Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to today's Golar LNG Limited Q1 2019 Results Presentation. At this time, all participants are in a listen only mode. There will be a presentation followed by a question and answer session. I must advise you the conference is being recorded today.
I'd now like to hand the conference over to your first speaker today, Ian Ross. Please go ahead.
You, operator. Good morning, good afternoon, everyone, and welcome to Golar's Q1 2019 earnings call. Today, I'm joined by CFO, Graham Robjohns Head of IR, Stuart Buchanan and we're pleased to advise that our Chairman, Tor Olav Troy is also on the call. Turning to Slide 3, we have had a lot of feedback over the last few months about the things we can do to try and make the Golar story more simple, more appealing to some of the longer term investors that we're trying to attract, and we hope to cover some of that today. Our vision is to participate competitively, sustainably and of course safely in owning and operating of LNG infrastructure assets, which we believe are part of the world's need to move towards cleaner energy.
And Slide 3 is a reminder of our current assets. Let me move to Slide 4 and just cover the highlights before handing over to Graeme for him to go through the numbers. The main achievements during the quarter were clearly to conclude all of the contractual agreements in order to get going on the Gimi FLNG conversion project for BP, which is now up and running and progressing to plan. As a reminder, the vessel should be on station and producing LNG in 2022, at which point it will start running down an EBITDA backlog of over $4,000,000,000 associated with the project. Our $700,000,000 debt facility is in place.
Partner in this development Keppel Capital has subscribed to its 30% share in the project. The second project that we made the final investment decision on is the Viking conversion from a carrier to an FSRU for LNG Croatia and that project will commence next year. And whilst we grew the EBITDA backlog, the amount of EBITDA that we generated during the quarter was about half of the Q4 2018 number, largely due to seasonally reduced shipping rates, which still was well above the Q1 last year. And importantly, subject to the shipping market improving as we think it will, we're getting closer to a spin off of the TFDE fleet having received approval from the Board to move forward on that basis. Spending off the ships will create 2 separate businesses that should be more appealing to investors individually than as a combined group.
I'll now hand over to Graeme to take you through the numbers in more detail before coming back to talk through the business segments.
Thank you, Ian, and good day, everybody. Starting on Slide 5 and our income statement, our net operating revenues were down this quarter at $97,800,000 from $141,800,000 last quarter, primarily as guided as a result of a weak Q1 spot shipping market, which was largely driven by seasonality as well as early Chinese LNG buying in Q4 leading to weak Asian LNG prices in Q1, which removed intubates and trading opportunities. As a result, fertilization fell 51% and TCEs to $39,300 per day. The reduction in shipping revenues was the key driver behind the adjusted EBITDA of $62,900,000 although realized earnings from the Brent linked element of the Hilli Episeyo contract were also reduced at 2 $200,000 for the quarter. The fair market value of the Hilli Episeyo linked oil contract, I.
E. The unrealized elements recorded a gain of $28,400,000 in Q1 as oil prices recovered from year end. This of course compared to the very large loss of $196,000,000 for Q4. We recorded a $34,300,000 impairment in the quarter in respect of the steam LNG carrier Golar Viking, the vessel being converted for our Croatian FSRU project. Although the sale is not expected close until Q4 2020, the transaction triggered an immediate impairment test as the carrying current carrying value of the vessel exceeds the price, a market participant would pay for it as an LNG carrier today, a non cash impairment charge of 34,300,000 dollars has been recognized.
A profit is however expected to be recorded when the sale actually closes along with a net cash inflow of approximately 40,000,000 dollars And finally, equity and net losses of associates was significantly reduced this quarter due to the impairment of our holding in Golar Energy Partners that was recorded in Q4. Turning over to the balance sheet. On the next slide our unrestricted cash balance was $213,000,000 as at March 31 as compared to $217,000,000 at year end. Included in our total restricted cash of $478,000,000 is $175,000,000 relating to the Hilli Episeyo letter of credit facility, approximately $29,000,000 of which is expected 19 with a further 85,000,000 scheduled to be released by May 2021. Turning over to slide 7, our last 12 months further adjusted EBITDA, which is adjusted for non recurring items and Golar LNG Partners share of Hilli annualized for the full year was 186,000,000 dollars which we would expect to increase as a function of an improving shipping market.
Note that this is, as I say, after the deduction of a one off gain associated with the Golar Tundra contract and also, as I say, Golar Partners share of Hilli, but does not include distributions that we receive from Golar LNG Partners, which is currently approximately $37,000,000 per annum. Moving over to Slide 8 and staying with EBITDAR, cash generation from our FLNG and downstream assets and contracts will now start to ramp up. We also expect our current base level adjusted EBITDA will improve as a function of an improving shipping market given that the $186,000,000 for the last 12 months numbers equates to an average TCE of only $44,000 per day. Cash generation will increase significantly over the next few years as a function of the start up of the Sergipe power station together with the Nanook FSRU, expected increase in utilization of the Hilli and of course the new Gimi FLNG contract. And this will bring us to over $500,000,000 a year.
These numbers, as I say, again, exclude any contribution from Golar LNG Partners in the form of dividends. 3rd slide on EBITDA on Slide 9, you can see that even without the assumption of the proposed shipping spin off, our earnings will become far more predictable as fixed contracts start to demonstrate dominate. And we move from a fixed element of contracts with 23% currently to over 70% once the Gimi is operational. Turning over to slide 10, here we show a breakdown of our debt. Adjusted net debt position as of 31st March including 100% of Hilli's 894 debt was $2,200,000,000 or $1,750,000,000 if you exclude Golar Partners share of Hilli's debt.
We've also set out in this side the split between short term and long term contractual debt, which as you see differs markedly from balance sheet position as a result of the requirement to consolidate the Chinese banks leasing companies, so called BIEs. An important part of the proposed shipping spin off is, of course, the debt reduction from our balance sheet. The debt associated with the vessels earmarked for the proposed shipping spin off equates to approximately $1,170,000,000 In terms of new debt, as Ian has mentioned and as we reported in our earnings release, on April 16, Gimi MS Corp, our 70% subsidiary, which owns the vessel Gimi, received a firm $700,000,000 fully underwritten financing commitment. The facility will be available during construction as a tenor of 7 years and has an amortization of 12 years. We also expect that as we get nearer to commercial operations, this level of debt will increase as was the case with Hilli.
In terms of other debt facilities, we've agreed a 2 year extension on the Golar Tundra, so leaseback facility and a 5 year amended hand back to Ian to carry on with the presentation.
Thanks, Graham. So I'm on Slide 11, taking the business sectors in turn. Firstly, FLNG. Hilli is going well, currently offloading cargo number 20 this week and as we recently achieved a contractual milestone of 1 point 2,000,000 tons of LNG produced that allowed the LC to be reduced as Graeme mentioned. On the back of our continued and potentially extending the overall duration of the contract.
We expect to conclude these discussions well before the year end, and I'm sure that you'll understand if we don't go into any further details at this time, but we'll update you fully when we've concluded the agreements. The Gimi conversion project for BP is being kicked off as mentioned. We recently cut the first steel on the sponsons. And as the project progresses, we're making sure that anything that we can learn from the Hilli operation is built into the design and operations of Gimi. And this is recent and relevant operations experience that's making our discussions with other potential FLNG customers so constructive.
Our pipeline of prospects remains very healthy, but it should be noted that these deals are complex and take time to conclude. And although we're confident that FLNG economics and risk profiles will result in readily refinanceable assets post startup, One of the key challenges for Golar is our ability to commit our portion of the equity required during construction phase of a project. Payment terms are a key component of this and we continue to work with yards and suppliers to try and optimize the commercial model, which will allow us to make this business more scalable. Turning to shipping on Slide 12. So the shipping market did experience a seasonal decline with the TCE effectively halving from the 4th quarter.
And as usual, it was a combination of factors led to the swing in rates. With a mild Asian winter, despite continued growth in China, we saw some nuclear restarts in Japan and Korea that largely offset that Chinese demand. They are closed and the Atlantic basin cargoes from the U. S. And Russia into Europe doubled by volume compared to the Q1 2018.
With these additional volumes remaining in Europe, ton miles and shipping rates continue to fall throughout the quarter, leaving spot TFDE and steam rates at 40,000 24,000 respectively by the end of March. Of course, with rate reductions, we also experienced reduced utilization, which in a down cycle has a greater effect on TCE. And although the rates softened further in Q2, we've recently seen the low point and shipping rates are now into their seasonal recovery. Forward gas prices of $9 per MMBtu being quoted for December gives solid support to an improved shipping market and our view on the coming structural shortage in shipping remains unchanged. Leading brokers continue to forecast the 10 plus vessel shortage at the end of 2019, increasing to more than 20 at the end of 2020.
Rates are expected to reflect this from the second half of this year onwards and remain strong for the next 2 years. This has resulted in an increase in requests for medium to long term charters. We have a couple of deals already concluded and several more under discussion based on index linked rates, which will secure full utilization of the chartered vessels. These deals will provide some support to the fleet TCE moving forward. And as mentioned in the introduction, at our recent Board meeting in Bermuda, a decision was made to proceed with a spin off of the company's TFDE LNG carriers into a separate business subject to satisfactory market conditions, which will allow us to focus the company's future activities around FLNG, Golar Power and the downstream assets.
We believe this spin off will allow investors more direct exposure to the LNG carrier market without having to consider the longer term CapEx projects. Golar is also in talks with other owners of similar tonnage to potentially join the new shipping company. And under the new arrangement, it should be noted that management of Golar's vessels will remain with Golar Management Norway. Turning briefly to the FSRU business on Slide 13. The Viking conversion project has taken FID with long lead equipment now on order.
She'll enter the conversion yard at Hudong at the beginning of next year and will trade as a carrier until then. This conversion contract will not consume any material amounts of cash due to the milestone payment structure agreed under the contract. Other FSRU prospects are being pursued, but the approval process remains slow and the returns are less attractive than other parts of the business can be. Turning to Slide 14 in the Sergipe power station. Construction remains on track for commencement of operations on January 1, 2020.
Completion and pre commissioning of selected systems has commenced in anticipation of first firing of the gas turbines currently scheduled for early July. Transmission lines from the substation to the grid were connected on the 3rd May and the FSRU Nanook with its commissioning cargo is ready for hookup to the mooring. And as a reminder, Golar's share of the earnings from this project are around $99,000,000 per year for 25 years regardless of whether power is dispatched or not. As discussed in the last call, Golar Power commenced a strategic review, which focused on how we can ramp up the business now that Sergipe power plant is nearing COD. We had a progress update a couple of weeks ago and there are a number of ways that we can grow the power business.
Of course, we can continue to pursue Brazilian power options to underpin further developments like Sergipe and we do have a couple of locations already permitted and with well developed business plans, 1 at Barcarena in the north and other at Santa Catarina in the south. We will continue to pursue these projects because the problem is that we have the timeframe between now and when we see cash flow is quite long between 4 6 years away. So in thinking about smaller amounts of CapEx and shorter payback times, we've been closely examining the downstream distribution market for some time and the clear conclusion of the review is that the immediate focus of Golar Power will be to utilize the strategic position of the Nanook FSRU to access the downstream small scale LNG market in Brazil. If we turn to Slide 15, we try to illustrate that there are several ways the Brazilian energy market is being serviced. We include a current reference price for the different forms.
For example, the industry is paying about $15 per MMBtu for piped gas. Isolated communities are paying about $14 for HFO generated power. Domestic consumers are paying about $20 per MMBtu for piped gas and diesel for transport costs about $26 per MMBtu. And in this slide, we're attempting to show that we have a small scale rollout solution for gas fired remote thermal power, remote domestic gas consumption and remote LNG transport. In all modes, we can generally beat the reference price for supply of LNG versus the current fuel.
And if you consider that 95% of the cities in Brazil are not connected to pipeline gas, there's an opportunity to displace expensive diesel and other fuels. The market in Brazil is large with diesel consumption across the whole country equivalent to approximately 40,000,000 tonnes per annum of LNG demand. So the key to this plan is to use the FSRU NIMID. We've already invested $300,000,000 to $400,000,000 in the vessel, the pipeline and the mooring, and that expenditure is justified and supported by the Sergipe power station project. But when the Sergipe power station is running at full capacity, it will only require a fraction of the volume of the FSRU.
We therefore have access to around 200,000,000 MMBtu per year spare capacity. Spare capacity. If you turn to Slide 16, the model we're developing involves breaking bulk from Nanook and transporting LNG to other coastal locations before transferring to storage tanks, secondary terminals or truck loading stations for further transport to the destination. We have had detailed discussions with many of the small cities that can be served from the Nanook FSRU and have received such strong interest from these communities, combined with a strong drive from the Brazilian government that we're moving ahead with the detailed planning and costing. The key will be to understand not only the cost of conversion for the consumer, but how we can make it as easy as possible for them to take advantage of the lower costs and improve environmental performance.
The Nanook is a strategic asset and creates very high barriers to entry. By means of example, if we use all of the excess capacity of the Nanook and assume that say $1 per MMBtu can be captured, this is equivalent to around $100,000,000 per annum in additional EBITDA for Golar Power. Importantly, the time between investment and cash flow is relatively short with returns commencing in 12 to 18 months. We believe this model is replicable at other locations such as Barcarena and Santa Catarina and importantly, it can accelerate the positioning of strategic FSRUs in those locations in advance of a power station contract being awarded. Turning to Slide 17 shows another example, this time looking at transportation.
Diesel for transport costs $26 per MMBtu as illustrated by the petrol pump or the diesel pump price that you can see in the slide. It probably be delivered in the form of LNG for about half the cost. And interestingly, LNG trucks cost about the same as diesel ones. And right now, there are around 2,000,000 trucks on the road in Brazil using about 32,000,000 tonnes per annum equivalent of LNG in the form of diesel. LNG cuts CO2 and nitrous oxide emissions by 30%, particulates by 70% and it basically takes out any sulfur.
It's cleaner and much cheaper to use LNG for transport than diesel and infrastructure is relatively cheap and fast to roll out. Moving now to Slide 18. This summarizes our contract earnings backlog, which is around $6,600,000,000 versus a current market capitalization of $2,000,000,000 and an enterprise value of 4,000,000,000 dollars We continue to look to build a strong and sustainable business with some high quality customers. And this seems like a good time to hand over to Golar's Chairman to Orlov Troy for his views and some closing outlook comments.
First of all, I want to thank all of you for listening into the call. The reason why I wanted to participate in this call was to give an unfiltered message from the Board to the company's shareholders and prospective investors about the strategy we have set and the focus the Board will have for the company going forward. To build a great company is never easy. I've had the pleasure of being a part of the group which historically built some great companies, made a lot of money for shareholders, but nearly all of them went through some tough times before the shareholders ultimately got their award. Even our vision to sell cheap and healthy food through the consolidation of the salmon industry ended with big of investor confidence and a market capitalization of $1,200,000,000 in 2012 before the investors saw the value of cheap and healthy food.
Today, the price of the company is $11,000,000,000 after I paid out another $3,000,000,000 I'm proud of what our employees in Golar have done and have achieved over the last year. We delivered the world's first FSRU. We delivered the first world's first FLNG and we delivered it under budget at a time. We had 100 percent uptime of operation in the 1st year of operation. We started the construction of the second one after BP has spent 3 years in our offices vetting the vessels.
We are seen as a top class operator of LNG carriers and we are in the process of completing construction of South America's largest thermal power plant, which will generate $1,000,000 in EBITDA every day for the next 25 years. We have altogether gathered a backlog of more than $10,000,000,000 for the group with a very good margin, not that bad for a company with a market capitalization of $2,000,000,000 However, we are as board also ultimately responsible for giving a return to shareholders. That is the most important thing you have in mind running the company and we have not delivered over the last 5 years. I have to admit that it feels tough to announce a 20 year deal with BP with an unleveraged return of 13.5%, at the same time see the share price fall. Particularly, it's hard when we are approached by pension fund out there, which we would be happy to see half of that return for a 20 year debt deal to a oil major.
We can't blame it on the market. The LNG market is the fastest growing energy market in the world outside of renewables and growing more than 10% a year. It's a great ESG story and as Ian said, it's significant pollution reduction. CO2 down 30%, SOX 100% and particulate is down 60%. It is really an ESD case.
The biggest three challenges we have had have probably been and ultimately have been the hurdle in developing this company over the last years has been the slowness of the decision making in this industry, the time it takes to execute from project to planning to permitting to construction and completion, and then a lack of developed financing for the LNG industry, which is a new industry. We will now can let Nanook pick up the cargo from Hilli, use the FSRU capacity and send gas into our power station in Brazil and let an Avonir ship, which comes in the end of the year, started distribution of small scale LNG in Brazil for Nanook. It's a result of 10 years of hard work in permitting, negotiating, financing, executing on a very firm conviction. LNG is cheap and clean energy. That's why in percentage term growth close to 10 times more than oil.
I dare to say that the biggest value in Golar today is not the contracted cash flow which all the analysts can estimate on a quarterly basis. It's the execution experience we have gained and the strategic value of that infrastructure we have built which is flown in the chart. There's only Golar and Petrobras today who can deliver LNG into Brazil and it will cost 100 of $1,000,000 for anybody else and years to challenge those. The main target for the company now going forward, as Ian said, is to fill the production capacity of Hilli for a longer term than initial contract. It is to increase the throughput on Onuk and it is to produce emerging power in Brazil in the periods that may not dispatch.
It is to replace diesel in the down stream market. It's all incremental revenue and EBITDA on a CapEx which already have been taken by the Golar shareholders. It is to use the entry points we know the further entry points we know are permitted in Brazil to deliver further LNG into the customer. The pump price for diesel in the worst fuel chamber in Amazonas was yesterday equal to $26 LNG prices. At the same time, LNG price in the U.
S. Market was yesterday $3.85 in Europe it was $4.24 and the JKM price was $5.32 out in Asia. They are all prices which are equal than less than $30 oil. Gas LNG is significantly cheaper. What we need in addition to Nanooka to go after this Brazilian market is a small scale vessel.
It's some LNG storage tanks typically costing $500,000 There is some ISO containers typically costing $110,000 It's filling stations for trucks costing around $500,000 and then some trucks costing around $100,000 We're talking about less than $100,000,000 to make a showcase for an energy revolution in what is the 1st 5th most populated country, a country which last year had these rights. I never seen a more obvious and stronger and more profitable E and D, ESG investment case. This is what Golar ultimately In order to streamline the company for long term cash flow oriented in MSR, the Board have decided to spin off the carrier business. We'll remain operators of the ship, but we think the volatility we have seen in the shipping business makes it difficult for investors to really understand what Golar is about. At the same time, we know we are heading into some interesting time in shipping.
We saw rates cross $200,000 per year last year. We dipped down in the 1st part of the year, but we already seen clear signs of recovery. For the next 2 years, we know that LNG production coming on will outstrip the amount of new shipping capacity coming from the yard and thereby should lead to a tighter market in the 2 years to come. There is time now, if any time, to create a pure play LNG shipping company. We have invested more than SEK 5,000,000,000 to get there where we are today.
From here on, it's much more a story about capital discipline, increased utilization of existing assets. It's all about return on assets with limited investment materially in it in order to create significant value for the company. We know we have the permit to build, for instance, an FSRU terminal in Bacarena. We know the group have an FSRU laid up. We know that through these assets can establish what normally is a $400,000,000 terminal at the marginal cost of probably $50,000,000 to $100,000,000 If we, after a couple of years, can get $1 in tariff on that throughput capacity, we're talking about an earnings potential of $180,000,000 having throughput capacity on that.
It just illustrates the economics of going downstream. We're talking about downstream methods that we typically pay back in 2 to 3 years, at least they come quickly contrary to FLNG. They also create a very strong relationship to our customers long term. We are often asked why we haven't concluded more FLNG deals. People stating, asking us are there not enough opportunities.
I'll tell you that's wrong. We had 3 guys from Golar visited 1 of the biggest energy company in the world last week. The company showed up with 40 people and presented us with 10 opportunities for FLNG developments. It's just an example. The reason we haven't concluded more FLNGs are twofold.
The time to take for oil companies and governmental institutions to get to FID and ability to get debt financing in a period between FID and startup. When you start production, you can usually leverage the contracts to and leave no equity. We have wanted to protect the upside for the existing shareholders in what we already have created by not diluting the capital. My friend, Wes Edens, who runs New Fortress and I share a vision, the biggest energy company 10 years from now might not exist today. I'm in no way saying that it will be off.
But I think as Wes and I say, because what we do is we give customers cheaper and cleaner energy and we can make a lot of money in between. I think this is generally a fantastic business model. I hope that in the next year, with that capital discipline and increased utilization of our assets and some of these unique downstream assets we're now talking about can give back a higher return again and can complete our integrated energy company. We can increase both short and long term earnings and that we maybe even can make Golar great again. Between 20,022,014, we were the 2nd best performing stock in the OSX index and we were up 1500%.
We have a history to take care of and we need to get back there. With $10,000,000,000 in the group backlog and 6 $1,000,000,000 in order backlog in Golar itself and a significant reduced debt load as a function of spinning of the shippings and a mission to lower energy costs for everybody, I think we are on the right track. I'm very confident about the future, the team we have put together and we have, and I'm excited. Thank you.
Thanks, Tor Olav. And with that, I'd like to hand back to the operator for questions.
Thank you. Ladies and gentlemen, we'll now begin the question and answer The first question today is from the line of Jon Chappell from Evercore. Please go ahead.
Thank you. Good afternoon, everybody. Hi, John. Ian, I want to ask about the key growth focus. The final bullet point was additional FLNG awards.
I understand you can't really say much on Hilli, so I'll ask about the other 2 that are kind of in the probability tree. Any update on a second potential asset for BP or just any thoughts about the timing of how that may transpire? And then also you introduced in the press release this comment about Del Feene term sheet expected basis of a shareholders agreement. If you could just explain a little bit of what that means and how that project is developing?
Thanks, John. So there's no further update on the BP second vessel. BP still retain that right and we've had no formal communication back on that. In terms of Delfin, we just wanted to update everyone that we have made a bit of progress in revising our term sheet from the previous agreement that we had. The challenge of that project remains and the focus of that project remains on trying to link an offtaker and the supplier to allow that project to proceed because that will be key to the financing of the opportunity.
We've made good progress on the technical aspects of the project that are happening in the background, but we're still trying push and make some progress on the offtake. So that's the critical path as it has been for the last 12 to 18 months.
Okay. So no real change on timing? No. Okay. The second question has to do with the shipping business and it's just comment that you made in the release and also in your comments about recently concluded charters.
I get that they're index linked, so that's both good and bad exposure to the market. But obviously, locking down the utilization is a huge positive. You remove 1 of the 2 variables from your net TCE. So can you provide a little bit more clarity as to how many of those how many of your ships have been contracted on these index links and also the durations for those contracts? Is it just bridging you to the winter or is it a multi year period?
So I'm not going to give specific details, but it's we hope to end up basically with a large handful of ships that have got some degree of contract in that order. And the duration that we're talking about is sort of north of 12 months for anything up to 5 years. So there's quite a wide range, but there is a flavor coming through of a trade off between us getting utilization and relating it to the market. My view is that there are positive development for the shipping fleet.
Okay. And is that something you think you'd disclose ahead of the spin off or not?
I don't think we did ever disclose that amount of detail for the shipping contracts.
Okay. I appreciate the thoughts. Thanks again.
Thank you. The next question is from the line of Michael Webber from Wells Fargo. Please go ahead.
Hey, good morning, guys. How are you?
Hey, Mike. Hi, Mike.
Hey, I wanted to touch on Golar Power. There are handful of new slides in the deck and you guys clearly made a point to run through the different options you have in terms of finding ways to deploy that excess NAND capacity. I'm just curious, I guess, one, is your confidence in small scale in Brazil, is that stemming from just the overall market opportunity or is this related to contracts either awarded or in bid? And then as you look at the different things you kind of lay out on Slide 16, how should we think about you guys cobbling together a book of business to absorb that excess capacity in terms of just a broad sense of scale for both industrial kind of municipal and service station outlets and timeline?
So the reason for the confidence in the small scale is when we went through the review, which is we held at New York a couple of weeks ago we went through the review of the work that has been done and the detailed work that's been done in analyzing the, I guess, the potential customers of the small scale, it was very thorough and very impressive. What that means is that we've gone to the level of having discussions with municipalities and end consumers. We've got letters of support and letters of intent and interest in taking LNG from us to the point where we've built up fairly detailed models of what those transactions could look like. What we have to do next is go to that next level of examination of the specific switching costs. So we know how to get the LNG as Torul have said in his remarks.
We can break bulk on Sergipe. We can take one of the Avenir ships and come around the corner. We know how much it costs for an overall isotainer or a larger tank. But then the trick is to take that into the consumer and make it easy for them to take advantage of that low cost and environmental benefit. So we're working on that.
And that will spread out between the various forms and sources on Slide 16. So the two areas that are of most interest to us, one is of course trucking as we detailed on Slide 17 whereby we can provide that fuel we get some of that saving. And then the other one of course is where you got diesel fired power generation remote communities deep into the heart of Brazil and displacing that diesel with LNG. And many of those power generation facilities are dual fuel anyway. So again, the switching costs are quite reduced.
Okay. Yes. And there are lots of ways, I guess, to kind of carve that up. I guess, maybe the best angle to ask about it would be, I guess over the next couple of years, if you're talking about a Jan 2020 start up for the project in general and then from there on you're looking to kind of place the excess capacity, what would the potential volume commitments look like 1 or 2 years out? I guess what are you targeting?
I think what we're looking at is a ramp up. So I think part of the once we reconvene towards the second half of the year, I would expect that if we have all our ducks in a row, we'll be pressing the button and pushing ahead with the first elements of, if you like, of this type of distribution learning from that and then slowly ramping or quickly ramping up as fast as we can out into the rest of the community. And I don't think we know yet just how much of that volume we can actually put through in this way. But also we do have capacity, for example, of Sergipe for an extension to the Sergipe power station, we get a power station number 2. So there'll be a ramp up of some degree over the next couple of years to maximize the utilization of the power station.
And I think during that time, we'll then be looking at what can we do towards perhaps one of the other locations to do that in advance of a power station award.
Got you. Okay. And then my second question is actually around Delfin, which I think you touched on John a bit earlier. Just you mentioned an ownership structure there. Is the best way to think about this that you're looking at something at the corporate level or this is the best way to think about it on an asset by asset basis because that project could span multiple assets theoretically.
Is this something where we're talking about a broader agreement or we're taking it a step at a time on an asset by asset level?
I think we could end up with a broader agreement, but right now we're absolutely taking it a step at a time because we've got to establish this off take in supply duopoly, if you like, to make sure that we can underpin the financing of the project. And we can spend all day looking at different structures. But if we don't have an offtake that supports the project and the financing of the project, then there's so much point.
Got you. Okay. I'll turn it over. Thanks for the time, guys.
Thanks, Mike. Cheers, Mike.
Thank you. The next question is from the line of Randy Giveans from Jefferies. Please go ahead.
Hey, howdy gentlemen. How are you?
Hey, Randy.
Hey, a few questions for me.
So you mentioned Hilli Trains 34 Slide 19. So is 4Q still the expected timeframe for Perenco to announce FID on Train 3? And any updated maybe expectations for Train 4? And maybe specifically some hurdles, milestones that need to be achieved in the coming months for these trains to take FID?
So as I said in the prepared remarks, we're right in the middle of a fairly detailed discussion with Perenco and how we can both extend the volume and potentially the duration of that overall contract. And I we will have that concluded, I would expect well before the end of the year. And maybe just let us have those discussions without obviously disclosing what we're saying and doing in the middle of those discussions. And certainly when we've concluded them, we'll put out an announcement. Sure.
Okay. Just seeing if there are any updates on the timing.
And then
obviously you're mentioning that the Board has approved the LNG carrier spin off. In your kind of guesstimation, what are the kind of chances it actually happens? And would it be closer in the coming months? Or is that kind of a let's wait till rates really rally in 4Q 2019, 1Q 2020? And then with that, what is the exit process from the Cool Pool?
So first of all, if our belief, my belief is that the rates have had a turning point and will continue to improve as we go forward. And on the basis, if that's correct, we've got the full backing of the Board to go ahead with the spin off of the ships. So I would expect that that would take place in months rather than in a particularly longer timeframe. And we are working through the process right now, the detailed transition should that go ahead of the way we think it's going to go ahead. And we'll advise details of that a little bit closer to the time when we look like we're going to be pushing ahead with the arrangement.
Okay. All right. Sounds good. Well, to quote Tor, good luck making Golar great again. Thanks.
Thanks.
Thank you. The next question is from the line of Chris Snyder from Deutsche Bank. Please go ahead.
So first question is on the spin off of the shipping fleet. I guess my question is how sensitive are you guys to the sale price just given that you'll likely retain ownership in the SpinCo and this transaction could drive a pretty significant valuation uplift for the existing Golarion today?
I think that the war's attitude, of course, we got to remain a major shareholder in this company going forward when it's public. So I think we're not that sensitive. At the same time, we want to do it in a positive momentum. That's why we want to do it pretty quickly and use the next 2 years to get the share price around. We're not talking about raising significant external capital.
I think we're talking to 2 parties as disclosed in the documents. And I think this is a deal which probably we should be able to do at a reasonable good price without too much kind of need for capital from third party.
Okay, fair enough. And then you also mentioned that term inquiries are picking up and the term rates seem pretty good. Are you planning to maybe lock up some of these vessels on to long term contracts prior to the spin, as maybe this could increase interest and or impact the price you get for the fleet?
No. I mean, possibly, but the more realistic scenario is that towards the end of this year, we'll see term business with fixed rates probably coming back into the freight. The distance for us is a bit too far at the moment, which is why we're interested in these linked rate structures. So depending on when we do the spin off, you could see some. But I think it's more likely that they would happen post spin off.
I think what we've seen in rates now, we've seen spot rates, of course, have crossed 50. So if you're indexed linked, you're close to that. And then I think the last term deal, which was now announced in the market, is something about 80 for 12 months. So we probably are pretty optimistic here for what to come this winter and not at least also the next winter. So as Ian said, I think we will hold back for the time being.
There will be if you're looking back to the situation in 'ten, 'eleven, when oil companies really became desperate, when rate was peaking, that's when we put on the charters.
Okay. Fair enough. And then just lastly, I mean, I think almost everybody on the call today agrees that the stock is worth more than where it's trading at. And Tor did a good job of kind of laying out this disconnect in his prepared remarks. So just in that context, how do you think about share
buybacks?
I think we have, of course, dollars 0.15 in dividend, that's $60,000,000 We have considered that if that should be dividend, should be buyback. We have, of course, 3,000,000 TRSs. I think what's been important for us now is to get the financing in place for the BP team, which kind of the team here have done a great job getting the 700 and limit our capital to that to 300. Then it's a question of course if BP2 is coming and the whole capital structure. It's also depending on what kind of financial structure do we ultimately end up with the shipping company.
But I think clearly, if we are talking walking the walk, we should buy back shares if we have excess capacity when we think the stock is clearly undervalued.
Okay. That does it for me. Thanks for the time guys. I appreciate it.
Cheers, guys.
Thank you. The next question is from the line of Craig Shere from Tuohy Brothers. Please go ahead.
Hi, congratulations on a pretty good quarter in a rough environment and nice discussion today. I have 2 kind of broad financing questions, one about project lending, the other about funding the ships, the FLNG. So on the project lending, strong credit and length of cash flows that are contracted behind it. What do you think it really takes to secure more project lender confidence and getting better matched loan payments with contracted cash flows? And kind of as a corollary to that, if you're successful with these Perenco discussions before year end this year for an expanded and elongated pillar utilization.
Would that tee up an immediate project debt refinancing opportunity?
Yes. Hi, It's Graeme. So I'll take your second question first because that's a fairly easy one. Absolutely, yes. If we get it significantly extended term, then I think that's absolutely an opportunity to refinance the Hilli.
On the Gimi financing, point taken, and I think Tor Olav kind of alluded to the challenges of financing FLNG projects, which is why we're looking at different structures going forward in terms of developing them. But bear in mind that the term was 7 years post COD. So it's 11 year financing, which given the sort of Basel regulations now is long for a bank financing. It is absolutely the case that as we get nearer COD, we would expect to both increase the level of debt, flatten the amortization profile and lengthen the term.
If you look at the FPSO business, which is in many ways a kind of similar business, which is a little bit more developed, we typically see that they leverage 6 times EBITDA to good counterparties or long term contracts. I think we can do something similar here when you are at COD and that means that you effectively take out all equity and you leverage $1200,000,000 $13,000,000 against these assets. That should be doable. But I think we have we're under some pressure to provide financing to effectively take FID with BP. And I think we've just said, okay, let's get this thing done and then we can optimize financing as we go along over the next couple of years.
I've
got no doubt as the industry becomes familiar and more comfortable with the concept of FLNG, the ability to finance will accordingly become more straightforward.
Great. And my last question about funding the ships at the shipyards. Ian, you commented on efforts to get more flexible equity funding terms. And two thoughts come to my mind about possible drivers for that. Together 2, 3, 4 FLNG conversions kind of concurrently one after the other, that could tee up much better overall contract terms and also be a major sea change for the future of the company.
Can you kind of opine on what the drivers are for potentially better equity funding terms and if any of the things I mentioned are on the table?
I think you're right, Craig, in that I mean, it doesn't have to be China, it could be Korea, it could be Singapore if the Singaporeans would come to the table. Mean, this is about creating something that's repeatable. If it's repeatable, it's treated more like a complex ship, maybe more like a drill ship, for example, where if the design is such that it doesn't need to be changed, then we can get terms that are more akin to shipping terms. So instead of paying as we go as we have to in the Singaporean conversions at the moment, we can maybe get 20.80 or some payment terms like that, that really allow us to take the benefit of export financing and therefore minimize our upfront CapEx. And when these projects take 3 plus years to complete, we can do a lot with that time.
And so it's a combination of all of the things you said, and we're looking at a number of variants to try and optimize it, which is why we're not saying one thing. We're looking at lots, because I think may the best combination win.
Understood. If you could find the magic bullet to unleash both the upstream and downstream financing opportunities, you guys have tremendous upside.
Yes. Thanks.
Thank you.
Thanks, Craig.
The next question is from the line of Chris Wetherbee from Citi.
This is Liam on for Chris. So I just want to kind of circle back to the spin off situation here for the LNG carrier or the TSB LNG carrier vessels. What is your plan for the Golar Arctic after the spin off? Will you guys look to continue to own it and operate it or are you going to look to sell?
Well, I mean, for the time being, we would look to own and operate. We have see, we had some success with the cool pool on the TFDEs. I guess it's possible to set up a cool pool for steam ships, but she would also be a potential conversion vessel, I guess, further down the line as well or to operate as an FSU.
I think what we and our management have done a great job and is maximizing the value, of course, with the vessel going into Croatia, which we have effectively gotten a lot more for than we would have gotten in the secondary market. So that's just a value enhancement of utilizing the vessels in different fashion. I think when people saying that what is the steam ship worth it stays, you have to remember that there are still 200 steamships out of a fleet of 550. So it's a pretty material part of the fleet we are still dependent on. So these ships will come off charters as over the next 5, 10 years to a large extent there were 20 year deals done in the beginning of 20s.
And that would be good in our 2,000. But I think we see the danger in being left with them. So I think we're working in order to find solution for them. Some of them we have on charter right now. And I think we're working as Graham said projects to try to maximize the sales value of these assets.
Okay. And also, I just wanted to circle back on the Gandria. I know you guys never really talked about it too much, but I know it's still listed as FLNG conversion candidate. I know it's hard to put a time line around potential conversion, but I was potential conversion, but I was just wondering if you could touch on the potential for such a conversion and when you think something like that could happen and how much EBITDA you would be able to generate from post conversion?
The way to think about Gandria, well, she's in layup right now. But if you look at the BP contract and the EBIT that we can generate from that, I think we would be if we could get a contract that gave us a similar return, then we would go ahead with it. So she's just there as the next potential conversion candidate ready to go.
Got it. I guess on that front, I know you guys don't really want to put time like a timeline around it, but if you were to kind give a sense on how long do you think it would take from when you got that initial level of interest into when like post conversion, do you think you can give some sort of sense on like the number how long it would take?
It's almost impossible to say because I mean, I think we've been talking to BP actively for 2 years between real serious discussion and review and actually signing a contract. But what I would say is the level of interest that we've had from large companies of the same size and scale as BP really taking an interest in both our Mark II and Mark III designs and a Mark I conversion. That's really ramped up continues to ramp up every quarter. And we're finding different groups of people coming in and getting more and more comfortable with the Is it something that is Is it something that is acceptable for a larger publicly owned company for whatever reason, I think BP is ticking the box to satisfy that. And as a result of that, we're getting more interest.
So you would hope that the next FLNG contract would be faster than 2 years. But I certainly don't want to create expectations now of having one just around the corner. These things are hard to get going.
I also think it's important to add that what we have seen, every time you do an F and D, you have 3, 4 years of pretty heavy capital commitments, which goes out and then you have no earnings. I think what we compensate is that, let's focus on things which actually bring earnings in 2020 20212022. Long term we get any earnings from FLNG and that's earning which is effectively based on the assets we already have invested in. So it doesn't need a lot of CapEx. So it's a very different profile.
So I think let's go after that first try to build the confidence back in the stock that people actually see we're making serious money. And then we can talk about doing a lot more in FLNGs.
That's great color. Thank you very much.
Excellent.
Thank you. The next question is from the line of Greg Lewis from BTIG. Please go ahead.
Yes. Thank you and good afternoon. And actually, thanks for squeezing me in at this point. And it's interesting and maybe a little inspiring to see you guys try to move into the downstream business in Brazil with the on the back of the Sergipe project. That being said, there probably are going to be some challenges.
It's kind of a step out of your business. Is this something where we're going to be looking to hire a team to kind of spearhead this? Is there potential local partners you can partner with? I'm just trying to understand what Golar has to do over the next, I mean, I guess what, 12 to 18 months to get this in a position where it can actually be successful?
So it's a good question. I wish you were sitting in our Board meeting. We've already hired our leader and the team. In fact, the chap that we've got leading the team has done this rollout before. He's probably the only person who's done it before.
And we're really impressed with the work that we've done. So we're very advanced in terms of this isn't just an idea. It was an idea when we started talking about this at least 12 months ago on the quarterly calls when we've said we're looking at using the downstream capacity or small scale downstream capacity of the Nanook. There's a lot of work that's been done to prove this up. We think it's real.
We're going to move ahead with it. And hopefully, if not on the next quarter's call, certainly the quarter after that, we'll have some significant updates to give in terms of detail around it and how we're moving forward.
Okay. And then just also in the prepared you mentioned some of the problems that are facing the build out of FLNG has been financing, financing of projects. Is it more a function of the terms that are being offered or maybe an overall sense of lack of terms of any terms being offered? Is it about pricing or really just the availability of capital to do these projects?
Yes, it's Graham. I think it's primarily it's I mean we kind of touched it on the question earlier where we're looking at a $700,000,000 facility for the Gimi, which is like 50% LTV. So it's the amount of financing during that construction period that's the challenge. I mean, the pricing on the Gimi financing is not that high. It's the amount of debt.
But as we said before, I think as this market develops, that will slowly change. But rather than sitting around and waiting for that, again, as we've said, we're looking
to
have better arrangements with the yard so that we have better payment terms and therefore the financing is not so much of an issue.
Okay. And then just as I mean, and just thinking about what you did at Golar Power by bringing in an outside third party investment partner. I mean is that something that we could potentially see with on the FLNG side or at this point, there's really no discussions around that type of event?
I mean, it's feasible. We talk to people all the time who want to perhaps participate. I mean, if we can get somebody coming into the FLNG business that values them as what they are, which is downstream LNG infrastructure facilities and they want to invest with us what we think they're worth, which is maybe 10 to 12 times EBITDA, then we're all full that type of conversation. So we'll see how it plays out, but we've got nothing imminent on that in that story.
Okay, guys. Hey, thank you very much for the time.
Thanks.
Thank you. The next question is from the line of Jason Gabelman from Cowen. Please go ahead.
Yes. Hey, thanks for taking the call. I'll just keep it to 1. I was wondering how you envision GMLP fitting into kind of the new structure that you see emerging over the next 6 months? Clearly, the valuation at the MLP seems a bit discounted.
Do you see potential to roll that up and kind of move the ships into this new vehicle that are looking to spin out? Or do you see potential to do something else with the MLP to kind of realize more of the value that's stuck there right now? Thanks.
So no, we're not planning to roll the ships from the MLP into the new spin off company at all. I don't think there's anything more that I can comment on the MLP. That's something you can maybe ask Brian if you come on the next call.
I think we are large shareholder in the M and P. So from that point of view, we have the same problem as all the other shareholders in the M and P that the valuation is low and the yield is high. But I think we have there is room for consolidation in the FSRU market. That's certainly something we have always been vocal for. And I think it's also a question about getting the contracts extended.
Of course, if you leave it extended, that's a major step forward for GMP. I think if we can get Spirit also lay up and utilize, that's also a major step forward. So I think we're working in order to do commercial sensible yield to increase the cash flow and keep the dividend or grow the dividend. But as a new vehicle to acquire things, when you're using 13% of whatever it is, it's impossible to use it.
Of course, the irony is for some time we've had any short term contracts in GLNG and that's the way we're moving forward now, we're going to have a significant number of long term contracts that would fit very nicely with the MLP.
Yes, that's a fair point. Thanks for the time. The
next question is from the line of Michael Webber from Wells Fargo. Please go ahead.
Hey, guys. Actually, I had a follow-up. I thought I got back out of the queue, but I'll go ahead and ask it since I'm on. The you've talked about building out another FLNG project in U. S.
Gulf developing downstream in Brazil. I mean, there's no shortage of stuff for you guys to look at. And the dividend at the parent level has just always seemed a bit incongruent with the stage of the business. You mentioned someone mentioned earlier buybacks. In terms of just the use of that cash, is that something you guys would think about allocating towards an operational purpose sometime over the next handful of quarters, especially with financing all these projects, one of the consistent hurdles?
I think dividend we have this year is costing $60,000,000 I think you can discuss if that's sustainable or not. It's certainly sustainable today with the cash flow we now have in the system. But of course we have a lot of CapEx. But we also remember what Graham and Doug defined the stock to. The stock is it over time pays back in dividend.
Dividend isn't important. It covers a lot of fund. I'm not saying that the dividend is at the level where it should be for return. But I think the history of this group, we come from a system where dividend has always been a part of the thing. And I think to pay something back to shareholders every year, even if you claim that it's inefficient, if you have to raise capital, we have been very limited in raising capital over the last years.
I think we have tried to protect the upside for shareholders. So it is a discussion to be had. We are happy to be listening to all the shareholders. I'm a shareholder myself as well. So I think no decision has been made.
I think we could pay it last year, we can certainly pay it this year and we can certainly pay it even more next year.
Got you. Okay. Thanks, guys.
Thanks, Matt. Thank you.
Thank you. There are no further questions. So I'll hand back to the speakers.
Thanks, operator. So just in closing, we've taken on your comments to try and simplify the Golar business. And on that basis, the basis that shipping market recovers, we expect to proceed with the spin off of the TFDE fleet. And this will lead Golar to focus on growth in the FLNG business, which is a strong pipeline of prospects, and importantly in Golar Power, which is a unique opportunity used in Nanook as a catalyst to accelerate the displacement of more expensive more polluting fuels with LNG. It's our intention to continue to build long term contract earnings backlog, We believe this will in turn create long term value for shareholders, and we intend to do that with as much capital discipline as we can.
Thank you for your interest in Golar and we look forward to catching up again next quarter.
Thank you. That does conclude the conference for today. Thank you for participating, and you may now disconnect.