The announcement set Golar's stock soaring as analysts recommended shares in the Norwegian shipper, calling the move a big game changer. Its share price rose more than 10 percent to $43.14.
Golar agreed to convert one of its old LNG tankers into a floating LNG vessel (FLNGV), or production plant, and is eyeing African flared gas and pipeline systems as a source of supply, it said.
Singapore's Keppel Shipyard will start drawing up designs with vessel conversion due to start around mid-2013, Golar said, in a deal analysts say may cost $600 million.
It will produce around 2 million tonnes of LNG annually.
Golar's billionaire chairman John Fredriksen said the company retains the right to convert another two tankers.
Fredriksen said FLNGV will open new markets for LNG as well as boost production capacity at a time of bottlenecks with "massive opportunities for growth in the next five to 10 years."
"If successful, a massive value transfer from oil companies to Golar LNG could emerge as the current LNG production cartel could be broken," RS Platou Markets said in a client note.
"A successful FLNG conversion will be a big game changer for GLNG as it can offer a full infrastructure solution between gas markets," it added.
The global LNG market is controlled by a handful of state and private companies, like Shell and BG Group, as the high cost of developing plants has prohibited the entry of independent players.
The move also underscores the growing attraction of LNG, with demand due to grow rapidly over the next decade as countries move away from coal-fired power plants towards cleaner burning gas.
It also paves the way for Golar LNG to leapfrog rivals by entering the upstream arm of the business long denied to shipping companies.
"This gives Golar the chance to enter the upstream segment, for example, by partnering with companies to monetize gas in west Africa that would otherwise be flared," Arctic Securities analyst Erik Stavseth said.
Oil drillers produce gas as a byproduct which is often flared, or burnt, on-site given its low value compared with crude oil.
Stavseth said Golar's ability to liquefy and sell stranded gas purchased at a discount will keep its shipments of LNG comparatively cheap at a time of rising global demand.
Unlike Shell's Prelude floating LNG project, the plant envisaged by Golar will be moored close to shore and supplied largely by pipelines, not distant offshore gas fields.
"The floating solution gives customers increased flexibility, quicker development times and the unique ability to develop reserves that are currently uneconomic," Golar said in a statement.
"It further gives them an opportunity to capitalize on the large global gas spreads and the attractive economics associated with gas as an energy resource," it added.
U.S. gas prices have bounced off 20-year lows to about $3 a million British thermal units (mmBtu), compared with $9/mmBtu in Europe and $13.50/mmBtu in Asia.
Golar's floating LNG plant will have maximum capacity of 2 million tonnes/year.
The first conversion will be ready by the first-quarter 2015, it added.
Golar’s Chairman John Fredriksen said, “Golar helped to open up the LNG market through the introduction of floating receiving terminals which have opened a lot of new markets for LNG. Our FLNGV’s will be able to provide a fast-track, cost effective solution for developing new LNG production capacity. We believe this technology will be extremely attractive to companies looking to develop their natural gas assets and we are actively pursuing multiple opportunities. It is Golar’s intention to market the solution for field developments as well as for direct production from existing pipeline infrastructure. The Board sees particular opportunities in the African region, where gas prices remain low. Significantly, large quantities of gas are currently being flared and the infrastructure doesn’t naturally support large land based LNG investments. The Board is excited about the new business line and sees massive opportunities for growth in the next five to ten years”.
Here's more from DBS:
Golar LNG is one of the world's largest independent owners and operators of LNG carriers, and where John Fredriksen is Chairman.
KEP will undertake the engineering and conversion work. Under the agreement, Keppel Shipyard will firstly undertake a front-end engineering and design (FEED) study, expected to commence in November 2012.
Vessel conversion is expected to start around mid-2013 following the conclusion of the detailed design and engineering work scope. To accommodate customer requirements, the first unit will be developed through several stages, and is expected to be ready for production in 1Q2015.
Contract to be firmed once FEED study concludes. The proposed unit will have a capacity of up to 2m tonnes per annum (tpa) and will have 125,000 cubic meters of LNG storage capacity.
Earlier FLNG projects by Shell and Petronas were valued at US$3bn and US$2bn respectively, with production capacity of 3.6m tpa/1.2m tpa. While we understand that the conversion contract and project value will be firmed up only when the FEED study confirms the engineering and work scope, we believe the project value to KEP will be significant.
Significant breakthrough for KEP; a potentially new growth driver. We see this project as a breakthrough for KEP, underscoring its capability and execution track record, with FLNGV projects and having been awarded to Korean yards to date.
We believe this could represent a new growth driver for the group, with Golar noting opportunities in the African region where large quantities of gas are currently being flared and the infrastructure does not support large onshore LNG investments.
DMG & Partners Securities
|Golar signed agreement with Keppel for conversion of FLNG vessel. News reports highlighted that Golar LNG has reached an agreement with Keppel Shipyard for the conversion of its first floating liquefied natural gas vessel (FLNGV). The FLNGV will have a capacity of up to 2m tonnes per annum and 125,000 cubic meters of LNG storage. Golar will convert one of its existing Moss LNG carriers and has options for two similar conversions at Keppel Shipyard. Upstream reported that Keppel will start Front End Engineering and Design (FEED) this month and physical work on the vessel is expected to start in mid-2013. The conversion is expected to complete in 1Q2015. We maintain BUY with a TP of S$13.80. Stock is now trading at 12.6x FY13F P/E with 4% yield.
Positive on the news.
We view the move positively and the award highlights the strength of Keppel in the conversion space. In the past, Golar awarded three FSRU conversions to Keppel (two projects) and Sembcorp Marine (one project) and we believe a successful conversion of a FLNGV could potentially lead to a more such projects. No contract value was reported in the news but we believe the shipyard value for the FLNGV could be as much as US$500m, depending on the scope of work, especially the procurement portion. For comparison, Shell’s Prelude FLNG project has a capacity of 5.3m tonnes per annum and the shipyard value with Samsung Heavy Industries is reported to be around US$3b.