Golar LNG Energy Reports Q3 2010 Results (Bermuda)

Golar LNG Energy Limited reports a net loss of $12.7 million and operating loss before depreciation and amortisation of $0.7 million for the three months ended September 30, 2010 (the “third quarter”).

Revenues in the third quarter at $19.1 million were increased from $14.5 million for the second quarter of 2010 (the “second quarter”). Operating revenue has benefited from a significantly improved performance from the Company’s spot vessels. In addition operating revenue for Khannur was higher than in the second quarter as the vessels charter was terminated in the third quarter with all outstanding charter hire due under the contract paid in the third quarter. Overall utilisation for the third quarter was up at 71% as compared to 42% for the second quarter and third quarter average daily time charter equivalents (“TCEs”) were up at $27,036 as compared to a second quarter TCE of $12,615.

Voyage expenses and operating expenses were lower than the second quarter by a combined $0.4 million whilst administrative expenses were higher by $4.1 million. The increase in administrative costs was attributable to set up and recruitment costs associated with Golar Commodities Limited, (“Golar Commodities”) the Company’s newly established LNG trading subsidiary, in addition to ongoing running costs.

Other operating expense of $3.4 million represents net mark-to-market losses on physical cargo trades and financial derivative contracts transacted in third quarter by Golar Commodities.

Net interest expense for the third quarter at $2.8 million was slightly down from $2.7 million in the second quarter. Other financial items primarily relate to the interest cost associated with ineffective interest rate swaps.

The net gain on sale of investee of $0.4 million represents the sale of 1.4 million LNG Limited shares for a total consideration of $0.8 million. Cash and cash equivalents decreased by $47.3 million during the quarter. The Company used cash from operating activities of $37.5 million. Included in this is a cash payment of approximately $36 million to secure obligations in connection with Golar Commodities initial LNG cargo trades, subsequent to the quarter end these amounts have been refinanced by the new trade finance facility or repaid. The Company generated $2.2 million in investing activities and used $12.1 million on financing activities during the quarter. Financing activities payments includes repayment of debt of $11.6 million.

Financing, corporate and other matters

The board of Golar Energy approved the grant of 1,993,333 share options to its directors and employees under the terms of the Company’s existing share options plan. The options have a strike price set at $1.54 (NOK 9.50) per share and will be adjusted for dividends. The options have a five year term and will vest equally one quarter each year over a four year vesting period with the first quarter vesting on September 9, 2011. Subsequent to the quarter end Golar Energy issued a further 165,000 options on similar terms with a strike price of $2.00. The options are designed as an incentive to promote long-term employment with the Company.

Golar Commodities has entered into a $150 million LNG trading facility on an uncommitted basis. The facility will provide finance for the provision of working capital requirements including the provision of letters of credit in respect of the purchase and sale of LNG cargoes.

The Company announced during the third quarter its intention to buy back up to a maximum of 5,000,000 of its own shares. To date the Company has acquired a total 483,627 of its own shares. At the time of the company’s initial public offering (“IPO”) one warrant to subscribe for one share was issued for every fifth share subscribed for in the IPO.

The warrants are exercisable on December 15, 2010 at a price of $2 per share. Information in respect of exercising warrants will be sent to warrant holders in due course. ncluden exercise price of $2.00 and which expire in December 2010 as noted aboveThe current total number of shares outstanding as of November 24, 2010 is 228.3 million, inclusive of treasury shares noted above.

In addition there are 12 million warrants with an exercise price of $2.00 and which expire in December 2010 as noted above. Subsequent to the quarter end Golar Energy sold its remaining 7.1 million LNG Limited shares for approximately $4.2 million which will give rise to a gain in the fourth quarter of approximately $1.2 million. The transfer of vessel management of all the Company’s vessels, including Golar LNG Energy’s vessels to Golar Wilhelmsen Ship Management was successfully completed shortly after the quarter end.

Operational Review

Shipping

A marked contrast to previous quarters was evident in the shipping market during the third quarter with a gradual tightening of vessel availability over the quarter and reaching a critical level by the end of the quarter. However utilisation was still disappointing in the first half of the quarter for Golar Energy’s vessels, including those on charter to Shell where results have been disappointing. Whilst rising over the quarter rates were still not satisfactory during the quarter.

The improvement in the market has continued into the fourth quarter and does not appear to show signs of easing in the near future. Vessel requirements as far ahead as the second quarter of 2011 are now being looked at and there has also been a trend towards longer vessel fixings than was the case earlier in 2010. Currently all Golar Energy spot vessels are employed and are expected to have a substantial improvement in their utilisation rates during the fourth quarter.

The short term shipping market is now “challenging” for those in need of tonnage for loading during the remainder of the year. Some buyers have been successful in securing tonnage, however others have had their cargo trading frustrated due to the absence of suitable open vessels. It is clear that many players have decided to keep enough length within their fleet to be in a position to accommodate the cargo opportunities that do arise. As a consequence the absence of firm open positions has hampered those who do not control tonnage from participating in FOB tenders.

As noted above, the period that charterers are fixing vessels has also trended towards longer periods rather than the situation that existed in the first and second quarters where traders would have looked at a cargo by cargo shipping strategy. Such a strategy is no longer possible and active traders are now taking longer and more speculative positions – which is good news for ship owners.

At quarter end the Global fleet stood at 360 vessels, (including regas and lay-up vessels) with a further 26 vessels on order.

Regasification

The Company announced in October 2010 the award of the West Java FSRU tender. Whilst an exciting development for Golar Energy, the Company believes it is also positive for the floating storage and regasification industry. Sponsored by Indonesia’s well known and respected national energy companies, Pertamina and PT Perusahaan Gas Negara (Persero) Tbk, “PGN”, this project represents yet another example of credible industry players turning to FSRU technology to deliver low cost and fast track LNG import projects.

Specific to the West Java project, the FSRU is being utilized to address an urgent fuel requirement by Indonesia’s national power company, PT PLN (Persero) (“PLN”) to fuel some of its power plants which in turn distribute electricity to the grid servicing Indonesia’s largest island, Java and the city of Jakarta. Interestingly, the project represents Indonesia’s first LNG regasifcation terminal and the first FSRU project in Asia outside of the Middle East.

The West Java FSRU project represents the Golar Group’s fourth FSRU project but first offshore FSRU which will include the provision of mooring facilities. The contract duration is for a firm period of approximately 11 years and with a total contract value of approximately $500 million. Additionally Golar Energy has automatic extension options for an additional three years, subject to contract terms. A Letter of Intent (“LOI”) was recently signed with Nusantara Regas to undertake the financial commitments associated with order of long lead items and detailed engineering, accomplishing an important project milestone. Parties have now commenced discussions on the FSRU Time Charter Party.

The Company continues to see excellent prospects globally for new floating storage and regasification projects and expects more projects to be concluded during the coming years.

Golar Commodities

Golar Commodities initiated operations in the third quarter and executed its first spot cargo transactions. The company was active in the spot markets as evidenced by its participation in the export of a cargo from the US and a cargo sale into Far Eastern markets. Although an undesirable, and unintended, short shipping position contributed to a loss on a cargo, transactions will normally be designed with a high degree of flexibility, including shipping flexibility, to reduce operational risks. With this intended flexibility Golar Commodities expects to be able to operate from a position of operational strength in the future in a tight shipping market.

Whilst as noted it is disappointing that above Golar Commodities recognized a trading loss in the third quarter this position is expected to be recovered during its first full year of trading.

The Golar Commodity team has been well received in the market by counterparts. The Company is hopeful that the combination of shipping and LNG trading activities will be more valuable to customers as the shipping market tightens.

Notable accomplishments in the 3rd quarter, besides executing the initial trades, include initiation of a $150mm trade finance facility, continued staffing to support operations, development of risk management systems and trading tool implementation and progress toward initiating certain term commercial transactions with customers.

Golar Commodities provides physical and financial risk management in LNG and gas markets for its customers around the world. The firm strives to provide risk management expertise to help customers improve profitability. This is accomplished through optimization of customers’ assets and operations and by fostering more efficient capital allocation through application of world-class risk-management tools.

Market

General

New LNG supply is expected to grow by more than 25 million tonnes this year, corrected for late start-ups and capacity reductions at existing facilities. Whilst there is a current oversupply of LNG, caused mainly by recession-hit demand and an increased unconventional supplies, new demand centres are emerging in Asia, led by China and in new markets such as South America and the Middle East.

Asia

Japanese demand continued its strong comeback in the third quarter as the country’s manufacturing sector sustained its recovery and a strong demand from the power sector to supply air conditioning load due to hotter than usual July and August temperatures. Early predictions expect a colder winter driven by the “La Nina” effect. Asian demand grew by approximately 17% year on year in the first 8 months of 2010 with Japan and Korea up 10% and 28% respectively.

Europe

European gas prices have been volatile over the summer driven by the usual field maintenance programmes and the wide gap between the low priced US market and the stronger oil linked price still prevalent in other regions. Iberian consumption remained depressed compared with 2009 due to low power demand and considerable quantities of alternative supplies. The recovery of underlying European gas demand is slow, uneven and partly driven by weather.

US

With LNG supply set for further growth in 2011 and pipeline gas pricing issues possibly displacing some Qatari LNG volumes in Europe there is speculation that LNG may be pushed into an already swollen US gas market. But with gas inventories already high and adding to downward price pressure, additional LNG entry could imply shutting in domestic production and/or displacing coal fired power production.

Demand Shift

In addition to the growing influence of China, new LNG Demand centres continue to emerge and both South America and the Middle East have been driving significant counter seasonal demand. Trinidad has sent an increasing number of cargoes to Brazil and Argentina with the latter two driving much of the Atlantic Basin Spot demand in the last few months.

The increased flexibility in the LNG market created by a strong increase in production and more flexible receiving terminals including FSRU’s is opening the LNG market and making LNG into a very cost competitive feed stock. The overall demand for flexible LNG solutions is likely to be further supported by the fact that large nations such as China are now seriously considering LNG fuelled vehicles.

Outlook

Although there is still some uncertainty as to how the tightening LNG shipping market will sustain through the spring of 2011, the fourth quarter of 2010 and first quarter 2011 look likely to be strong in terms of utilisation with improving rates. After more or less ten years with structural over capacity in the LNG shipping market, the Board is increasingly optimistic that market fundamentals are changing. With a total order book of only approximately 5% of the total fleet and strong increases in LNG production it is likely that the LNG shipping market will significantly improve in the years to come. Such a bullish view is further supported by current increases in demand for short to medium term charters from major oil and gas companies.

The market for provision of FSRUs continues to gain velocity both in terms of number of visible projects and progress of those projects towards final investment decision. Being named the successful bidder in the West Java FSRU tender process has firmly established the Company as a top tier provider of cost effective and reliable solutions to fast track the import and regasification of LNG. There are a number of new bid processes under way which the Company will aggressively pursue and expects to remain very competitive relative to other bidders. The Company also intends to progress other value added market offerings in the marine-based LNG infrastructure space such as floating power and floating storage.

The Board also believes that the opportunities to layer on logistic services on the back of our FSRU assets will increase as end-users and other market participants see value in utilizing these assets above and beyond the original base trade. As such, the increasing deployment of the Company’s FSRUs, such as in West Java, will allow greater opportunity, including through Golar Commodities, to leverage these assets into tradable positions.

Whilst merchant LNG trading continues to develop, the tightening of the LNG shipping market has impacted the spot LNG cargo market. Therefore, some firms with limited shipping length are currently somewhat constrained from participating in certain spot trading opportunities and suppliers are seeing less spot liquidity. If this trend toward a reduction in shipping slack persists, the control over vessels may become a more important driver impacting the direction of Golar Commodities. Golar Commodities continues to evaluate this dynamic and will assess the merits of contracting tonnage on a term basis to complement and enhance its cargo trading activities. Constraints in transportation and storage flexibility in the commodity market value chains can often be a very favourable dynamic for merchant trading firms able to adapt quickly. Golar Commodities fully intends to leverage its deep knowledge in shipping and FSRU’s to enhance its evolution of its LNG trading efforts.

The financing of projects such as West Java is clearly extremely important for the Company’s growth strategy to be successful. To this end the Company has been in discussions with various banks with regards to the availability, levels and commercial terms of debt finance for the West Java project and has been encouraged by the response. The Board feels that the Company is properly equity financed for current activities and believes that a high proportion of the total West Java project cost will be able to be financed with debt.

The Company has not been satisfied with the utilisation of the four modern vessels trading in the spot market. This also includes the trading results from the three ships operating under the Shell agreement. The Board is currently evaluating its chartering strategy and is hopeful that they will identify more efficient employment strategies for the ships.

The cash break even rate, including financing cost (interest and repayments) for the four modern vessels is currently approximately $33,000 per day.

The operating performance of Golar Commodities is expected to be improved in the fourth quarter.

Also, while the older vessels Gimi and the Khannur will stay inactive during the fourth quarter, the majority of this earnings reduction will be offset by significantly improved utilisation and earnings from Golar Energy’s vessels operating in the spot market.

The Board is hopeful that the trend shift in shipping demand that has been seen in the last quarter will continue and strengthen and will bring the modern fleet back to a net cash generating position.

The results for the fourth quarter are likely to confirm this trend. The Company’s open shipping position will, together with a strong FSRU franchise and the newly established commodity team, make Golar Energy into a major player in the LNG infrastructure market.

The Board is not satisfied with the Company’s financial results to date, but is hopeful that the improved shipping market and the West Java project, together with the Company’s strategic position should result in good long-term returns for shareholders.

[mappress]

Source: Golar LNG Energy , November 26, 2010;