells Fargo.

Iain, I want to touch on Golar Power.

There are handful of new slides in the deck and you guys clearly made a point to run through the different options you have in terms of finding ways to deploy that excess Nanook capacity.

I'm just curious, one, is your confidence in small-scale in Brazil, is that stemming from just the overall market opportunity?

Or is this related to contracts either awarded or in bid?

And then as you look at the different things you kind of layout on Slide 16, how should we think about you guys cobbling together a book of business to absorb that excess capacity in terms of just a broad sense of scale for both industrial kind of municipal and service station outlets and time line?

So the reason for that confidence in the small-scale is we went through the review, which we held in New York a couple of weeks ago.

We went through the review of the work that has been done and the detailed work that has been done in analyzing the, I guess, potential customers of this small-scale.

It was very thorough and very impressive.

And what that means is that we've gone to the level of having discussions with municipalities and end consumers.

We've got letters of support and letters of intent and interest in taking LNG from us to the point where we've built up fairly detailed models of what those transactions could look like.

What we have to do next is go to that next level of examination of the specific switching costs.

So we know how to get the LNG.

As Tor Olav said in his remarks, we can break bulk on Sergipe.

We can take one of the Avenir ships and come around the corner.

We know how much it costs for an overall isotainer or a larger tank.

But then the trick is to take that into the consumer and make it easy for them to take advantage of that low cost and environmental benefit.

So we are working on that.

And that will spread out between the various forms and sources on Slide 16.

So the 2 areas that are of most interest to us, one is, of course, trucking as we detailed on Slide 17 whereby we can provide that fuel we get some of that saving.

And then the other one, of course, is where you've got diesel-fired power generation in remote communities deep into the heart of Brazil and displacing that diesel with LNG and many of those power generation facilities are dual fuel anyways.

So again the switching costs are quite reduced.

Okay.

And there are a lot of ways, I guess, to kind of carve that up.

I guess maybe the best thing to ask about, I guess, over the next couple of years if you talk about the Jan '20 startup for the project in general and then from there on you're looking to kind of place the excess capacity.

What would the potential volume commitments look like 1 or 2 years out?

I guess, what are you targeting?

I think what we're looking at is a ramp up.

So I think part of -- once we reconvene towards the second half of the year, I would expect to -- if we have all our ducks in a row we will be pressing the button and pushing ahead with the first elements if you like of this type of distribution, learning from that and then slowly ramping or quickly ramping up as fast as we can into the rest of the community.

And I don't think we know yet just how of that much of volume we can actually put through in this way, but also we do have capacity, for example of Sergipe.

For an extension to the Sergipe power station, we could have power station #2.

So it'll be a ramp up of some degree over the next couple of years to maximize the utilization of the power station.

And I think during that time, we will then be looking at what can we do towards perhaps one of the other locations to do that in advance of a power station award.

Got you.

Okay.

And then my second question is actually around Delfin, which I think you touched on with John a bit earlier.

Just you mentioned an ownership structure there, is the best way to think about this you're looking at something at the corporate level?

Or is it best on an asset by asset basis because that project could span multiple assets theoretically.

Is it something where we're talking about broader agreement or we're taking it a step at a time on an asset by asset level?

I think we could end up with a broader agreement.

But right now, we're absolutely taking it a step at a time because we've got to establish this off-take and supply duopoly if you like to make sure that we can underpin the financing of the project.

We can spend all day looking at different structures, but if we don't have an off-taker that supports the project and the financing of the project then there is no much point.

The next question is from the line of Randy Giveans from Jefferies.

Few questions for me.

So you mentioned Hilli trains 3 and 4 on Slide 19, so is 4Q still the expected time frame for Perenco to announce FID on Train 3 and any updated maybe expectations for Train 4 and maybe specifically some hurdles, milestones that need to be achieved in the coming months for these trains to take FID?

So as I said in the prepared remarks, we're right in the middle of a fairly detailed discussion with Perenco and how we can both extend the volume and potentially the duration of that overall contract.

And I -- we will have that concluded, I would expect, well before the end of the year and maybe just let us have those discussions without obviously disclosing what we're saying and doing in the middle of those discussions and certainly when we have concluded them we will put out an announcement.

Sure.

Okay.

Just seeing if there are any updates in the timing.

And then obviously you were mentioning that the Board has approved the LNG carrier spin-off in your kind of guesstimation what are the kind of chances it actually happens and will it be closed in the coming months?

Or is that kind of a let's wait till rates really rally in 4Q '19, 1Q '20.

And then with that, what is the exit process from the Cool Pool?

So first of all, our belief, my belief is that the rates have had a turning point and will continue to improve as we go forward and on the basis if that's correct, we've got the full backing of the Board to go ahead with the spin-off of the ships.

So I would expect that that would take place in months rather than a particular longer time frame, and we are working through the process right now, the detailed transition should that go ahead the way we think it's going to go ahead and we'll advise details of that a little bit closer to the time when we look like we're going to be pushing ahead with the arrangement.

The next question is coming from the line of Chris Snyder from Deutsche Bank.

So first question is on the spin-off of the shipping fleet.

I guess, my question is how sensitive are you guys to the sale price just given that you'll likely retain ownership in the SpinCo and the transaction could drive a pretty significant valuation uplift for the existing Golar today?

I think that broad strategy is of course we've got to remain a major shareholder in this company going forward when it is public.

So I think, we are not that sensitive.

At the same time, we want to do it in a positive momentum.

I probably want to do it pretty quickly, use the next 2 years to let the share price run.

We're not talking about raising significant external capital.

I think we are talking to 2 parties as disclosed in the documents.

And I think this is a deal which probably we should be able to do at a reasonable good price without too much need for capital from third-party.

Okay.

Fair enough.

And also you mentioned that term inquiries are picking up and the term rates seem pretty good.

Are you planning to maybe lock up some of these vessels on to long-term contracts prior to the spin as maybe this could increase interest and/or impact the price you get for the fleet?

I mean possibly, the more realistic scenario is that towards the end of this year, we will see term business with fixed rates probably coming back into the fray.

The distance for us is a bit too far at the moment, which is why we are interested in these linked rate structures.

So depending on when we do the spin off you could see some, but I think it is more likely that they would happen post spin-off.

I think what we have seen of rates now, we have seen spot rates of course have crossed $50.

So if you're index linked you are close to that and then I think the last term deal which was announced in the market was something about $80 for 12 months.

So we probably are pretty optimistic to overcome this winter, and not only this, also the next winter.

I think we will holdback for the time being.

If you're looking back to the situation in '10 and '11 when the oil companies really became desperate was when rates were peaking up and with it on the charters.

Okay.

That's fair enough.

And then just lastly, I think almost everybody on the call today agree that the stock is worth more than where it is trading at, and Tor did a good job of kind of laying out this disconnect in his prepared remarks.

So just in that context how do you think about share buybacks?

I think we have, of course, fixed incentive dividend of $60 million.

We have considered that, if that should be dividend, should we buy back.

We have, of course, $3 million TRSs.

I think what is going to be important for us now is to get the financing in place for the BP thing, which current team here has done a great job getting to $700 million and limit our capital that to $300 million.

Then the question of course is BP 2 is coming and the whole capital structure.

It is also depending on what kind of financial structure do they ultimately end up with the shipping company but having clearly if we are walking the walk we should buyback shares.

If you excess capacity, managing stock is clearly undervalued.

The next question is from the line of Craig Shere from Tuohy Brothers.

Congratulations on a pretty good quarter in a rough environment and nice disclosure for today.

I have 2 kind of broad financing questions.

One about project lending, the other about funding the ships, the FLNG.

So on the project lending, I was a little disappointed with initial Gimi financing duration and amortization schedule considering the strong credit and length of cash flows that are contracted behind it.

What do you think it really takes to secure more project lender confidence and getting better matched loans, loan payments with contracted cash flows.

And kind of as a corollary to that if you're successful with these Perenco discussions before year-end this year for an expanded and elongated Hilli utilization would that be up an immediate project debt refinancing opportunity?

Yes.

It's Graham.

I'll take your second question first because that's a fairly easy one.

Absolutely, yes, if we can get a significantly extended term, I think, that's absolutely, opportunity to refinance the Hilli.

On the Gimi financing, point taken.

I think Tor Olav kind of alluded to the challenges of financing FLNG projects, which is why we are looking at different structures going forward in terms of developing them.

But bear in mind the term was 7 years post CRD, so it's a 11 years financing, which given the sort of powerful regulations now is long for bank financing.

It is absolutely the case that as we get nearer COD, we would expect to both increase the level of debt, flatten the amortization profile and lengthen the term.

If you look at the FPSO business, which is a manifestation of kind of similar business, it is a little bit more developed we typically see that they leverage 6x EBITDA to good counterpart as long-term contracts.

I think we can do something similar here when you are at COD and that means that you effectively take out all equity and you leverage $1200 to $1300 million against these assets.

That should be doable.

We are under some pressure to provide financing to take FID with BP.

And I think we just said okay, let's get this thing done and then we can optimize financing as we go along over the last couple of years.

I have no doubt as the industry becomes familiar and more comfortable with the concept of FLNG, the ability to finance will accordingly become more straightforward.

Great.

And my last question on funding the ships at the shipyards, Iain, you commented on efforts to get more flexible equity funding terms.

Two thoughts come to my mind about possible drivers for that.

One could be using alternative shipyards maybe in China.

But another could be just economics of scale.

If somehow you are able to string together 2, 3, 4 FLNG conversions kind of concurrently one after the other, that could tee up much better overall contract terms, and also be a major sea change for the future of the company.

Can you kind of opine on what the drivers are for potentially better equity funding terms and if any of the things I mentioned are on the table?

You are right Craig and it is not to be China, it could be Korea, it could be Singapore, if the Singaporeans would come to the table.

I mean, this is about creating something that's a repeatable.

If it's repeatable is treated more like a complex ship, maybe more like a drillship, for example, where if the design is such that it doesn't need to be changed then we can get terms that are more akin to shipping terms.

So instead of paying as we go, as we have to in the Singaporean conversions at the moment, we can maybe get 20, 80 or some payment terms like that, that really allow us to take the benefit of export financing, and therefore minimize our upfront CapEx.

These projects takes 3-plus years to complete, we can do a lot of with that time.

It is a combination of all other things you said and we are looking at a number of variants to try and optimize it, which is why we are not saying one thing.

We're looking at lots because I think may the best combination win.

Understood.

If you could find a magic bullet to unleash both the upstream and downstream financing opportunities you guys have tremendous upside.

The next question is from the line of Christian Wetherbee with Citi.

This is Lam on for Chris.

I just want to kind of circle back to the spin-off situation here for the LNG carriers vessels.

What is your plan for the Golar Arctic after the spin-off?

Will you guys look to continue to own it and operate it or you are going to look at sell?

I mean, for the time being we would look to own and operate.

We have some success with the Cool Pool on the TFDEs.

I guess, it's possible to set up a Cool Pool for steamships, but she would also be a potential conversion vessel, I guess, further down the line as well or to operate as an FSU.

I think what Iain, our management has done a great job when maximizing the value of course with the vessel value integration where we essentially got lot more for than we would have gotten in the secondary market.

That's just the value announcement of utilizing the vessels in a different fashion.

I think when people say what is the steamship purchase date, we have to remember there are still 300 steamships out of a fleet of 550.

So it's a bit immaterial part of the fleet we are still dependent on.

These ships will come off charters as -- over the next 5, 10 years to the extent that there were 20-year deals done in the beginning of 2000.

So I think we see the danger in being less prudent, so I think we are working in order to find some solution for them.

Some of them we have on charter right now and I think we are working, as Graham said, projects trying to maximize the sales value of these assets.

Okay.

And also I want to circle back on the Gandria.

I know you guys never really talk about it too much, but I know it is listed as a FLNG conversion candidate.

I know it is hard to put a timeline around potential conversion.

But I was just wondering if you can touch on the potential for such a conversion and when you think something like that could happen and how much EBITDA you would be able to generate from post conversion?

The way to think about Gandria while she is in lay-off right now, if you look at the BP contract and the EBITDA that we can generate from that I think we would be, if you can get a contract that gave us a similar return, we would go ahead with it.

So she is just there as the next potential conversion candidate ready to go.

Got it.

I know you guys don't really want to put timeline around it but if you would kind of give us sense on how long you think it would take from when you got that initial level of interest into one post conversion?

Can you give some sort of sense on the number of -- how long that would take?

It's almost impossible to say.

I think we have been talking to BP actively for 2 years between real serious discussion and review and actually, signing a contract.

But what I would say is the level of interest that we have had from large companies of the same size and scale as BP really taking an interest in both our Mark II, Mark III designs and Mark I conversion.

That's really ramped up, continues to ramp up every quarter and we are finding different groups of people coming in and getting more and more comfortable with the technology.

So it is almost like you have to go through these phases of does FLNG work, and I think Hilli proves that.

Is it something that is acceptable for a larger publicly-owned company?

For whatever reason I think BP is ticking the boxes to satisfy that and as a result of that we are getting more interest.

So you would hope that the next FLNG contract will be faster than 2 years.

But I certainly don't want to create expectations now of having one just around the corner.

These things are hard to get going.

Also I think it is important to add that we have seen every time we do an FLNG you have 3, 4 years of pretty heavy capital commitments, which goes out and you have no earnings.

I think what we come to say is that, let's focus on things which actually can bring earnings in 2020 and 2021 or 2022.

Long-term results we get annual earnings from FLNG and that earnings which is effectively based on the assets we already have invested in.

So it doesn't need a lot of CapEx.

So it's a very different profile.

So I think let's go after that first, try to build the confidence back, and let's hope that people actually see we're making serious money and then we can talk about doing a lot more FLNG's.

The next question is from the line of Greg Lewis from BTIG.

Actually thanks for squeezing me in at this point.

It's interesting and maybe a little inspiring to see you guys try to move into the downstream business in Brazil on the back of the Sergipe project.

That being said, there probably are going to be some challenges, it's kind of a step out of your business.

Is this something where we are going to be looking to hire a team to kind of spearhead this?

Is there potential local partners you can partner with.

I'm just trying to understand what Golar has to do over the next, I mean, I guess, about 12 to 18 months to get this in a position where it can actually be successful?

It's a good question.

I wish you were sitting in our Board meeting.

We have already hired a leader and the team.

In fact, the chap that we have got leading the team has done this rollout before.

He is probably the only person who has done it before.

And we are really impressed with the work that we have done.

We are very advanced in terms of, this isn't just an idea.

It was an idea when we started talking about this at least 12 months ago on the quarterly calls when we said we are looking at using the downstream capacity, small-scale downstream capacity of the Nanook.

There is a lot of work that's been done to prove this up.

We think it's real.

We are going to move ahead with it and hopefully if not on the next quarter's call certainly, the quarter after that we will have some significant updates to give in terms of detail around it and how we are moving forward.

Okay.

And just also in the prepared remarks you mentioned some of the problems that are facing the build-out of that FLNG has been -- has been financing -- financing of projects.

Is it more a function of the terms that are being offered or maybe an overall sense of lack of any terms being offered.

Is it about pricing or really just the availability of capital that do these projects?

Yes.

I think it's -- primarily I mean, we kind of touched on the question earlier where we're looking at $700 million facility for the Gimi, which is 50% LTV.

It's the amount of financing during that construction period, that's the challenge.

I mean, the pricing on the Gimi financing is not that high.

It's the amount of debt.

But as we said before, I think, as this market develops that will slowly change.

But rather than sitting around and waiting for that, again as we have said, we are looking to have better arrangements with the yards so that we have better payment terms and therefore the financing is not so much of an issue.

Okay.

And just thinking about what you did at Golar Power by bringing in an outside third-party investment partner, I mean, is that something that we can potentially see on the FLNG side or at this point there's really no discussions around that type of event?

It's feasible.

We talk to people all the time who wanted to perhaps participate and then if you can get somebody coming into FLNG business that values them as what they are which is downstream LNG infrastructure facilities and they want to invest with us at what we think they are worth, which is maybe 10 to 12x EBITDA then we are all for that type of conversation.

So we will see how it plays out.

We got nothing eminent on that story.

Your next question is from the line of Jason Gabelman from Cowen.

I would just keep it to 1. I was wondering how you envision GMLP fitting into kind of the new structure that you see emerging.

Over the next 6 months clearly the valuation at the MLP seems a bit discounted.

Do you see a potential to roll that up and kind of move the ships into this new vehicle that you're looking to spin out or do you see a potential to do something else with the MLP to kind of realize more of the value that's stuck there right now?

We are not planning to roll the ships from the MLP into the new spinoff company at all.

I don't think there is anything more that I can comment on the MLP.

That's something you, maybe, ask Brian if you come on the next call.

I think we are a large shareholder in the MLP.

So from that point of view, we have the same problem as all the other shareholders in the MLP that the valuation is low and the yield is high.

But I think there is real focus [we are taking] in the FRSU market that's certainly something we have always been looking for.

And I think it's also a question about getting the contract extended.

Of course, if it is extended that is a major step forward for DMP.

I think if you can get Spirit outer layer unutilized, that's also a major a step forward.

So I think we are working in order to do commercial sensibly to increase the cash govern and keep the dividend or grow the dividend.

But as a new vehicle to acquire things when you are yielding 13% of derivatives that's impossible to use it.

Because the irony is after some time we have had only short-term contracts in the LNG and the way we are moving forward now we are going to have a significant number of long-term contracts that would fit very nicely with the MLP.

The next question is from the line of Michael Webber from Wells Fargo.

Actually I had a follow up.

I thought I got back out of the queue but (inaudible).

You talked about building out another FLNG project in U.S. Gulf, developing downstream in Brazil.

There is no shortage of stuff for you guys to look at and the dividend at the parent level just always seemed a bit incongruent with the stage of the business.

You mentioned earlier, buybacks.

In terms of just the use of cash is that something you guys are thinking about allocating towards an operational purpose some time over the next handful of quarters especially with financing all of these projects one of the consistent hurdles?

I think dividend they have this year is crossing $60 million.

I think, you can discuss if that's sustainable or not.

It is certainly sustainable today with the capital we now have in the system.

Of course, we have a lot of CapEx.

But we also remember what Graham and Doug defined as top 2, stock is (inaudible) pay back in dividend, dividend isn't important.

It covers a lot of fund.

I'm not saying dividend is at a level where it should be for return, but I think you know the history of this group, we come from a system of dividend has always been a part of the team.

And I think to pay something back to shareholders every year even if you claim that is inefficient if we have to raise capital.

We have been very limited in raising capital over the last year.

I think we have tried to protect shareholders.

It is a discussion to be had.

We have to be listening to all the shareholders.

I am a shareholder myself as well.

I think no decision has been made.

If you could pay last year we can certainly pay this year and we can certainly pay even more next year.

There are no further questions.

I'll turn back to the speakers.

Thanks Sophia.

So just in closing, we have taken all your comments to try and simplify the Golar business.

On that basis and the basis of how shipping market recovers we expect to proceed with the spin-off of the TFDE fleet.

And that's how we are going to focus on growth in the FLNG business, which is a strong pipeline of prospects and importantly, in Golar Power, which is a unique opportunity to use the Nanook as a capital to accelerate the displacement of more expensive and more polluting fuels with LNG.

It's our intention to continue to build long-term contract earnings backlog and we believe this will in turn create long-term value for shareholders and we intend to do that with as much as capital discipline as we can.

Thank you for your interest in Golar and we look forward to catching up, again, next quarter.

Thank you.

That does conclude the conference for today.

Thank you for participating and you may now disconnect.