Tue 09/01/2020 13:00 PM
Relevant Documents:
Q2 Presentation
Investors Presentation
2019 Report
Aug. 31 Release
Golar Power IPO

The above relevant documents are available only to EMEA Core Credit by Reorg clients and trialists. Please request a trial to access them and follow other financial restructurings. 

Some investors are looking at the shares and a convertible bond issued by Golar LNG, a liquefied natural gas, or LNG, shipping company headquartered in London, as a series of short and medium-term catalysts could unlock a significant amount of value from the group, sources told Reorg. The company is an integrated midstream services provider covering floating LNG liquefaction, or FLNG, LNG shipping and floating storage and regasification, or FSRU.

The company’s $402.5 million 2.75% convertible 2022 bond struggled at the peak of the Covid-19 crisis and dropped to about 65, before slowly recovering to around 90. The notes were perceived as part of sectors such as shipping and energy, which have been strongly impacted by the pandemic, sources said. The bond is convertible at $37.69 per share; the convertible bond's price and Golar’s share price year to date is below:
Golar high-yield bond share price from EMEA Core Credit by Reorg

Golar is aiming to simplify its group structure and create some investable units out of its four divisions. This could in turn unlock value for investors as there is a significant discount to the group’s sum of its parts valuation, according to sources. Golar also has to deal with the refinancing of a $150 million bilateral loan and a $30 million margin loan balance maturing in the third quarter of 2020, as well as its $402.5 million convertible bond due 2022.

A significant positive catalyst for Golar LNG would be the IPO of its downstream division Golar Power. Yesterday, Aug. 31, the group filed a registration statement relating to a proposed IPO of Golar Power’s common shares under the name of Hygo Energy Transition. Some sources also expect a possible spin-off of Golar LNG’s shipping division.

Shares of Golar Power’s comparable New Fortress Energy trade at $26.77 with a $4.25 billion market capitalization.

However, Golar LNG also faces risks, in particular in relation to Golar Power’s significant exposure to Brazil - a country which is transitioning to cleaner fossil fuels but poses a challenge in terms of political and macroeconomic dynamics. Another potential downside is a material delay in the construction of FLNG Gimi, one of the two assets in the company’s upstream division, due to Covid-19 disruptions. In that regard, on April 7, Gimi MS Corp received a force majeure notice from partner BP seeking to delay by a year receipt of a floating liquefied natural gas facility for the African Tortue Ahmeyim project because of the coronavirus outbreak.

Also, the price of U.S. natural gas has dropped to $1.74/mmbtu, down 25.9% year over year according to World Bank data. Golar management said that while lower prices are not ideal for the shipping market, they are expected to continue to stimulate demand for liquefied natural gas and accelerate its use compared to more polluting fuels.

According to sources, natural gas provides countries which rely on fossil fuels for power generation an alternative that is both cleaner, as well as having the capacity and infrastructure to service the demand in excess of what pure renewable energies can provide at this current juncture.
Golar high-yield bond natural gas from EMEA Core Credit by Reorg

During its latest call with investors, on Aug. 13, Golar’s management said that there will not be “an imminent breakup of the group” but reiterated that the board approved management’s “four legs” approach, which is expected to result in each division of the group standing alone. “The board has selected some of the routes we proposed to achieve the four legs and we are pursuing them in more detail. When and if they are executable, we’ll go back to the board for its final say,” management said during the call.

The four-legs approach is aimed at aligning the risk return of each of the group’s businesses to the risk return of different sets of investors and therefore to make it easier for them to potentially partner with Golar, management added.

Golar LNG shares are currently trading at $10.35, with a $1 billion market capitalization, from around $5 in mid April and $12.79 a year ago. The company’s shareholders include Orbis Investment Management, Cobas Asset Management, Fidelity Management & Research Company, Troim, BW Group Limited, BlackRock Institutional Trust Company and Bain Capital Management, among others.

Golar LNG’s board comprises some of Norway’s most high-profile offshore and shipping dealmakers led by chairman Tor Olav Trøim, John Fredriksen’s former business partner at Seadrill and founder of jackup driller Borr Drilling. Fredrik Halvorsen and Georgina Sousa were also part of the Seadrill group previously. Niels Stolt Nielsen is CEO of Stolt Nielsen.

Downstream and Upstream Divisions

Golar LNG has four divisions: an upstream division, which deals with LNG production and liquefaction (FLNG), a shipping division, a floating storage and regasification division (FSRU) and a downstream division, according to a June 2020 investor presentation. FSRU is a liquefied natural gas storage ship that has an onboard regasification plant capable of turning LNG back into a gaseous state and then supplying it directly into the gas network.

The downstream division, or Golar Power, is the segment which investors put more faith in and is owned 50% by Golar LNG and 50% by infrastructure investor Stonepeak. FSRU terminals usually act as an LNG hub for a large-scale anchor customer, which is typically a power plant or a large industrial customer locked into long-term agreements with the company to secure significant volumes from the FSRU. Sources mentioned that the group mitigates commodity price risk through agreeing long-term contractual offtake agreements with industrial customers, before beginning to supply the LNG.

On the other hand, the company has been implementing a form of on-land LNG transportation to extend its reach to new geographies and smaller-scale customers, as well as transporting LNG from the FSRU to large or medium-scale customers that may not have direct access to LNG from the FSRU or pipeline. The target is to use excess capacity of the terminal for small scale LNG distribution to boost the group's total return.

An example of this is the February 2020 partnership Golar LNG announced with Petrobras Distribuidora in order to introduce liquefied natural gas as an alternative to the fuels currently available to Brazil’s cargo and people transportation, industrial, thermoelectric generation, commercial and residential sectors, according to a release.

Golar LNG’s upstream division can count on two assets: FLNG Hilli Episeyo, where Golar LNG Partners LP (30% owned by Golar LNG) has a 50% interest in Hilli T1 and T2, and FLNG Gimi, which is under construction at Keppel in Singapore and is expected to serve the 20-year Tortue project for BP. FLNG, or floating liquefied natural gas, refers to the floating production unit of liquefied natural gas, while a floating liquid natural gas vessel is a ship with all the apparatus to enable offshore liquefaction of natural gas.

An environment of low gas prices is likely to reduce the growth of the upstream division but eventually benefit the performance of the downstream one, sources said.

According to its second-quarter presentation, Covid-19 conditions in Singapore have increased the construction delay for FLNG Gimi. Golar LNG said that constructive discussions are continuing with partner BP to agree on a project timetable and delivery dates and with lending banks to adjust the financing schedule. Changes to the overall Gimi project budget are expected to be minimal, Golar LNG added.

Hilli’s adjusted EBITDA in the second quarter amounted to $41.4 million from $43.1 million in the first quarter, while discussions with customer Perenco to expand production are continuing.
Golar high-yield bond Hilli adjusted EBITDA from EMEA Core Credit by Reorg

On the other hand, adjusted EBITDA of Golar LNG’s shipping division dropped to $32 million from $43.4 million, while seasonality in the second quarter led to lower TCE rates compared to the first quarter.

One comparable for Golar LNG’s upstream division is Cheniere Energy Partners, according to sources. Cheniere Energy Partners develops, constructs and operates natural gas liquefaction facilities. Brookfield Asset Management has agreed to acquire an interest in Cheniere Energy Partners from Blackstone Group, according to Bloomberg. The deal price of $34.25 per unit (slightly below its current price of $36.33 a unit) values Blackstone's 41% interest in Cheniere at roughly $7 billion. According to some analysts, $34.25/share implies a dividend yield of 7.6% and EV/EBITDA multiple of 11x.

Golar Power IPO

On Aug. 31, Golar LNG announced that Hygo Energy Transition Ltd. (formerly Golar Power Ltd.) has filed a registration statement relating to a proposed IPO of Hygo’s common shares. Morgan Stanley and Goldman Sachs are acting as the lead bookrunning managers for the proposed offering. Barclays Capital, BTIG, Citigroup and UBS Securities are acting as bookrunners for the proposed offering.

The proceeds from the IPO will be used to redeem the preference shares issued to Stonepeak, as well as for capital expenditures relating to the Barcarena Terminal and Santa Catarina Terminal.

In 2016, 20 million preference shares of $5/share were issued to Stonepeak at an 8.5% rate payable semi-annually.

Hygo energy Transition’s organizational structure is as follows:

The group notes that although there is a risk that the final investment decisions of the Barcarena and Santa Catarina terminals may be delayed due to travel restrictions, the contracted nature of the LNG terminals reduces the risks of material impacts from Covid-19 over the longer term. A summary of the group’s investments and ownership interests is below:
Golar high-yield bond investments and ownership interests from EMEA Core Credit by Reorg

Second-quarter Results

Golar LNG’s second-quarter operating revenue increased 5.7% year over year to $102.2 million, driven by 13% growth in vessels and other operations. Shipping revenue improved on the back of higher TCE rates, which increased from $24,400 to $45,100. Additionally, utilization improved from 66% to 93% year over year. As a result of improved TCE rates and utilization, shipping adjusted EBITDA increased to $26 million from negative $3.2 million in 2019.

The group’s shift in shipping strategy, together with a stronger supply/demand dynamic has contributed to a 54% CAGR in shipping adjusted second-quarter EBITDA over the last two years. The group expects strong utilization for most of 2020, with Golar LNG looking to de-risk shipping exposure and hedge expected volatility. For the third quarter, Golar expects the TCE rate to be $35,000 per day, roughly in line with the third quarter, with utilization of 78%, versus 65% in the third quarter of 2019. Sources indicate that the TCE breakeven rate per day is approximately $15,000, with Golar LNG continuing to benefit from relatively low marginal costs in its shipping division.

Total FLNG adjusted EBITDA declined 4.1% to $41.1 million, with Hilli adjusted EBITDA of approximately $41.4 million. Hilli operates with 100% commercial time, with 42 cargoes offloaded to date. A financial summary for Golar is below:
Golar high-yield bond financial summary from EMEA Core Credit by Reorg

Levered cash from operations increased from negative $42.2 million in the second quarter of 2019 to $36.9 million, largely on the back of higher EBITDA, partially offset by a $9.9 million working capital outflow. Capex declined to $44.3 million from $108.8 million in the first quarter or $113.7 million year over year, resulting in a levered cash outflow of $7.5 million. Levered cash flow before financing activities was negative $15.9 million, with the group paying a further $5 million of dividends before reducing gross debt by $17.3 million.

As a result of higher EBITDA, where LTM EBITDA margins are 63.9%, or $295.7 million, compared to a full-year EBITDA margin of 56.8%, or $254.9 million, net leverage declined by 0.8 turns of adjusted EBITDA on a sequential basis to 8.2x. Total debt as reported on the balance sheet was $2.545 billion with cash of $128.7 million. Below is a snapshot of the company’s cash in the first and second quarters:
Golar high-yield bond cash from EMEA Core Credit by Reorg

In the earnings report, released on Aug. 13, management said it was working on the refinancing of the existing $150 million bilateral loan due Nov. 20 and the remaining $30 million outstanding margin loan due on Aug. 20 with a corporate RCF. The company said the discussions were advanced with term sheets having been exchanged among the parties.

Golar LNG adjusts book value of net debt to include variable interest entities, which serve as counterparties for sale and leaseback transactions on a variety of their FLNG facilities and ships. It adjusts net debt for the VIE restricted cash, consolidation adjustments, deferred finance charges and TRS restricted cash. Reorg’s adjusted net debt for Golar is below:
Golar high-yield bond adjusted net debt from EMEA Core Credit by Reorg

The group’s capital structure, based on contractual debt obligations and reported cash on the balance sheet is shown below:
Golar high-yield bond capital structure from EMEA Core Credit by Reorg

The company’s $156 million net loss in the second quarter was caused by an impairment of $135.9 million on Golar’s investment in Golar Partners due to the persistence of the market unit price below the previous book value, now impaired to $2.58/unit as at June 30. The group’s $30 million margin loan is secured by 21.23 million units held against Golar Partners.

Management is also working on the refinancing of Golar Frost (option in October 2024) and Golar Seal (maturing in January 2021), for which discussions “are underway.”

Below is Golar LNG’s corporate structure:
Golar high-yield bond corporate structure from EMEA Core Credit by Reorg

-- Luca Rossi, Patrick Soede
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