Golar LNG's (GLNG) CEO Doug Arnell on Q1 2014 Results - Earnings Call Transcript

May.28.14 | About: Golar LNG (GLNG)

Golar LNG Limited (NYSE:USA) (NASDAQ:GLNG)

Q1 2014 Earnings Conference Call

May 28, 2014 09:00 AM ET

Executives

Brian Tienzo - CFO

Doug Arnell - CEO

Analysts

Herman Hildan - RS Platou Markets

Fotis Giannakoulis - Morgan Stanley

Ben Nolan - Stifel

John Chappell - Evercore

Michael Webber - Wells Fargo

Operator

Good day and welcome to the Golar LNG Limited Q1 2014 Earnings Conference Call. Today’s conference is being recorded. And at this time, I'd like to turn the conference over to Mr. Brian Tienzo. Please go ahead.

Brian Tienzo

Thank you, moderator. Hello everyone and welcome to Golar LNG's first quarter 2014 results presentation. As the moderator said, my name is Brian Tienzo, and as per usual, I'll be taking you through the first quarter highlights of 2014 as well as financial highlights. I am joined here today by our CEO, Doug Arnell, who will go through with you the business updates and the summary announcement section.

So let’s now turn to Page 4, so I would take you through the Q1 highlights. Golar reported first quarter 2014 net income of $13 million, and including the gain on sale of old Golar Igloo to GMLP, the Company’s EBITDA that was generated during the quarter amounts to an income of $33.1 million. Golar also took delivery of the FSRU Igloo in February where the vessels Maiden cargo was delivered on-board and commissioning concluded successfully off Kuwait as the vessel subsequently started its 10 year charter with KNPC, commencing from first of March 2014. Golar has also completed the sale of its interest in the FSRU Igloo to Golar Partners for $310 million on March 27, 2014.

Furthermore the Company concluded it’s financing of four of its remaining five vessels during the quarter through our sale and leaseback transaction with ICBC. During the quarter we saw Gimi commence layup in the Far East and as it will be -- we will be highlighting later on, the spot and short term chartering market remains illiquid and lightly traded by historical standards. While the results are poor for the quarter, the Board nevertheless recognized the importance of shareholder compensation through dividend and as such the board has board has maintained a dividend of $0.45 for the quarter.

Over to Page 5 on subsequent events. Golar took delivery of the Golar Crystal in May and as per our Q1 earnings release, we also now are announcing that the company is confirming timing to take a decision on the proposed furthermore ph of its floating LNG production unit before the end of June 2014.

Turning over to Page 6, when looking at the column to the left of the page, you will see the net operating revenues for Q1 is slightly higher than Q4 at $14.8 million and this is due to various factors including full Arctic revenue during the quarter. In comparison Arctic dried off in Q4. As mentioned, Igloo also contributed to close to one month revenue during the quarter, whereas Viking and Celcius were mitigated or lessened revenues through quite high voyage expenses incurred during the quarter.

The operating expense during the quarter, 13.8 compared to 12.1 during Q4, is pretty much in line with expectations. However, as we have mentioned previously the management is through a drive of controlling costs during pretty turbulent chartering times. Halfway through the column there you will see a $35.5 million gain and this relates to the Golar Igloo dropdown. That was concluded at the end of March. You will note in our press release that $8.5 million of gain is further the deferred and will be subsequently released through the P&L during the life of the vessel.

Further down the page, comparing the total PC equivalents between Q1 in Q4, you will see a slight improvement, see $26,104 per day versus Q4 of $24,128 per day, again as a result of the majority of that improvement is through a full revenue Arctic and also close to one month’s revenue of Golar Igloo. To the side of the page is a comparison of the Golar group including the MLP’s fleet. And you will see that the EBITDA numbers of Q1 is better than Q4. Again a majority of that is due to contribution of the Golar Igloo delivering during the quarter.

Turning over to Page 7, again we would like to highlight the importance of the dividend contribution by Golar LNG partners and how this relationship has helped Golar LNG Limited come through the sort of turbulent times in the chartering and space. Golar dividend income from partners has increased by 70% since Golar Partners’ IPO. Since Q3 2012 the total IDRs received have increased by approximately 400%. And while IDRs are currently at 23% level, we have committed -- we are very close to the 50% threshold by the time the potential Eskimo dropdown is completed. You will note that the dividend received on Golar LNG Limited between Q4 and Q1 2014 has dropped very slowly from the levels of Q3 2013, that as a result of Golar LNG dilution of the shareholding for Golar LNG Partners in December. However following the increase in the distribution of Golar LNG Partners which Golar LNG will receive in Q2, the earnings or the dividends received from Golar LNG Partners will have normalized.

Turning over to Page 8 and just looking the highlights of Company’s balance sheet, you will note that the cash levels both at the end of Q4 and also the end of Q1 pretty robust. Of course the end of December 2013 cash level was helped by dilution of the sale of Golar LNG Partners units by Golar LNG Limited, and cash and cash dividends values at the end of March 2014 was as a result of the dropdown of Golar Igloo. You will note that both current assets and short-term debt are quite high this quarter and that is a result of that LNG trade that the Company did during the quarter.

Turning on to Page 9, again Company is reporting pretty weak results but the position of the Company is pretty robust and Golar has throughout this period build a solid foundation to ride through its turbulent times. Of course the fleet expansion is now fully funded through the 8 vessel ECA-backed financing where the company is able to achieve 65% LTV and approximately 3.75% all in interest cost on eight of those vessels. Furthermore there were recent completed transaction of ICBCL through sale leaseback transaction where the company achieved 90% LTV at less than 6% all in interest cost of both attractive financing terms for the Company.

Monetization of long-term contracts through GMLP which fuels increases in dividends and IDRs for Golar has also been evident, firstly through the Igloo dropdown that occurred at the end of March and of course the potential Eskimo dropdown in early 2015.

So while results are prevailing at the moment the cash that has resulted from all of the above factors have given the Company robust liquidity standing and of course probably more importantly leaves it well positioned for the chartering upturn which the Company expects in 2015 and also the opportunities brought about by its FLNG projects.

I will now hand over the presentation to Doug, who will go through the business updates with you.

Doug Arnell

Thank you Brian and good afternoon and good morning everybody. I’ll start my part of the presentation on Slide 9, where we’ll have a quick summary of the Golar Group Fleet, both Golar LNG Partners and Golar LNG Limited. You see at the top of the page there, we now have nine vessels inside the Golar LNG Partner fleet, with the addition of Golar Igloo in late March, with the start of four vessels when Golar Partners was IPOed we have had very good success in growing LNG Partners and dropping down those vessels into the fleet, generating cash for Golar LNG Limited to fund our growth, and there is lots more growth potential available as we see down below with the Golar LNG Limited fleet. You’ll see there the variety of classes of vessels that we’ve got, the top three vessels Gimi, Hilli and Gandria, three conversion candidates in layup available for our new FLNG program, which we’ll talk about later. The spot vessels Viking, Seal, Celsius and the newly delivered Golar Crystal and Golar Arctic which is on a shorter-term charter presently.

The following vessels you will see the balance of the new build deliveries coming, all of them carriers except for Golar Eskimo, which is an FSRU -- sorry Golar Tundra and - two FSRUs, the Golar Eskimo and the Golar Tundra which delivered later on in the program. We have been working with our shipyard partners to manage delivery timing on some of the vessels. You will see the new estimated delivery timings there on that slide which we presently expect the vessels to come.

So this is somewhat different than what was originally planned. We have worked cooperatively again with our shipyard partners to manage the deliveries in the face of lack of cargos in the market and need to manage our way through the ship capacity out there in the market. I will say that for the chartered vessels, particularly on Golar LNG Partners, we have 100% operating uptime on all those vessels, which is of course critical in providing a risk free dividend to the unit holders and so we’re very proud of that again.

As Brian says, another key element to this program is that we concluded our second tranche of financing, which leaves the new build fleet fully funded and sets us up really well for a rational strategy going forward in the chartering market.

Turning to Slide 10, with a discussion of the present or short term shipping market, as predicted and as previewed by ourselves in our previous quarterly releases, the short term shipping market remains oversupplied and likely will do so for the balance of 2014. The market continues to plagued by underperforming LNG production. The year-on-year production for the last two years has been down some percentage points while at the same time we’ve had a lot of new build capacity coming on to the market and it continues to come.

Some bright spots on the horizon, PNG has loaded its first cargo and we expect some ramp up both at cargoes ramp up of production from that project in the second half of this year. Algeria is ramping up two new trains. However on the downside Angola continues to suffer major delays and will be at reduced flows even through 2015 and Egyptian volumes remain constrained. Added to that dynamic at the moment, as we come into the summer season, the Atlantic Pacific pricing arbitrage, which can drive a lot of ship demand as being quite collapsed of late due to large inventories in key buyers in Asia. And so you’re not getting the divergent traffic that supports ship capacity from time to time.

What our approach to this is, is to again, as we said before, we’ll have a keen eye on controlling costs, no surprises on operating costs and minimize what we can while maintaining a safe and efficient operating performance record. We will and have been marketing the significant economic advantages of our modernized fleet. These vessels clearly provide significant savings to our charters and they are all-in costs of shipping the product. We can say that our experience has been charters out there that are -- that have been utilizing the new-build vessels, are very positive on their performance. The savings, you could see it on paper but until the ships do a couple of voyages and it really gets home, you don’t really see an effect. So we’ve seen the charters who had the new-builds coming back for more and we expect that to continue. And in fact we expect that if the rate differentials between the modern new-builds and the older steam vessels to continue to widen and see as the advantages of the ships seep into the planning of our charters.

Turning to Slide 11, and where things certainly look to visibly brighten up, beginning with PNG later this year and including Algeria is the start of over 90 million tons of liquefaction capacity that will be coming online by the end of 2016. All of that volume and you can see the projects there down below putting aside potential delays and upsets on the project, all that volume is under construction and on its way.

So again the demand for vessels is clearly visible. At full capacity, adding up all that -- all those projects, using a fairly conservative estimate of ton miles, the demand is close to 100 vessels. When you combine that with certainly -- with rates at or near where they are now, the older first generation steam turbine vessels will likely be pushed out of the market. We estimate that’s 20 to 30 old inefficient vessels will be either laid up or sent for scrap. And only 90 vessels delivered in that same period. So we think that it’s very clear that the market will return to a structural deficit sometime during this 2015-2016 time frame. Charters who most of them will have a long term planning outlook, we believe in the not too distant future will begin to look to adding structural tonnage to their positions.

This trend of new production capacity coming on expect to continue pass 2016 where the U.S. export project and other areas such as East Africa and Western Canada start to become relevant. In the case of the U.S. certainly in Western Canada, those projects drive high ton mile shipping demand and so we see this trend of a structural deficit continuing. The current weak market is leading to dearth of new ship orders. There have been very few orders this year. And so we see that starting in the 2016-17 time frame, this market is going to tighten up and we believe that the tightness will likely sustain and be more extreme than it was the last cycle.

Turning to Slide 12, FSRU update. We continue to be very pleased with our FSRU franchise. Of course the latest news is the Golar Igloo successfully being delivered to Kuwait and commissioned during March. She is on a five year contract there. So we can at least see -- see at least five years of service for KNPC. The charter’s a bit unique in our portfolio where it’s on hire for nine months out of the year and then the vessel is free to trade for the other three months which are the winter months, December to February. We think that with the vessel positioned in the Middle East in December through February, that there is good potential for that vessel to be utilized during the off season to carry cargos.

The commissioning on our very first new-build FSRU went very smoothly. No more than a couple of weeks she was up fully up and running and I know that the charter is quite pleased with the performance on boil off gas management and fuel efficiency, which are of course critical for their falling costs.

The next FSRU on our schedule is the Golar Eskimo. That vessel is on schedule at the yard. It will be delivered to us in December of this year. Of course in the middle of last year, we signed a firm charter with Jordon for that vessel. It’s a 10 year contract and that project will start sometime early in 2015. Of course that long-term contract is another excellent candidate for dropdown to Golar Partners and will likely trigger the higher -- the 50% splits on the IDRs for the Golar GP.

The third new-build FSRU, the Golar Tundra is scheduled for delivery in November 2015. So we have got fairways off before that vessel is due to be delivered from the yard. So the opportunities we’re looking at, Southeast Asia is looking interesting, some opportunities in Africa and also in the Med. But we also expect that over the coming months some other opportunities will crystallize and we feel very confident that that FSRU will be employed at the time she is delivered.

Turning to Slide 13, of course something that we have been very focused on off late, our floating LNG production project. We said last quarter that we anticipated a decision on this project for the second quarter of this year and that’s exactly what we’re on track to do. We are on track for completion and funding, the conversion of Golar Hilli and the EPC contracts for that during Q2 of 2014.

The contracts, which are all completed and ready to go are with Keppel Shipyard out of Singapore for the vessel conversion with the sub-contract for the process topsides with Black & Veatch. The construction period of the project is 31 months. So with a June trigger that puts us out of the end of 2016 for vessel delivery. We think we have put together at Golar Keppel and Black & Veatch, an excellent winning formula. Of course we have a successful track record in financing, owning and operating innovative floating LNG midstream assets, particularly on the FSRU side where the execution model is very similar to this.

We of course have worked with Keppel on three of our previous FSRUs. We will have the same team on our side overseeing the FLNG project that did the FSRU. So we have a high degree of confidence there. Keppel has a shipyard, top notch, certainly one of the top conversion yards in the world, to say the least, both in the FSRU side and on PSOs as well.

Black & Veatch, our choice of technology. This was I think an obvious choice for us. We were looking for something that was reliable, something that was proven and cost effective and Black & Veatch’s PRICO technology is all of that. They have a growing position worldwide of the units very similar to what we will use on this project. So what we’re developing with this project is a new paradigm in the LNG production space which we think is badly needed.

We intend that these projects will be faster, more cost effective and smaller bite size floating projects with a much simpler financing model and of course with our existing carrier and FSRU franchises, we will be set to stream together a mid-stream value chains from production right through the FSRUs.

Turning to Slide 14, well we’re not releasing any specific capital costs on the project. Just to give some guidance on an economics in comparison, that stack chart is kind of current projects globally and the cost elements there that make-up the all in delivered price for LNG out of those locations. Gearing in on the liquefaction part of that stack you can see that based on the assumptions that were used here with 15% pretax rate of return and I believe it’s actually 25 year projects but at any rate they range from $2.88 per million Btu to $7 per million Btu. And we can confirm that even at the lower end of this cost range, our model can deliver superior returns.

Not only that, the loading project, just like with FSRUs has several advantages over traditional approach to LNG projects. The cost advantage that we will provide with this unit is not dependent on having huge economies of scale, the massive LNG volumes in order to reach the low unit costs. Our costs, where we can be competitive with these projects shown above is maintained even on the smaller volumes of our target, which is 1 million to 2.5 million tons per annum where liability, we’ve chosen a simple approach with proven technology to mitigate unplanned outages and startup delays.

Predictability. We’ve all seen what can happen to the mega projects, cost overrun, scheduled delays. With this project being executed inside a shipyard, we are certainly believe we’ll be relatively inflation proof and good control on schedule compared with the in situ LNG construction projects.

Financeability, our approach to funding these projects will be different from how normal mega projects, non-recourse project financings are done, which often cause huge delays for kicking up projects. We won’t have that overlay on our projects and we’ll be building the vessel, funding it and making it available to the projects. Speed of execution, again the floating asset, the timeline of permitting a project in construction will be dramatically improved with this asset, definitely up to 50% of the total project cycle as is usually experienced by large scale land based LNG production projects.

Turning to Slide 15, a little bit on the project pipeline. The funnel of projects that we’re working on, we’ve been out marketing and receiving feedback from developers, reserve owners, marketers ever since that we completed the feed for the project last August. I can tell you that the feedback we’re getting is very positive and the interest is high. We expect that the business cycle that we’ll see going on here with FLNG and this approach is similar to that in the FSRU business.

We expect a rapid acceleration in the execution of new projects due to the inherent benefits I described earlier. Most notably the scalable aspect, to be able to economically produce a project of the size of 1 million to 2.5 million TPA opens up options for reserves and gas supply on the project that certainly are not available with the traditional approach. And again, as with FSRUs what we’ll see is a large opportunity for would be new entrants to the LNG commodity space which will reshape the market in the years to come. We’re developing a portfolio of projects. Most of them, the ones that we’re active on are kind of at the MOU stage for which we have executed multiple agreements. The follow on definitive agreements are currently being negotiated. Various relevant government agencies are engaged and of course off-take discussions with LNG commodity players are ongoing.

We have designed this vessel to be a generic approach to the market. It has a specific operating element, operating envelop sorry, which requires clean and relatively dry feed gas, which at first may look like a limitation but I can tell you that the vessel is finding multiple applications with offshore fields, with smaller reserve bases as again that will never find a way to a land based project or even in situation where the gas has been flared or existing domestic pipeline quality gas. So sourcing gas and finding gas that’s suitable for this vessel is not going to be a problem. Citing the vessel for the projects we’re looking at, all of the projects have relatively low cost fixed infrastructure, meaning - the fixed structure meaning the jetty and high end pipeline and local infrastructure of that nature, $0.15 to $0.40 per million Btu of the way on the outside is the kind of cost we’re looking at for the projects. So no big overhang there. And the sites are normally near shore or inside port, without any huge cost elements such as capital or maintenance dredging. So all-in cost $0.15 to $0.40 is what we’re seeing in addition to the vessel cost itself to take gas to LNG and load it on carriers.

Of course the execution model remains relatively complex compared to a lot of the projects Golar has worked on in the past. The vessel must be permitted and licensed with relevant government agencies. So we have to get through that. And then the commodity chain which underpins the revenues that pays for the capital recovery on the assets needs to be put together. So that is a relatively time consuming and complex process. However we see with the economic rent available here and the time to market that we’re coming with late 2016 to early ’17 that the commercial motivation is also there to offset that risk.

So turning to Slide 16 just to wrap up. Again our uptime on our chattered vessels was nearly 100% during the quarter reflecting our continued operational excellence which we’re very proud of. Our summary of the market is that the short term market is over supplied. We’ve been predicting that. We’re in the middle of it now but certainly the recovery is visible with medium term ramp up over the next years, 2015 and ’16 driven by most primarily Australian projects and then continuing on where U.S. projects become more relevant. The long term is certainly set for a structural deficiency.

Our positive balance sheet allows us to maintain a strategic position to wait for the recovery in the market and to position ourselves for integration with our FLNG projects. Again, we’ll be marketing the high efficiency of our new-build fleet. We’ll have a keen eye on cost control and as we’ve shown, we’ve been managing our delivery timetable.

The FSRU franchise continues to deliver well with great integration and cooperation with our corporate structure, vis-à-vis Golar partners. We’ve delivered on Golar Igloo on time and the vessel’s performing perfectly. And finally as I just went through, we’re set to complete and fund our maiden FLNG ship conversion contracts in June of this year, leading to a shipyard delivery late in 2016. We think doing this creates significant commercial and strategic early mover advantage and we’re very, very optimistic about the unique opportunity for value that’s created for investors out of this project.

That concludes the presentation part of our webcast today. I’d now like to turn it over to the moderator for questions.

Question-And-Answer Session

Operator

Thank you, ladies and gentlemen, (Operator Instructions). We now take our first question from Herman Hildan, RS Platou Markets. Please go ahead.

Herman Hildan - RS Platou Markets

You mentioned before that a positive go forward position will be taken in June. Could you elaborate on what this relates? Is this kind of a contract with Chappell or is it FYB what kind of announcement will we see from Golar when this go forward position is taken.

Doug Arnell

Yes, the contracts that we will be targeting to go firm are the EPC contracts with Kepple and the subcontract with Black & Veatch. Associated with that will be of course funding decisions on that, that the first payment that happens with that contract is a down payment that happens the day the contract becomes effective. So that will all be going on in June as well.

Herman Hildan - RS Platou Markets

And in terms of financing, what are you expecting on the leverage of this.

Doug Arnell

Well the leverage -- I guess, the answer is different depending on the stage of the project we’re talking about. We’re unlikely to announce a firm contract at the same time that we’re triggering the startup construction on the vessel. We don’t think it will be too long in the future that we’ll be having that contract. But obviously it’s difficult to leverage, too high on an asset like this without a firm contract. After the contract’s completed, I’ll let Brian talk about that, how he’s thinking about that.

Brian Tienzo

Yes, thanks Doug. So as Doug mentioned during the FLNG slide just now, I think the initial take by Golar in respect of the construction is that Golar itself will fund the initial conversion contracts and there will come a point when we become firm on certain contracts and at that point that’s when we will seek to further finance or at least put leverage on the construction itself. I think in the meantime in the background, whist the conversion contracts and the contracts of Black & Veatch have been negotiated, we’ve also been looking at a variety of financing opportunities for the initial phase and those are obviously progressed in the background also and will be effective once the contracts with Black & Veatch and Keppel are firmed up.

Herman Hildan - RS Platou Markets

And in terms of the equity investment that Golar will make -- obviously I believe that your term funding on the 30 new-builds are basically for 12 or 13 vessels. So you can leverage up Eskimo, you could probably do some downside of common units. My question here, do you expect making a -- call it equity ratio to finance the initial vessel?

Doug Arnell

I think all we can say at this point is lot of options are being studied and analyzed but certainly at the time we announced the effectiveness of the contract, the funding of the contract will also be announced and described.

Herman Hildan - RS Platou Markets

And in terms of potential projects, Alfira [ph] has kind of being using a picture FLNG on their Block R. Is that one of the near-term contracts you think you’ll sign or what region do you expect to sign the first FLNG?

Doug Arnell

You’ll have to ask Alfira [ph] what they’re intending on that project but I wouldn’t say it’s high up on our priority list of projects at the moment.

Brian Tienzo

I think you will notice, we didn’t speak specifically about projects. One, that’s because we have confidentiality agreements in place. And two, we would only speak on projects once that are confirmed. I think Alfira’s [ph] intentions are unknown to us. Whilst as we had discussions with them, as Doug said, they are not necessarily on the top 10 of our list.

Herman Hildan - RS Platou Markets

And then final question, what kind of duration do you expect to have on the first FLNG contract? 5 to 10 years or?

Doug Arnell

Well I don’t know if it’s the first LNG project but the other benefit of this approach is that we don’t need to do 20 year commitments on this project to make the whole thing hold together and to get a finance and have it create value. We can look at smaller reserve bases that maybe are supplied over a seven to eight year term and do just fine with that. Especially in cases where you have negative value on gas that’s been flared, maybe you don’t have 20 years of gas but you can do a shorter term project and given that the asset is floating and re-deployable, we’re available for instrumental gas at the same location from a different field, we’ll be able to execute projects that are of a shorter duration. We just think that’s a huge advantage to get in this acceleration that we’re looking at to get new production on to the market.

Herman Hildan - RS Platou Markets

My real question is will the contract -- will the asset be in sort of MLP? Will the duration of the contract be longer than five years?

Doug Arnell

In the vast majority occasions it will be longer than five years. I what I would add to that is it’s not just the FLNG asset that’s relevant to the MLP at that point, because certainly in a lot of cases there’ll be carrier opportunities in association with that same project and in some cases FSRUs. So you may have an entire chain of assets put together for longer than five year contracts that can be dropped down to the MLP. So it’s tremendous growth potential for partners.

Herman Hildan - RS Platou Markets

So are you kind of bidding or negotiating provisionally on for the full infrastructure?

Doug Arnell

I would say the nature of these projects isn’t really-- although there is some element of it -- it’s not really a bidding scenario and we are looking for opportunities where gas wants to get to an LNG market somewhere around the end of 2016. And those kind of projects don’t have time to run a bid process, but they are projects that are ready to get developing and get to an execution phase. So again we’re not really exposed to bid situations in most of the cases, although there is an element to that in the projects we’re working on.

Operator

Thank you. We’ll now take our next question from Fotis Giannakoulis. Please go ahead.

Fotis Giannakoulis - Morgan Stanley

Apparently you have done a lot of projects about the FLNG, and I want to ask how do you expect the contract with Keppel to be structured? How much of the cost will be paid upfront upon signing and how much you’re expecting to pay upon delivery?

Doug Arnell

Without giving too much detail its -- again because we’re bound by confidentiality agreements, there is a significant down payment on kick off of the project [audio gap] conversion contracts, sorry, FSRU conversion contracts that we have seen rather than shipbuilding contracts.

Fotis Giannakoulis - Morgan Stanley

Okay, that’s clear. And you mentioned in your previous calls that your goal is to keep control of all those FLNGs which means that you’re going to have at least 50% of the project. But based on the discussions that you have with commercial partners, what kind of ownership shall we expect for each of these units?

Doug Arnell

The LNG industry likes to have its off takers investing in the liquefaction asset. So we see interest in some of that. Again for us it will depend. If we are doing a project with a large player that’s already in the industry, has other liquefaction assets, is comfortable of all that; we may see ownership for the vessel at a higher level. But I don’t think -- the vessel itself, I think 20% is a good guideline for what we would see as being held by a third-party.

Fotis Giannakoulis - Morgan Stanley

Okay, that’s much higher than what we were expecting. And I think Doug you mentioned back in February that at least this first unit is going to be on a larger scale. Is it still going to be the case and do you have any expectation regarding the additional couple of units that it seems more likely that you are going to exercise your option to build?

Doug Arnell

Yes. So I think one of the -- I don’t know if it surprises, but one of the learnings over the last year is that once we find an opportunity that works for a million ton type size, we quickly realize that it’s likely that even a smaller projects like that for various reasons would turn into a larger size project. So most of the opportunities we’re working on our of the larger variety and certainly this first spec vessel, we will be building, the four train set up which is depending on the amenity [ph] conditions is the 2.5 million to 2.8 million ton per annum vessels. It could happen, but I doubt it. It could be that the second or third vessel is smaller. I don’t think so though. I think we’re going to find that the range of projects is closer to the 2.5 size and even if we don’t have identified reserves for that late, having -- adding the fourth train onto this asset is extremely cost-effective. So it’s a pretty easy decision to make to tap all port trains capacity on the vessel.

Fotis Giannakoulis - Morgan Stanley

Thank you Doug. You just said that the first payment, the down payment is going to be quite substantial amount. I assume that these also demonstrate your confidence that this project will go ahead and that there are commercial agreements and discussions. I think three months ago you said that you are in discussion for 15 million to 20 million tons of capacity. How are these discussions being developing? Have you narrowed down that the number of potential commercial partners? Is there any commercial agreement that might be closer than the rest? And if you can give us a little bit more color about tolling versus LNG production, that you’re going to develop yourself and market over the LNG?

Doug Arnell

Okay, in terms of the number of projects that we’re working on, I will tell you that the discipline that we are having to apply is to not work on too many of the projects, so that we don’t get scattered and to lack of focus on the important ones. Availability of gas for this unit is absolutely not an issue. There is opportunities, because of the scalability of the unit, and the fact it is floating and really flexible and there is all sorts of opportunities.

The trick is to find a site and partners and a commercial structure that can carry the project through. So yes, I think 15 million to 20 million tons of opportunity is being worked on, is a comfortable estimate still. No, we haven’t narrowed down. We -- as I said, these projects are commercially complex. They take a long time to put together. We’re not going to put our eggs in one basket. We don’t need to. We’ve got two other options for conversions. We have got conversion candidates ready to go.

So we don’t really look at it that way. We are leaning forward on multiple projects and it’s a bit simple to say but it’s kind of a first come first serve. And the handful of very serious projects that we’re working on, we are very busy on; serious negotiations, serious discussions for getting permitting going and that kind of thing. But again, we don’t want to give too much focus on a single project until it reaches a point where we believe it’s going to go firm. We don’t want to get ahead of ourselves. So we’re extremely optimistic on the project side.

In terms of structure, there is a lot of ways to structure these things. Whether or not Golar takes a position on the commodity side -- that will be, those decisions will be taken depending on the specific project but it’s kind of a separate revenue stream than what we’re talking about here. No matter how it’s structured, if Golar is on the commodity side or not, a part of that structure you can assume there will be some tolling component which underpins the revenue stream going into the vessel company. So it will be very clear the payments coming into the FLNG asset, that’s for financing purposes. That’s for purposes of the dropdown. That’s how the LNG industry is used to having things structured. So if we do a commodity transaction beside it, that will be just a whole other revenue stream separate from the tolling.

Fotis Giannakoulis - Morgan Stanley

Thank you, Doug. If you can also help me clarify some of the numbers, I remember that you had mentioned that the cost of operating a vessel like that is expected to be something like two to three times and FSRU, if my calculation is correct that means around $20 million per annum. The North America the tolling revenue could be $3 to $3.5 per MMbtu. That makes something like $350 million per unit for 2.5 million tons. Is this a number that sounds reasonable and in terms of construction cost, am I reading your press release correct that you are talking about three times EBITDA is going to be the conversion cost?

Doug Arnell

Yes, that’s a guidance we are giving for. If you look at the capital cost or enterprise value of the single FLNG project, it means again strictly the tolling revenue with an assumption that the market indication or certain comparative economics to the U.S. Gulf Coast projects, which I think that marker is around $3.50. So, with that kind of toll, even adjusted for locations in terms of deliveries into Asia and netback adjustments and all that, against the enterprise value is a factor 3 yes. I would say on the OpEx, I can’t remember what you just said but I think that guidance is okay. I think if it’s 4 - 4.5 times an FSRU type operating cost, that’s fairly safe.

Fotis Giannakoulis - Morgan Stanley

Okay. Thank you. And one last question. When these vessels will be delivered, when the commercial contracts are in place, is there a plan to be dropdown to GMLP or you have thought that you can potentially create separate MLPV just for the liquefaction projects?

Brian Tienzo

I think the initial intention is that these assets as Doug mentioned earlier are MLP type assets. So the contracts will be of tenants that are droppable to the MLP. I think as you can imagine, the size of these assets will be far greater than the FSRU that we have been dropping down to some extent. We may follow a similar SeaDrill type model where sort of part of the asset is dropped down at -- one at a time as opposed to the entire head [ph] being dropped down. Whether or not we sort of create another MLP specific to these assets, it’s not really something that’s crossed our mind. I think it’s something that that we’ll have to see as and when we start getting the and start firming up on the type of assets and the location of those assets are much more visible to us.

Fotis Giannakoulis - Morgan Stanley

And in terms of dropdown multiple, if the construction multiple is only three times the EBITDA, how high can the dropdown multiple is part of a goal as intention to maximize the profit from the dropdown upfront or the profit will be maximized in the GP level?

Brian Tienzo

No I mean whilst we’ve been using sort of EBITDA multiples to guide, to some extent to give them guidance on FSRU dropdowns and vessel dropdowns to the MLP, the process is always that we have to follow sort of the conflicts to meet sort of recommendation to Board of Golar LNG Partners and Limited and they have to go through the contracts that are sort of within that vessel and they have to value those contracts, the residual values, the risks associated with those contracts and then we’ll come back with a suggestion. But I guess the way we then explain how those are reached is through an EBITDA multiple. So we’re not trying to maximize the profit as such we’re just following the sort of the fair market value of the contracts committee suggestion.

Fotis Giannakoulis - Morgan Stanley

Thank you, Brian. If you kind of allow me one final question and if you can present us, what are the potential risks? It seems that you are pretty confident on this project. Do you have any appropriate technology here or expertise that why wouldn’t other companies try to replicate that or producers that have access to the natural gas wouldn’t tried to do something like that on their own. Are there any risks that you would like to present us here regarding the completion of certain ambitious projects?

Doug Arnell

Well, the risk is generally on the project specific side Fotis, the permitting and the licensing and all the commercial structuring that has to go on. That’s why we’ll be working on multiple projects because a way to mitigate that kind of risk is to have several irons in the fire. But in terms of the technology risk and the constructability risk, that’s something we’re least concerned about. There is nothing new going on in this project. The execution model is very similar to our FSRUs. The conversion yard we’re using is the top conversion yard in the world. The technology we’re using is used today all over the world the only difference is we’re going to mount it up on a ship and mounting equipment up on a ship so that it works with something that Golar and Keppel have done in combination many times. So having this vessel work properly is not high up on the list of our risk. I think the risk is on the specific projects. And again we’re mitigating that by working on several and we’re pretty confident that if we have trouble on one or two, the others will come through.

Operator

Thank you. We’ll now take our next question from Jon Chappell, Evercore. Please go ahead.

Doug Arnell

Hello Jon, you’re there? Moderator, maybe we move on to the next question.

Operator

Yes. We’ll take our next question from Mr. Ben Nolan, Stifel.

Ben Nolan - Stifel

Great. Thanks guys. And just to change pace a bit from all the FLNG discussion; could I maybe get you to talk about the pace of FSRU contract? In the past -- since the first of the year, have you seen much in way of new incremental interest that hadn’t been there previously? Is there any level of acceleration or conversely are there people that have been very serious that maybe aren’t quite as serious about it that at this point?

Doug Arnell

That’s a subjective thing I guess. But the -- I think the number of -- today the number of FSRU projects that we believe will actually go ahead, new ones, is probably slightly lower than it has been over the past couple of years. But I always said that if it’s one to two maybe on the outside three fixtures of FSRUs globally per year, that’s about right. I’m not sure we’ll keep up that exact pace from today for the next few months. There are projects out there we respond to increase all the time. We’re pretty good at filtering when things are firm or not. But I guess in summary we’d say that we’re not feeling too bad that our next FSRU isn’t delivering to the end of next year. Because the prompt projects which we like to look at, we’re going to build a speculative vessel. We like to look at projects that can take advantage of a prompt vessel. There aren’t that many out there, that we think are firm. Now we can always be proven wrong. Projects can surprise you. But I’d say it’s a little bit lower right now than in the back.

Ben Nolan - Stifel

Okay, well that’s interesting. And I guess, has there been any, and I guess I would have thought that maybe given everything that’s going on in Russia and Ukraine that Western Europe would have been little bit more aggressive. Has that not been the case?

Doug Arnell

Well, Western Europe, I mean we’ve highlighted this - I guess reading between the lines that we were saying in some of our releases today that some of that uncertainty could drive new opportunities for FSRUs, but it is not really Western Europe because Western Europe currently is pretty much oversupplied on re-gas capacity. But projects -- Lithuania has a project now, and Eastern European countries (indiscernible) that’s where we think possibly it could drive some interest.

Ben Nolan - Stifel

Okay, well that’s helpful. And then last question from me. I know earlier that you’ve mentioned and historically you guys have highlighted the fuel consumption or burn-off differential between the dry fuel vessels and the steam power vessels, and how you are looking to capitalize on that in terms of the rates that you are able to earn? I was just hoping that maybe you could quantify where you are in the process, or at least in a percentage terms, how much of that value do you think you’re capturing today as opposed to what you ultimately feel like you may be able to capture?

Doug Arnell

I think, in today’s market, it’s more about a situation where we will have more success keeping utilization rate on the vessel up because of those cost advantages. There’s a lot of vessels out there right now, new-build and steam vessels. And the charters can be pretty picky about rates. So what I would say is that the spread is all over the place from what we have seen between the new-build vessels and the steam vessels depending on what day of the week it is and which vessels are vying for our cargo.

In general though I’d say it’s a lot tighter now than it’s going to be. In general for kind of quick spot aside, which is kind of -- it’s hard to get any indications other than that right now because there is so few cargoes. But if you look at the kind of one to two or three year deals that are going around, I think the spread is quiet narrow. And that’s one thing that we’re going to see opening up. It’s not looking like it’s more of $10,000 or $15,000 a day at times, which is quite narrow given the savings. But that kind of buyers -- indication of a buyers’ market. So as these charters have the new-build vessels coming into their portfolio more and more, I think we will see that premium spread out. And the preference to charter the new-builds will gain momentum going forward.

Operator

We now take on the next question from John Chappell, Evercore. Please go ahead, sir.

John Chappell - Evercore

Let’s try to get this quick. On the options, you mentioned six and 12 months on the options for the second and third potential FLNGs. What are you kind of looking for before deciding to move forward with that? Is it kind of progress on the first one with Keppel and Black & Veatch? Would you like to have a contract on the first one in place? Is it just kind of commercial discussions? How do we think about the decision to move forward with those two options?

Brian Tienzo

Well, it’s not a looksee on how their project is going with Keppel on the first one, but we -- I would characterize it like this. We would like to be extremely confident and the options were set with this kind of timing in mind. We would like to be extremely confident of what have in fact signed at commercial arrangement for the first vessel.

John Chappell - Evercore

Okay, and I want to harp on the timing of that. Obviously you wouldn’t sign that 2.5 years before delivery of the asset, but how close to the actual delivery would you really feel comfortable? Or I should say, as you are approaching the delivery in late ’16, when would you start to feel uncomfortable if you’d in have a contract -- a commercial contract in place for the first one?

Doug Arnell

Well, we are uncomfortable all the time, John. It keeps this focused, but it’s an interesting way that frame the question. I don’t think we’ve been thing in about that. It’s hard for me to answer. We are closing in on projects -- it’s -- I would be surprised that we go out a year and we don’t have that done. Does that help you?

John Chappell - Evercore

Okay. Yes, it does. Two more quick ones. Thanks for giving us an update of schedule on the delivery of the new-buildings after last quarter. Is there any wiggle room left potentially delaying those even further as you kind of think about all those fourth quarter ‘14 deliveries versus the kind of mid-term industry time horizon you talked about of improving late ‘15?

Doug Arnell

Well, for now we have finished those discussions with the shipyard. So you don’t know whether there is wiggle room until you kind of reinitiate something like that and we just completed getting this new schedule set. I don’t know whether there would be more wiggle room for not. We’re relatively comfortable with this schedule. We’re uncomfortable with the state of the market right now but in the time when we get out into the back end of this year, where really a lot of the vessels are coming, we are hopeful that things are starting to improve and we don’t need to kind of worry about that anymore.

Brian Tienzo

There is also of course the factor that as we go through 2014 and 2015, a lot of these shipyards are ramping up in the LNG related activities and of course those takeaway resources from building LNG carriers. So, it may not be that Golar LNG -- Golar itself initiate certain wiggle room on these deliveries. It could be that yards themselves take that initiative.

John Chappell - Evercore

That certainly be helpful. Last one for you Brian. I know that obviously given the tone of this call, FLNG is all that matters right now but trying to get my arms around kind of a clean first quarter. There’s other financial items of about $16.7 million baked into the press release that said non-cash swap losses. How much of that is non-cash, so we try to figure out kind of a clean one kill?

Brian Tienzo

Off my mind, I think it’s approximately $10 million to $11 million of that non-cash then there is about 3.5 or so on unhedged swaps i.e. interest rate swaps interest that aren’t hedged on specific notional financing.

John Chappell - Evercore

So, almost that entire number would be considered one-time nature based.

Brian Tienzo

Yes, correct.

Operator

Thank you. We will now take our next question from Mr. Michael Webber, Wells Fargo. Please go ahead.

Michael Webber - Wells Fargo

Yes, it’s long and meandering call, so I’ll keep it short but just to come back in on John’s question around really the data point that’s the most important, which is the commercial agreement. Without pinning you guys down to a date, it seems like first half ‘15 is probably the most likely timeframe for commercial agreement. Am I hearing you guys right around that?

Doug Arnell

Yes, it could be sooner and the news flow as well can start a lot earlier. There will be time on some of these projects where they will just have to become visible because there will be visible permitting activities going on specific locations and government probably is making some things. So, I think two things, investors will begin quite soon to start hearing some news flow about the specific projects.

Michael Webber - Wells Fargo

Yes.

Doug Arnell

It’s just that now before we got the ship going firm, we weren’t terribly excited about telling everybody we were working but -- and then like I said if we aren’t in at least in one firm agreement in the first half of ‘15, I will be pretty surprised. Now that firm agreement may have some conditionality on a specific operating permit or something but that kind of risk can be evaluated at the time. So that’s I think the best guidance we can give.

Michael Webber - Wells Fargo

Okay, that’s helpful and pretty direct. Around the financing and I know you guys talked a bit about this earlier but just to be completely clear around this. You get the financing more or less walked up to the long lead items you guys are talking about in terms of your initial order capital and then you went to, kind of into the payment schedule. In terms of thinking about that, is there a chance that there can be a capital call associated with the building of this asset before the dropdown of the Eskimo right. So, is there a chance that you guys have the further cash collateralize the spec build before you actually see dropdown proceeds or anything that would need to trigger an equity raise or something along those lines or is that payment structure with Keppel, as such that the bulk of that is going to be later in ‘15 where you guys are going to have more options?

Brian Tienzo

So, Mike, as we mentioned earlier, whilst the results of top asset towards the end and beginning of 2015, the initial payment to make the contract effective obviously happens well before that. Now, we haven’t mentioned in our press release firmly how we’re going to go about financing that. I think obviously in the background we have got a very good hand on what we are going to do to be able to do that. I think at the time that we announced firming the yearly contract, it’s probably the right time to be also talking about the financing for that because obviously they go hand in hand. But I think suffice to say, we’ve looked at various options and we believe we’ve come to a conclusion on what’s the best one to go forward.

Michael Webber - Wells Fargo

Okay and I think it’s an earlier question I think I’m earlier here was with -- you’ve talked to the fact that there is a bit of a larger upfront payment associated with this bill than obviously already you’ve raised some capital associated with this. I guess it was six months to a year ago. On a percentage basis or on -- so if you can give us some degree of scale around what you guys have now versus what you guys could be looking at, any help there? There is a lot of -- the previous question was basically under the assumption and you guys had that initial payment more or less down and the question was would you have another capital call, just some color on the scale of initial outlay versus what you guys have already raised?

Brian Tienzo

I think just to clarify, when we initially raised to find that some of the funds at the end of 2013, we did say it was for long need items. We didn’t specifically say of course it’s for the initial payments of the Keppel and Black & Veatch contracts. Now admittedly, the Keppel and Black & Veatch contracts are probably a bit more substantial than what we raised, but again I think suffice to say that we have sufficient growth on that what we need to put into place to be able to make that effective, and in all -- it sounds like I’m avoiding the question, but as I said I think the financing and effectiveness of that contract being announced need to go hand in hand together.

Michael Webber - Wells Fargo

Okay. I will wait for more color on that. Just one or two more for me and I’ll hop off. I know you guys have talked about Pemex in the past that and they’ve got 5 MBTA project around Gulf. It seems like the way these options are structured with Keppel that you would need to do as a single asset first or another project first before you could look biting out something like a Pemex? Is that the right way to think about it in terms of the order?

Brian Tienzo

Yes, I don’t remember talking too much specifically about Pemex, but Mexico as a country, opportunities for this asset I think are very positive and whether or not Pemex is talking about different size things or anything, we don’t know exactly what their plans are in their whole program. But Mexico is an interesting situation whether importing extremely expensive LNG in specific size while building up huge actual gas reserves of their own than building up capacity bringing gas from the U.S. So interesting gas dynamic there but the bottom line is we’ve got sort of domestic grid building up with supply that fit our vessels very well. So I think that, it could be interesting.

Michael Webber - Wells Fargo

Okay that’s helpful. One more just around the Tundra and I don’t know you addressed the FSRU market better earlier and you said it’s getting more competitive. Obviously the steady stream of FSRU cash flow is supporting your MLP currency, and you’re right, as we get close to the Tundra delivery that it’s going to get a lot more focused. At what point in terms of the construction and contracting that asset you guys start looking harder at other avenues for providing growth and kind of keep in supporting that currency, be it through acquiring free chartered assets or finding some other way to kind of augment the backend of that dropdown profile, right, if the market assimilate, Tundra gets done and the environment getting more competitive. How do you kind of handle that, that backend and the year dropdown pipeline?

Brian Tienzo

That’s probably more in MLP question, but I think why Golar LNG Limited and partners do have a partnership agreement that allows Golar LNG Partners to pick and choose vessels to buy from LNG Limited, of course Partners itself has the ability to look at all that sort of circle and buy assets from the outside and continue that growth. Now obviously at the moment, it’s not very transparent way additional dropdowns could be put to LNG partners [indiscernible]. I think certainly we want confidence that we have chance for the Tundra by the times it comes out. But it’s very difficult to also promise on other assets, given one the charter market is very soft and of course that FLNG project development, Golar LNG Limited is only starting. So I guess answer is MLP has ability to lookout the LNG space, Golar LNG space to continue that growth.

Michael Webber - Wells Fargo

Okay and just before I hop off just, John’s final question around that kind of [indiscernible] coming through, the continuing EPS number, you’re looking at 13.5 million to 14.5 million of I guess unrealized gains that’s reflected in that other number. Should we stripping out that entire number or just 14.5 million to get to your continuing EPS?

Brian Tienzo

I think majority of that number needs to be stripped out because one, it’s very -- if you look at our number in Q4, it was a positive $20 million or something, right. So it needs to be stripped out because one it is a volatile and traditional cash.

Operator

Thank you. As there are no further questions, I would like to turn the call back to the speaker for any additional or closing remarks.

Doug Arnell

Yes, thanks moderator. And again, well thanks everyone for the contribution to this quarter’s call. It’s been a pleasure talking to you and as always we look forward to speaking to you again in the next quarter’s presentation. Thank you and good bye.

Operator

Thank you. That will conclude today’s conference call. Thank you for your participation ladies and gentlemen. You may now disconnect.

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