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Thursday, 27 August 2015

Kep Corp's FLNG: Watch What Golar Is Reporting too!


Investment Review

Conversion Contracts

As of end-July, overall Hilli FLNG project progress remained on schedule and expenditure for the quarter was in accordance with the approved budget. During the quarter sponson construction, assembly, blasting and painting work progressed.  Fabrication of piping and pipe supports continued and good progress was made with the repair and life extension work for the vessel. Significant activities undertaken during the last quarter included addressing specific design and operation issues (Perenco/Cameroon) and the overall project at the end of July is calculated to be 60% complete.

On July 21, the Company executed agreements for the conversion of the 126,000m3 LNG carrier Gandria to a Golar floating liquefaction facility (GoFLNG). The Gandria conversion will now be dedicated to satisfy the commitments to Ophir in Equatorial Guinea, covered by the agreement announced in May this year, requiring delivery of facilities in 2019. This move will release the Gimi (conversion contract signed in December 2014) to cover the potential emerging demand for a 2018 GoFLNG project. Provisions in the Gimi and Gandria contracts give Golar the flexibility to adjust project timing and to limit expenditure. The objective for Golar is to ensure that it does not remain financially exposed in any material manner to more than one speculative GoFLNG. Golar's ability to deliver fast track GoFLNG solutions by having a pipeline of key long-lead components on order is a critical part of the business strategy.

The Gandria conversion contract is on target to become effective by the end of September this year. This contract provides similar beneficial cancellation provisions, which if exercised before December 2016 will allow termination of the contracts after deduction of a set cancellation fee.

GoFLNG - Business Development Progress

Agreement has now been reached with the support of the Boards of both Golar and Perenco on the material commercial terms and conditions for the approximate 1.2 million tonne, 8-year Cameroon FLNG project scheduled to commence operations in 2Q 2017. The Tolling Agreement which defines the material commercial terms and conditions for the project is now subject to finalisation with SNH. The Midstream Gas Convention setting out the regulatory and fiscal regime governing the FLNG operations in Cameroon is now only subject to finalisation with the government. All parties including the government of Cameroon remain on track and are confident of approving the Tolling Agreement and the Midstream Gas Convention by the end of September 2015. Signing of these agreements will formalise FID for Golar's first GoFLNG project.

The Company expects the project in Cameroon to deliver an EBITDA for Golar in the first full year of operation, based on the utilisation of 2 of the available 4 liquefaction trains, in the range of $170 million to $300 million, with a flexible tolling structure which correlates to Brent crude oil prices ranging from a floor of $60/bbl to a cap of $102/bbl.

Golar announced on May 5 that it had signed a binding Heads of Terms with Ophir Energy Plc for the provision of the GoFLNG vessel Gimi or alternate. Subsequently the Gandria was nominated for the Equatorial Guinea project so that Gimi can be available in time for potential GoFLNG projects starting operations in 2018. The agreement for Gandria will be structured as a 20-year tolling contract, commencing commercial operations in the first half of 2019.

Golar, with its partners Keppel Shipyard and Black & Veatch, committed to the Gimi FLNG conversion in December 2014. Gimi and Gandria will both benefit from utilising the same configuration of utilities and liquefaction facilities as sister ship Hilli, with variations to Gandria to accommodate production direct from the deep-water reservoir. During the quarter, additional detailed engineering studies (FEED) were commenced for Gandria with the objective of finalising the design and budget for the deep water variations. The integrated Ophir/GEPetrol/Sonagas/Golar project remains on schedule to take FID during the first half of 2016.

The Cedar LNG Project development activity for the quarter included continued support of the NEB LNG export application as well as focus on solidifying arrangements for gas transportation service into the Douglas Channel area. The Company continues to monitor development activities for the relevant large scale pipeline projects upon which the first phase of Cedar LNG is dependent. Golar is currently anticipating FID for Cedar Phase I to be achieved by the end of 2016 assuming such third party pipelines maintain their current schedules.

New GoFLNG business development activity has been focused on maturing projects that have the potential to commence operations in 2018. A shortlist of 4 potential projects is currently subject to active discussions. Interestingly, each of these projects is located in a completely separate geographic region. In each of these projects the competitive tolling fees and flexible commercial structures have the potential to generate very attractive economics, even at today's low oil and LNG prices.

To meet potential customers' demand for early commencement, Golar has initiated discussions with Keppel Shipyard and Black & Veatch. The target is to achieve a fourth conversion with a delivery in late 2018/early 2019. A commitment will be dependent on Golar firming employment opportunities within 1Q 2016.

The recent weakness in oil and gas prices has highlighted the benefits of a fast track FLNG solution versus large, capital intensive greenfield LNG developments. In addition to reduced capital expenditure and accelerated start up, the Company's counterparts appreciate the flexibility the floating toll creates with respect to term and volume. Several of the business opportunities currently being discussed are based on stranded, associated or flared gas with limited commercial value without monetization through LNG production.

Capital expenditure for new, large scale Greenfield LNG developments shows a cash breakeven level from $10 per mmbtu and upwards. The cash breakeven level for a turnkey GoFLNG development can be significantly lower.

The Company is confident that a GoFLNG solution supplied with African or Asian gas reserves generates a reasonable return both for producers and Golar even with European and Asian gas prices at current levels. Significant upside can be monetized if gas prices recover. Golar is further confident that with respect to feed gas price, capital cost, transportation cost and flexibility, it has a competitive advantage over US export projects.



FLNG financing

As at June 30, including the value of the original vessel, Golar has invested $411 million in the Hilli conversion project. Today this investment sits at $424 million.  From the end of September when the tolling agreement and the midstream gas convention have been approved by SNH and the Cameroon government, respectively, all remaining conversion and site specific costs for the GoFLNG Hilli will be satisfied by a fully documented and underwritten facility provided by CSSC (Hong Kong) Shipping Co. Ltd. ("CSSCL"). This will fund up to 80% of the GoFLNG Hilli.

The financing structure will be split into two phases. Phase one enables Golar to draw down up to $700 million from the facility to fund the ongoing project cost once Golar and its minority partners have spent $400 million of the estimated $1.2bn project cost. Phase two is triggered upon delivery of the converted GoFLNG Hilli from Keppel Shipyard and the satisfaction of certain milestones.  This will provide for the drawdown of a further $260 million giving an aggregate $960 million.  This final tranche is expected to satisfy the remaining conversion costs outstanding at that time and the remainder will be a release of the Company's equity.

The CSSCL financing has a tenor of 10-years, a 15-year amortisation profile and contemplates the eventual sale of GoFLNG Hilli to Golar Partners.  The expected cost of the financing during the conversion period is 6.25% while the long term financing is projected to cost less than 6% on a fully swapped ten year basis.

Liquidity

The Company maintains a good liquidity position notwithstanding the current weak operating results. The cash balance at the end of 2Q is $375 million and a further $100 million is receivable from Golar Partners in respect of the Eskimo sale. Additionally, the Company will receive $50 million in yearly distributions from Golar Partners. The capital expenditure for Gimi and Gandria over the next twelve months is to a large extent dependent on progress with contractual employment discussions. As at June 30, 2015, $50 million has been invested in the Gimi and Gandria conversions.  If no progress is made firming up employment opportunities, the total cash expenditure will have increased to $65 million for these two vessels in the period up to June 30, 2016, of which $30 million is recoverable in the case of termination.




Corporate and other matters

The recent collapse of oil and gas prices has increased interest in LNG fueled combined cycle power generation. A shortage of power in areas like Brazil, Indonesia, India and South Africa and strong power prices in these areas together with lower gas prices have dramatically improved the economics of gas fuelled power generation.  Simultaneously, we see stranded and associated gas reserves that can be acquired at attractive valuations. The lack of near term liquidity in the LNG market to a certain extent prevents resource holders from developing reserves before they have firm off take contracts.

In order to develop Golar further and accelerate the implementation of the GoFLNG concept, the Company has in recent months been negotiating with Brazilian power partners. These partners have been awarded a 25 year PPA contract with Brazilian authorities to build and operate a 1.5 GWha LNG fuelled combined cycle power station in Sergipe, Northern Brazil. Golar has negotiated a right to participate in up to 25% of this project and has the exclusive right to provide the FSRU. In addition to supplying the power station with gas, the FSRU would also have excess capacity to deliver gas to the Brazilian grid. The partners are currently working through the permitting process and are in negotiations with LNG providers, contractors and financiers. The capacity payment achieved in the PPA contract was awarded at a historically high level. If Golar proceeds, it would do so on the basis of an expected unleveraged project return in excess of 15 %. Further upside is available based on usage.

Golar intends to establish a stand-alone, non-recourse subsidiary, Golar Power Ltd. to hold this investment. The Company's total commitment to this subsidiary will initially be $5 million in liquidity lines and $24 million in non-performance guarantees, effective from 2020. Further equity investments would be needed if the project gets a final go ahead. It would be Golar's intention to bring additional partners into Golar Power. In addition to the solid project return, Golar would use this position to accelerate its GoFLNG activities by creating a natural partnership with power producers and traders. The target is to offer a more integrated LNG solution to resource holders.  Golar has approached several leading trading companies with this idea and has received encouraging feedback. A final clarification around this structure should be expected before year-end.

The size of Golar's investments in Golar Power will be relatively small compared to the Company's commitment to FLNG, FSRUs and LNG shipping. Golar's business model remains to be a midstream gas company focussed on tariff based FLNG production. It is the Company's intention to separate Golar Power from the rest of the activities over time. This can take place through a spin off to Golar's shareholders.




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