Golar LNG, Ltd. Earnings Call Insights: Rate Expectations, Operating Expenses

On Wednesday, Golar LNG, Ltd. (NASDAQ:GLNG) reported its first quarter earnings and discussed the following topics in its earnings conference call. Here’s what executives shared with analysts and investors.

Rate Expectations

Michael Webber – Wells Fargo: A handful of questions for you. I wanted to start with the quarter and Brian you mentioned some of the incremental costs associated with the Hilli and Gandria that you guys could not capitalize and then obviously inflated that OpEx line item. Can you give a breakout of how much that was and what a normalized run rate will be going forward?

Brian Tienzo – CFO: I think the normalized run rate should be along the lines the Q4, slightly higher than Q4 number, so $17.16 million to $17.18 million. So, I guess from that you can deduce that sort of $10 million as a result of Hilli and Gandria reactivation costs in this case repair costs.

Michael Webber – Wells Fargo: You mentioned, they are going to start getting marketed relatively soon. Can you give a little bit of commentary around I guess interest level? I’m assuming you probably have people calling you, you probably have already, and maybe some color around the rate expectations on those assets?

Brian Tienzo – CFO: I think interest for these carriers have obviously been around – we said we would start heavily marketing them in June. We are now just completing that conversion. Obviously, we can’t really say anything firm just yet, simply because we’re not at that stage, but certainly interest for these guys are there and quite numerous.

Michael Webber – Wells Fargo: I wanted to turn to the Satu and you have obviously been pretty transparent about the desire to drop that down. Can you give a little bit more color about where you are in that process and maybe a little color around potential timing?

Brian Tienzo – CFO: I think it’s a two way process. We obviously have been talking with LNG Partners and that discussion is ongoing. I think both sets of entities see the benefit in this, but ultimately, we have to decide on the schedule that we would follow and the price that we would agree on. I think this is under pricing that is already been governed by a fairness opinion, on the timing, and given that the vessel is now just on hire, on charter to Nusantara Regas, I think we expect the dropdown to come in the pretty near-term.

Michael Webber – Wells Fargo: So, it’s fair to classify that as being an early Q3 event?

Brian Tienzo – CFO: potentially.

Michael Webber – Wells Fargo: Then you mentioned the pricing being set obviously by kind of a third-party arbiter. Can you talk a little bit about Golar as expectations would be apparent in terms of what you’re taking back stock versus equity versus most of the breakdown there?

Doug Arnell – CEO: Do you mean how MLP would fund it?

Michael Webber – Wells Fargo: Yes. How would you be taking back from MLP, yes?

Doug Arnell – CEO: Well, first and foremost I think, as I said, it is something that is beneficial to both. I think in terms of pricing that’s an ongoing task. We have appointed a third-party officer to do that and as far as the pricing is concerned that is yet undecided. Obviously from MLP’s perspective they have a variety of instruments that they can use to be able to satisfy whatever the price that is agreed. I mean, as you know, they filed, they have three in May and that gives them the option of potentially raising equity, public debt and so on and so forth and of course they’ve got third-party to resolve and given the leverage level at the moment, they remained and they do have that flexibility to choose any of those options.

Michael Webber – Wells Fargo: That’s helpful. To change gears momentarily and you guys obviously you talked about the buyback program. Can you talk a little bit about timing, I mean you put the price ceiling out there it is obviously above where you are trading now and actually above some of the three price targets. Can you just talk about how you think about buying that stock and how we should think about it from a modeling perspective?

Doug Arnell – CEO: Well first and foremost, we haven’t got, we don’t have a roadmap as far as timing is concerned. We haven’t said, look, we are going to go this that and the other in these months. I think ultimately the Board has looked our stock price and looked the fundamentals of the business that we are in, where they are very positive about it and so we are very bullish about certainly the medium term in the business and we just feel that there is an opportunity here to be able to reward those shareholders who are in it for the long term. I think as far as the valuation is concerned we just feel that the opportunities are not priced in.

Michael Webber – Wells Fargo: One more from me and I will turn it over. Some modeling question. GN&A was off during the quarter, can we talk about Q4 – (assuming) the 2012 run rate?

Brian Tienzo – CFO: I think we would probably – we do think there are always sort of one-off costs, but if you (check out) one-off costs and so on, I think the run rates would be somewhere around 5ish, along those numbers, but I would just add, it’s dangerous to just say our numbers, simply because we do incur sort of one-off costs ever so often.

Michael Webber – Wells Fargo: I can follow up with you on that offline.

Operating Expenses

Fotis Giannakoulis – Morgan Stanley: Brian I would like to follow-up a little bit on Mike’s question about operating expenses. Can you give us a number of what was the cost of the Hilli and Gandria that we can back out from our earnings comparison?

Brian Tienzo – CFO: I think you can back out $10. Basically, we budgeted a number for the reactivation for Hilli and Gandria. They are both running to budget, but from a cash perspective, it doesn’t matter, but there are certain expenses under accounting convention that you simply can’t take to the balance sheet. We have gone through a technical analysis of these – our technical guys have gone through it with our accountants, and having sat down and gone through it in detail, we’ve arrived at the conclusion that, in this case, $10 million of those expenses are more of repair in nature as opposed to a capital program.

Fotis Giannakoulis – Morgan Stanley: We should assume, I guess, that for the second quarter these two vessels will incur operating expenses for the entire quarter?

Brian Tienzo – CFO: They will incur some operating expenses, but as mentioned, the reactivation process isn’t complete. Having said that, majority of the repair related costs hit Q1, so we wouldn’t expect anywhere near the type of operating costs that we’re seeing now in Q2. I think there will be a bit of operating costs in Q2 as a result of the Khannur becoming operational, but ultimately I think we’re looking at sort of a level of around similar to Q4 number.

Fotis Giannakoulis – Morgan Stanley: Can I ask on the dropdown also what has prevented so far to dropdown the vessel? Are there any practical issues that you have to resolve first, any chartering agreement, why this dropdown has not already happened?

Brian Tienzo – CFO: I mean, we’ve never really said to anyone that we’re going to dropdown Khannur or Nusantara Regas Satu on X date, but I think simply first and foremost, we had to complete the conversion. We completed that in March. We don’t have to go through a process of obviously towing her to where she is now in Jakarta and that wasn’t just couple of days, a few weeks. Then, you just prepare for the notice of readiness for the charter. We have done that now and as soon as that was done, the discussion on a potential dropdown to LNG Partners commenced.

Fotis Giannakoulis – Morgan Stanley: I would like to – if you can clarify to everyone, what was the situation regarding the registration statement of the GMLP shares? It created some confusion in the market when the shelf was filed. Can you please give us some explanation on that just to have everything clear?

Brian Tienzo – CFO: The shelf filing that we did for LNG Partners essentially opens the option for LNG Partners to be able to arrange financing for its growth. I appreciate that people probably mistook LNG Partners as being LNG Ltd. and obviously within that was an option to raise equity and an option to raise public debt, and to some extent also, there was a notion that LNG Ltd. could potentially sell most of the shareholding in LNG Partners. I mean, we included all of those simply because it allows LNG Partners the option to do it. It doesn’t cost us any more than if we didn’t include them. We don’t have a roadmap that says, we’re going to sell down X number of shares at X rate in order to fund the projects. It’s just something that allows us further options for fully able to finance our growth. As I said, as one example, I mean we put in that potential to raise public debt but potentially, we might not be able to use that instrument to raise debt, it is just another option.

Fotis Giannakoulis – Morgan Stanley: This is a pure housekeeping. Doug, a couple questions for you, I’m looking your market outlook on Page 12, it looks very bullish for the next couple of years, but I see that there on 2015 there is some excess capacity, of course this is for a short period of time it doesn’t include any benefits from debottleneck and spot trading activity. How do you view your chartering strategy, you have a number of vessels that are open including the newbuildings, you recently chartered one vessel, if our information is correct, the rate is at around $150,000, but this is only for around one-year. How do you view your short-term versus long-term chartering strategy?

Doug Arnell – CEO: Well, I mean short-term we have executed a strategy where I think we have really maximized the value of our lot of vessels already. Short-term we have Hilli, Gandria, and Maria I guess are the key vessels short-term. I can tell you that the demand through the winter of ‘12 and ‘13 is what we are going to leverage with those vessels. The tightness of the upcoming winter market I think will be unprecedented much more than we have seen even in the last 12 months. So, we will be leveraging that tightness into both higher rates, but possibly getting some more term on the charters. Looking long term, it would be nice if every year looking out that the shipping sector was going to be tight, but that’s probably unlikely to happen. What you can see though is that a couple of things, our vessels are coming out at a time ’13 and ’14 where there will be good demand for those vessels and you can turn that into a chartering strategy that can take you through, what maybe a slightly overbalanced situation in 2015, but certainly not extreme. So, something you have remember on that stack you are looking at on Page 12 are the vast majority of those vessels are significantly less efficient than our newbuild fleet. So, for example, you have a large chunk of first generation vessels, which will be the first to come out the market, and (indiscernible) we are not worried at all about finding homes for our newbuild fleet and our modern vessels. So, long term again leverage that tightness in ’13 and ’14 and take advantage of the fact that we will have our one of the most efficient fleets in the market, very attractive to charterers.

Fotis Giannakoulis – Morgan Stanley: Just to insist little bit more, I understand that you are thinking only to fix your vessels as they are becoming available for short period of time because the rate – it seems that the rate for a long term contracts, beyond seven years, is quite lower than the short term rates that we see for one, two, and three years? Also, what kind of impact it will have for your potential dropdown strategy to GMLP?

Doug Arnell – CEO: Again, you’re right. There is a large gap between the short-term market right now and the longer term contracts. Our feeling actually is that the longer term charters, anyone looking at them now; there is gap between charter expectations and owner expectations right now. We feel like maybe that long-term market hasn’t matured enough. We’re in no panic and no rush to get our newbuilding fleet all charted out as soon as possible, that’s not the idea. We will make pragmatic chartering decisions that benefit the Group and that will I assure you eventually benefit MLP in terms of its dropdown strategy. What we’d like to see is the incremental volumes that are coming on through 2012 and 2013. Some of its been a little bit delayed for a couple of months and we just think that as that volume starts hitting the market more and people are seeing impact of that volume, that the longer term charter rates will be properly valued at that time. So, we’re not rushing out and chasing it in an overaggressive way. We think the market is going to play out fine and we’ll capitalize it on at the right time.

Fotis Giannakoulis – Morgan Stanley: I read also in your press release about other potential investments related to the LNG infrastructure. Can you clarify what these potential investments will be? There was a discussion about gas to electricity in the past. Could it be also some floating liquefaction project, and what will be the economics that would make attractive such a potential investment?

Doug Arnell – CEO: I mean we have conceptual designs for both Floating Power and Floating Liquefaction. Our Floating Liquefaction context is not your prelude style offshore full gas field development,. At concept, it will be more of a pipeline flow of the gas into liquification type project. So, both of those ideas are there, both of them have showed quite strong economics, but again, the ideas that take a lot more focus on absolute project development, permitting, regulatory processes, that we are to be honest hardly focused on now. We’re pretty focused on the existing fleet and operating that fleet properly and efficiently, but as and when production projects or power targets start to become more real, we’ll certainly return to investors with some news on that. We don’t really have anything short-term or near-term pressing on those right now.