Golar LNG: Decent Earnings But Problems May Be Ahead
Summary
- Golar LNG's revenues surprisingly improved in the face of the coronavirus outbreak that has devastated the shipping and energy industries.
- The company could see some difficulties over the remainder of the year as the space struggles to recover from the economic shutdowns.
- It has been taking steps to improve its revenue backlog, which should better help it weather the current conditions.
- BP's force majeure claim could disrupt or at least delay the company's forward growth story.
- We definitely see signs of the usual Q1 seasonal weakness and some negative impacts from the virus but the company looks positioned to weather through.
- Looking for a helping hand in the market? Members of Energy Profits in Dividends get exclusive ideas and guidance to navigate any climate. Get started today »
On Thursday, May 28, 2020, diversified liquefied natural gas tanker and production firm Golar LNG Limited (NASDAQ:GLNG) announced its first quarter 2020 earnings results. At first glance, these results appeared to be mixed as the company managed to beat the expectations of its analysts in terms of top-line revenues but also announced a fairly large net loss during the quarter. With that said though, few people expected too much out of this company as the coronavirus outbreak and resulting global economic shutdown has been devastating for this industry. It was certainly not all bad news in this report though and indeed there were a few items in here that could prove quite promising for the company's future. Overall though, it seems likely that we will continue to see struggles out of it until we return to sense of normalcy, which may take a few more quarters.
As my long-time readers are no doubt well aware, it is my usual practice to share the highlights from a company's earnings report before delving into an analysis of its results. This is because these highlights provide a background for the remainder of the article as well as serve as a framework for the resultant analysis. Therefore, here are the highlights from Golar LNG's first quarter 2020 earnings results:
- Golar LNG reported total operating revenues of $122.559 million in the first quarter of 2020. This represents a 7.24% increase over the $114.287 million that the company brought in during the prior year quarter.
- The company reported an operating income of $21.158 million during the most recent quarter. This compares rather unfavorably to the $28.864 million that it reported during the year-ago quarter.
- Golar LNG's Golar Power division saw its Sergipe power plant in Brazil receive its COD acceptance milestone that triggered the commencement of earnings under its 25-year power purchasing agreement.
- The Gimi floating liquefied natural gas plant received a force majeure claim from BP (BP) in Mauritania in order to delay its delivery date by twelve months.
- Golar LNG reported a net loss of $91.251 million in the first quarter of 2020. This compares very unfavorably to the $17.484 million net loss that the company reported in the first quarter of 2019.
Without a doubt, the biggest piece of news that affected the world in general and the company itself during the quarter was the outbreak of the COVID-19 pandemic. This outbreak of this disease resulted in nations around the world shutting down their economies and limiting or curtailing shipping traffic in an effort to slow down the spread of the disease. This shutdown reduced the demand for natural gas from industry globally. In addition, the quarantine and stay-at-home orders have reduced the demand for natural gas to heat office buildings and other commercial structures. Finally, there was a relatively mild winter in much of the world, which also reduced the demand for natural gas to heat homes and other structures where people were actually staying. This drop in natural gas demand combined with an increase in the supply of liquefied natural gas being produced in the United States resulted in the price of the compound declining.
This is reflected in Golar LNG's first quarter results. As I have discussed in various past articles, it is not exactly atypical for a natural gas tanker company's performance to decline in the first quarter of the year compared to the fourth quarter of the previous year. This is because those nations that import the compound, such as China and South Korea, typically try to stockpile the compound in the fourth quarter in order to prepare for the winter months and then burn off these stockpiles over the course of the winter. This reduces the demand for carriers to ferry these resources across the ocean during the first quarter and due to the economic law of supply and demand, dayrates decline. Golar notes that the dayrates on the charters that it has that are linked to an index did indeed decline relative to the fourth quarter of last year.
One metric that is used by shipping companies that is used to measure the financial performance of a vessel is time charter equivalent. This essentially tells us the daily profit or loss of operating a vessel and allows us to measure period-to-period changes. In the first quarter of the year, Golar LNG reported a time charter equivalent of $61,900 compared to $77,000 in the fourth quarter of last year. This reinforces my statement that dayrates and by extension demand declined in the quarter compared to the fourth quarter.
It may be somewhat surprising though that despite the increase in demand, Golar LNG saw its fleetwide utilization increase quarter-over-quarter from 90% to 94%. The utilization rate is a measurement of the percentage of the fleet that is employed at any given time. The primary reason for this increase in utilization is that one of the company's vessels left its active fleet in the quarter. This vessel, the LNG tanker Golar Viking, completed the charter that it had in the fourth quarter and entered into the Hudong shipyard where it will be converted into a floating storage and regasification unit in preparation for work for a customer under a long-term contract. While this had the effect of increasing the company's utilization rate, it also had a negative impact on its revenues because the ship was employed during the fourth quarter but was obviously not employed during the most recent quarter.
One thing that Golar LNG has been aggressively working on is converting its fleet from spot charters to long-term ones. There are essentially two ways that a vessel can be chartered. It can be hired to perform a single trip for a customer, which is known as a spot or voyage charter as the dayrate for it is typically based on the prevailing price based on a shipping industry benchmark. A vessel can also be hired under a time charter, which is a contract for an extended period of time. A time charter has the advantage of providing the company with a reasonably reliable source of cash flow over a long period of time. This protects the company from needing to find new short-term charters in what might be a weak cyclical market. In some ways, these time charters can provide some insulation against changes in dayrates but this is not always true as the dayrate under a time charter can also be index-linked and be regularly reset with fluctuations in dayrates. The company has had success at improving the portion of its fleet that is covered by time charter agreement. We can see this by looking at the company's revenue backlog. This is shown here:
Source: Golar LNG
As we can see, the company has successfully managed to boost its revenue backlog from $20 million in April 2019 to $126 million in the most recent month. This is important because of what revenue backlog represents. A company's revenue backlog is the total amount of future revenues that the company will generate based on its existing charters. As these revenues are backed by contracts, they are as close as we can get to guaranteed revenues in this business. This backlog represents more than a quarter of revenues at the current level, which while not ideal is a reasonably good position for the company to be in and is certainly much better than what it has had in the past.
As I discussed in a previous article on Golar LNG, British supermajor BP (BP) has declared a force majeure contract provision on the FLNG Gimi. This is a floating liquefaction plant similar to the Hilli Episeyo that was originally scheduled to begin work in 2022 but BP has now asked for delivery to be delayed until 2023 due to the coronavirus pandemic. At first, I questioned the validity of these claims but Golar LNG has been working with Keppel Corp. (OTCPK:KPELF) under the assumption that BP will end up winning the court challenge. While Golar did not provide any exact information in its earnings report, it implied that Keppel is willing to delay the receipt of the final payment for the plant, which is about $59 million, until 2022. This agreement would certainly help Golar LNG maintain its liquidity over the next two years. As it is ultimately liquidity that a company depends on to pay its bills, this is obviously something that is beneficial from an investor's perspective.
In conclusion, Golar LNG was not devastated as much by the coronavirus outbreak as many expected in the first quarter. However, the global economy was shut down for a much greater portion of the second quarter so we could certainly see much more impact as the year drags on. We also see some initial difficulties with the company's growth program as the Gimi, which would have represented a significant positive impact on revenues now could very easily be delayed by a year. With that said though, it is nice to see that the company appears to be taking the steps that it needs to in order to weather this crisis.
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This article was written by
Power Hedge has been covering both traditional and renewable energy since 2010. He targets primarily international companies of all sizes that hold a competitive advantage and pay dividends with strong yields.
He is the leader of the investing group Energy Profits in Dividends where he focuses on generating income through energy stocks and CEFs while managing risk through options. He also provides micro and macro-analysis of both domestic and international energy companie. Learn more.Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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