Good day. Welcome to the Golar LNG Limited 2Q 2018 conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Iain Ross. Please go ahead, sir.
Thank you. Good afternoon, good morning. Welcome to the Golar LNG second quarter 2018 results call. My name's Iain Ross, and I'm joined today by the GLNG CFO, Graham Robjohns, and our head of investor relations, Stuart Buchanan. We also have Tor Olav Trøim on the line from Oslo. I think this call's notable in that after four long years, we finally have the Hilli Episeyo up and running. We have all our current project commitments financed. The shipping market, despite a weaker second quarter, is poised for a fairly strong period of sustained growth that will deliver cash into the business. Our next big project, being Sergipe, should start generating cash in about 16 months. We're now focused on the next wave of project investments.
We are in a more stable position as a company than we have been for many years and ready for that next phase of development. On the basis of this stability and firmer markets ahead, today the GLNG board is pleased to announce an increase of the dividend to $12.5 per share. Let me hand over to Graham to go through the numbers. We can come back to the business review and outlook. Over to you, Graham.
Thank you, Iain. Good day to everybody. We'll start the financial part of the presentation on slide three. As anticipated and communicated in last quarter's earnings release, revenues from vessel operations, which are predominantly from the Cool Pool, decreased significantly in the quarter as a result of a seasonal softening in the shipping market. Our fleet utilization fell from 77% in Q1 to 62% in Q2. Rates also dropped during the quarter. Collectively, this resulted in a $16,400 a day reduction in daily time charter equivalent earnings, from $36,000 in Q1 to $19,600 in Q2. However, we expect this to reverse in Q3 with an expected more than doubling of Q2 TCE. Offsetting the decrease in shipping revenue was the contribution from the FLNG Hilli Episeyo, of course.
She was accepted with effect from May 31, and earnings under the contract have started to be recognized in the income statement from this point. Our total operating revenues, net of voyage charter hire and commission expenses, therefore increased from $41.7 million in Q1 to $42.9 million in Q2. Of the total Q2 amount, $24.8 million is derived from vessel and other operations, and $18.1 million from FLNG operations. Our vessel operating expenses increased by $2.1 million to $20.5 million in Q2. FLNG operating costs for the Hilli's first month in operation amounted to $3.6 million, which is roughly in line with expectations. Operating costs for the rest of the fleet fell by $1.5 million, offsetting some of this increase. As a significant part of our G&A costs, we have split out project development expenses from admin expenses this quarter.
These costs include costs associated with the pursuit of specific potential projects and contracts increased from $3.3 million in Q1 to $7.9 million in Q2. The FLNG project development expenses of $6.8 are predominantly represented by FEED expenses incurred in respect of FLNG conversion project for the BP Greater Tortue project. Most of the $1.1 million vessel and other operating-related project costs are recharged to affiliates Golar Power and Golar LNG Partners. The Brent linked component of Hilli Episeyo's invoice fees generates additional operating cash flows of approximately $3 million for every dollar increase in Brent crude prices between $60 per barrel and the contractual ceiling. Monthly billing of this component is based on a three-month look back at average Brent crude prices. This hire component for June amounted to $3 million and has been paid in July.
The fair value of the derivative asset, i.e., the value as at June of the potential future cash flow from the oil-linked hire component, increased by $94.7 million during the quarter with a corresponding unrealized gain of the same amount. The fair value increase was driven by changes in the market expectations of future oil prices, of course, Brent spot prices increased from around $67 at the beginning of the quarter to $77 per barrel at the end. Together with the realized movement of $3 million, this results in $97.7 million realized and unrealized gain on FLNG derivative instruments. Depreciation and amortization increased as a result of the Hilli Episeyo becoming a depreciating asset. For the rest of the fleet, was pretty much in line with the previous quarter.
Interest expenses increased by $10 million to $24 million, mainly due to the interest on borrowing costs in respect of the Hilli no longer being capitalized post acceptance and a general increase in rates and an increase in the amortization of deferred debt-related expenses. Other financial items reported a Q2 gain of $1.8 million, which predominantly represents non-cash derivative valuation movements in connection with our equity TRS interest rate swaps and Golar Partners earn out units derivative. As a result of the above, our net income for the quarter was $36.3 million. Moving over to slide four and the balance sheet. There are a few movements this quarter, the most important of which relates to the drawdown in additional Hilli debt, and the resulting cash increase. Our total short-term cash position as at June 30 was approximately $650 million, of which $375 million was unrestricted.
The increase from $172 million, free cash as at March 31, is as a result of having drawn down the post acceptance at $960 million lease financing facility for Hilli Episeyo, and having repaid the $640 million construction financing facility. It should be noted that during Q3 2018, we expect to pay approximately $130 million out to settle final Hilli capital commitments as well as amounts due to minority shareholders, Keppel and Black & Veatch. As a result of the commencement of operations of Hilli, the asset has moved from assets under development to vessels and equipment. We also have a movement between short-term and long-term debt, and a net increase in debt as a result of the drawdown of the new facility. Moving over to slide five. We now are in a pretty strong financial position.
With the acceptance of Hilli and the drawdown of the new long-term lease facility, the closing of the Sergipe financing earlier in the quarter, and the commitments Golar Power has received for the Nanook FSRU, all of our and our affiliates' capital commitments are fully funded, and we have $375 million worth of free cash as at June 30. We are also well progressed with work on financing our new as-yet-uncommitted projects. The table in the bottom left shows an analysis of our short-term debt, which has reduced significantly this quarter as a result of the new long-term Hilli financing. However, we still have $538 million of debt related to bank leasing subsidiaries that under U.S. GAAP we are required to consolidate, so-called variable interest entities. However, the vast majority of this debt is not short-term to Golar, but GAAP requires us to disclose it as such.
We also have two sale and lease back facilities, the Tundra and Seal, that are both long-term but have requirements for term employment by specific dates. If term employment is not in place by these dates, then the bank has an option to require repayment. We have previously extended these facilities, and now the Seal has a December 31, 2018, employment deadline, and the Tundra June 2019. We are now in discussions again with the banks with regards to a further extension of the Seal. Of course, the rising shipping market significantly increased our options with regards to financing these vessels. Finally, in the bottom right of this slide, we've shown an analysis of our debt between security class and our net debt position. Thank you. With that, I will hand back to Iain to carry on with the rest of the presentation.
Thanks, Graham. I'll now go through our business lines of FLNG carriers and power, starting with FLNG on page six. Hilli, fully accepted by our charterer on the 2nd of June, with an effective date of the end of May. All four trains have been commissioned and tested to above nameplate capacity. Hilli has and continues to operate with 100% commercial availability. We're very pleased with the way that we're progressing with the vessel, the crew's becoming comfortable with the facility, learning as we go, and of course, that experience becomes invaluable for the next project. We've successfully offloaded five cargoes to date, and as we speak, are currently offloading the sixth.
We'll continue to focus on production uptime and optimization, demonstrating we are ready to receive more gas from our charterer, Perenco, when they feel it's the right time to increase production and utilize the third and potentially fourth trains. Moving on to the BP Mauritania Senegal project. Just as a reminder, this project is for an FLNG unit similar to Hilli on a tolling arrangement for 20 years. The FEED update is being progressed at pace. We've got a couple of months to go on that. There continues to be strong appetite from the lenders interested in financing the project, and that aspect is moving along nicely. BP is indicating to shareholders that production is targeted to commence before the end of 2021. We are gearing ourselves up for an FID decision whenever BP is ready to go.
Remembering that the overall Tortue project is not just an FLNG vessel, but also includes an upstream sub-sea development, an FPSO, and a large breakwater. We are continuing to work closely with BP to do all we can to assist them in taking FID for the overall project. If we look at the FLNG pipeline on slide seven, in the last three months, we've taken control of the FLNG portfolio that was held within OneLNG, and we've built a small team around the technical and the commercial development of these potential opportunities. We are seeing Hilli's proof of concept triggering new interest and adding momentum to existing discussions. I think that people are really starting to take notice, not only of the cost and schedule achievements of Hilli, but also the uptime we've achieved from startup. This is clearly evidenced through the number of cargoes delivered to date.
We think this is a truly disruptive solution in an industry sector that's not known for its disruptive solutions. Golar can create viable early production systems and monetize stranded gas in a way that's now proven and de-risked compared to just a few months ago. The pipeline of opportunities is being developed. We've had teams in West Africa in particular, having various discussions to move projects along, and it's clear that that Hilli performance is giving some project sponsors more confidence in our solution. We have two or three strong prospects that we hope to be able to take to the next stage in due course. We also remain committed to obtaining access to gas reserves as part of this strategy, as in time, we still believe that this will bring enhanced value.
Building on experience in the last few years, we're currently evaluating alternative shipyards that offer more attractive payment terms and long-term financing packages, particularly on the back of the Mark II design, which lends itself to modular construction. It has higher LNG capacity, it can deal with more complex well streams, and can operate in harsher met ocean conditions. On the Fortuna project, to say something about that, Fortuna continues to be worked. We certainly have not given up on it, but really we can't provide any further information at this stage, other than to say that we've made some progress on financing, and there are several interested parties actively considering a position in the project. FLNG is obviously a longer-term play that requires project investment to be successful, but we really like this segment as it brings in stable, long-term cash over a very long period.
It's difficult to do, but right now we're leading the market, and the Hilli deployment remains a clear differentiator that we will try and maintain for as long as possible. Moving on to more short-term cash inflows in the shipping market. We retain and maintain our view that the LNG carrier business is poised for rates growth over the coming quarters, and as such, will hopefully bring a long period of earnings drag on the Golar business to a close. Too simply, a forecast 23% in LNG production over the next two years is expected to require some 100-plus vessels to be able to transport that LNG. Only 66 vessels are currently scheduled to deliver, and therefore it's no longer possible to go out today and order a vessel for delivery before 2021.
This seems to us to be a structural change in the sector that will have an outcome of driving demand for carriers up, therefore increasing utilization and ultimately moving the carrier rates up. In terms of how this has played out, as Graham mentioned in the last quarter, we did see a softening of the market, which we forecast, and that led to a halving of the TCE earnings from the first quarter. We saw rates pick up again late May and early June, which we'll see in our third quarter earnings, and so we expect TCE for Q3 to be at least the same value as Q1, if not higher. A couple of other indicators that support that. We're seeing some charterers keen to lock in rates before they go too much higher, and as a result, they're approaching the market for multi-month and multi-year charters.
In addition, unsolicited offers are also being received for the purchase or potential purchase of individual steam and TFDE carriers. We're seeing similar dynamics to those that played out in the second half of 2010 being repeated today. Based on these supply-demand dynamics, Golar expects to generate significant EBITDA and free cash flow from its carrier fleet over the next two, three years. You can see from the graph in the bottom left-hand side on slide eight, what the impact of the TCE rates has on the EBITDA contributions from the ships. Moving over to the FSRU and power sector. The Sergipe Power Station project in Brazil continues to make very good progress and remains on track for January 2020 startup.
We currently have over 2,000 workers on site installing the main GE supply turbine modules, the pylons, and other transmission infrastructure that you can see in the photos on slide nine. The FSRU Nanook is due out of the yard in Korea in the next couple of months and will be ready for commissioning in Q1 2019. That project's fully funded. Equity is paid in. The FX exposure has substantially been hedged. The FSRU financing commitment has been received, and the documentation is in its final stages. From that finance, we expect to release a further $70 million of cash back to Golar Power on completion and drawdown of that facility, which you see that joint venture self-funding their near-term development.
Our share of expected EBITDA is around $100 million for 25 years, and that's a similar proposition to the FLNG business, and it's a steady income cash flow for a long period of time after project build phase. Golar Power is also concluding its options and strategy for participation in the upcoming power auctions in Brazil, and we've got two auctions planned between now and the end of the year. Just moving to the FSRUs. We have previously aired our views on the challenging nature of the standalone FSRU market, and whilst there are plenty of opportunities to chase, we haven't seen so many actually coming to the market over the last few years. This does seem to be changing with more tenders coming out, and this will hopefully take some of the excess FSRU capacity off the market.
We're looking at opportunities in Europe, Latin America, Middle East, and Southeast Asia, and we'll participate selectively in these tenders, and especially where we feel there's potential to become involved in downstream infrastructure, which will include terminals, pipelines, and of course, power stations in addition to providing that FSRU. Additionally, we see significant potential for gas to displace diesel in many applications in the very near future. This is driven by both economic and environmental concerns. On one hand, we have the IMO 2020 regulations that will impact shipping, but we also have more remote communities that are paying huge costs for their diesel-powered electricity.
These things are all demand for gas, and we've been looking at our options to monetize spare FSRU capacity and become more involved in the LNG distribution side of things, such as LNG fuel trucking, switching nearby mines and industry to LNG power, supplying LNG directly to the grid, and supporting additional power stations. Our FSRUs are the strategic assets that enable these smaller-scale activities to happen. We think this business has a shorter capital cycle time that fits in nicely to generate cash for us between now and when the next wave of FLNG and power station projects are complete. Summarizing and turning to our outlook. With Hilli Episeyo in full and stable commercial production and the rising LNG carrier market, we expect stronger cash flow from operations in the short term.
With Sergipe, due to come on stream beginning in 2020, the potential to fix one or more FSRUs on longer-term contracts, and the interesting small-scale LNG and LNG distribution market, we expect to see stronger cash flows in the medium term. With our proven low cost and fast LNG concept leading to one or more project FIDs over the next 12 months, plus further development of our power business, we expect to see an increase in longer-term cash flows. Supported by these solid fundamentals, a fully financed balance sheet, and a self-funding Golar Power, the board has decided to increase the quarterly dividend from $0.05 per share to $0.50 per share. Further dividend growth should be expected as the shipping market improves, and cash flows from long-term contracts and Golar Power commence. Thank you.
Before we hand back to the operator for questions, I'd now like to introduce our Chairman, Tor Olav Trøim, who's kindly joined us on today's call to say a few words.
Thank you to Graham and Iain for the presentation. I have, as Chairman in Golar, been asked to have three, four minutes before the Q&A. It was commented after the last call from several of the large shareholders that I, as Chairman and big promoter of the Schlumberger event, should have been there on the call to take heat from the Schlumberger divorce. The divorce from Schlumberger was sad, I really believed in the concept of working together with a great upstream partner. In a partnership, you also need a partner who are willing to commit the necessary resources to the partnership. After Schlumberger in January committed not to do any further material investment in the SPM area, this partnership was clearly not working. That had nothing to do with their belief in Fortuna project. It had all to do with their appetite for SPM investments.
It was much more about Schlumberger's commitment to their shareholders to focus on existing business than any evaluation of what they were doing together with us. As stated by Iain, the termination of the Schlumberger agreement has opened new doors, in many ways improved the outlook for this and other prospects. The Fortuna project is a project which showed a great return with LNG prices at around four, it's obviously showing significant better return with LNG price at eight. 100% uptime and delivery significant under budget is an addition, a great testimony to the Golar staff in commencement with the Hilli operation. It's probably the best advertising for FLNG solutions to monetize stranded gas. Perenco's return on the first LNG transaction done on a speculative basis is nothing else than spectacular. I've been involved in Golar for 19 years.
I've all the time been a firm believer in LNG solutions. Today, I will accept that we started far too early, at the same time, know it's happening. The parity to oil is broken. The first liner company have placed their LNG new building orders. China is delivering as many LNG trucks as Tesla delivering cars, the big trains from Australia and America is commencing. LNG is today both cheaper and cleaner than alternative fuel uses. As stated in our capital market today, there is today a $500 billion yearly arbitrage substituting expensive oil products with cheaper and cleaner gas. The Chinese clearly see this, looking to a 50% growth in import this year. This and the opportunity pipeline we today have in Golar makes me excited.
We in Golar generally believe that stranded gas today is one of the most undervalued assets in the energy chain, and thereby also one of the biggest value creation to monetize. Golar is, with its technology, uniquely positioned to capture this opportunity. I'm pleased to report that the board of Golar, in connection with the quarterly meeting, revisited our dividend strategy. We are as of today nearing completion of a $4 billion investment phase and moving to a cash flow phase, including Hilli, the improved shipping market, and the Sergipe and Nanook commencement. We are fully financed for all the existing activities, and we have, as of June 30th, a cash position, including restricted and unrestricted cash, in excess of $650 million. In view of this, the board agreed to increase the dividend 150%, from $0.05 a quarter to $0.125 a quarter or $0.50 on an annual basis.
The board has, at the same time, in the Q2 report, given a strong commitment to shareholders that the target is to increase the dividend further in the period to come as the cash flow continues to increase. This is supported by the already contracted deals, as well as the strong improvement we today see in the shipping market. Golar is today a fully integrated company with pieces of the puzzles which goes all the way from producing LNG to producing power. It's a very different company than when we started 20 years ago, or even 10 years ago. I accept that it is a complicated structure, and it's particularly complicated because of the now unblinded OneLNG and Golar Power. I hope we, over time, can make it more transparent and easier to understand.
The most important thing for me as chairman of this company and beneficial owner of more than 5.5 million shares, including shares I bought also this year, is that we're coming to the start of the cash flow period. This includes unique projects like the Sergipe and Nanook projects, which will start next year, generating cash flow of more than $1 million a day for the next 25 years. Golar LNG's shares of that cash flow is more than $100 million on a yearly basis, and the EBITDA backlog based on this project isolated is actually larger than the market capitalization of Golar LNG. I hope my participation in this call confirms to everyone who complained about my no-show in the last call, that as chairman and large shareholder, stands fully behind and are very confident of developments in our company.
We have a super competent management which execute extremely well in what is from time to time a very frustrating and bureaucratic business. I'm, as chairman, however, very excited and confident about the prospect of LNG as cheap and clean energy source and the opportunity this will create for Golar to deliver some return to our shareholders in the years to come, a very good return. In many ways, in all my business life, which include 19 years working in the Fredriksen Group, I never been more excited and convinced that we are in the right growth commodity business. I want to leave that, and I hope this gives some evidence that the whole team of Golar are super excited about what's going on. It is frustrating from time to time, the time it takes to do deals.
When you can do deals with fixed term cash flow of $1 million a day per day in 25 years, I think it is all understood by everybody, and it takes a little bit of time. Thank you, and I hope some of the confidence Iain, Graham, and I are trying to give you today also gets reflected by the investors in the period to come. Thank you.
Thanks, Tor Olav. With that, I would like to hand back to the operator to start the Q&A.
Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star one to ask a question. Please limit yourself to two questions. We will pause for just a moment to allow everyone an opportunity to signal for questions. We will take our first question from Jonathan Chappell from Evercore. Please go ahead. Your line is open.
Thank you. Good afternoon, guys. Graham, first one for you, kind of technical-
Sure
Hopefully important. Can you just help us understand how this Brent-linked part works? I mean, $94 million addition to the derivative in one quarter seems pretty significant. And I know Brent was significantly above $60, but still. Is this your forecast over the 8-year term of the contract? Is this over a one-year period? How do you get to this $94 million? And I guess most importantly, when does that then translate to real cash on Golar's financial statements as opposed to just this mark-to-market?
Yeah, sure, Jon. The real cash comes in the form of the ratio that we gave that for every dollar that Brent's oil is above $60, we earn $3 million a year in cash flow. Brent's at $61, we earn $3 million, et cetera. That will come in over the 8-year term on a monthly basis. The derivative movement is because under U.S. GAAP, that element of the contract is deemed to be what's called an embedded derivative. The valuation is arrived at by looking at the forward oil curve out for the whole contract period and effectively discounting all the expected future cash flow back to today. It's an NPV movement of the total potential value of that element of the contract over the whole contract period.
Okay. Are you using an oil curve for that, or is that an internal estimate?
It's an oil curve, yeah.
Okay. All right. I understand. Thanks, Graham. Second one for you, Iain. Can you just provide a bit of an update on Train 3? It seems as if all four trains from Hilli have been up and running above nameplate capacity. The gas is there, no incremental investment, seems to be a slam dunk. Any update as to the timing of this or what the hold-up may be?
I think you've summarized it quite well, Jon. We remain engaged with Perenco, and we remain ready to accept additional gas. They've got some issues to work through on their side. I guess the important thing from our point of view is there's no further CapEx required for us, and we're ready to roll with Train 3. You've got to think that it's a strong economic prospect for Perenco. Other than, I can't say any more than that until we've got something firmer to discuss.
Just to be clear, they have enough gas also to fill Train 3, right? I was always under the impression that if you were to fill Train 4, they may have to tap into an adjacent field. Based on the current field, as it sits for Trains 1 and 2, that could also fill Train 3. Maybe it's an offtake issue, not an investment decision on Perenco's part.
I think it's quite a complicated story because they've got their gas, but they've got other uses of the gas and perhaps other commitments. They're just probably trying to work through how they sources and uses of gas rather than sources and uses of money that we normally talk about in this call. I think it's something they're still working through, and I remain hopeful and confident that we'll get Train 3 occupied and earning cash for us in due course. Unfortunately, we just can't put a timeline on it right now.
Okay. I understand. Thanks, Iain. Thanks, Graham.
Thanks, Jon.
Thanks, Jon. We'll now take your next question from Michael Webber from Wells Fargo. Please go ahead. Your line is open.
Hey, good morning, guys. How are you?
Hey, Michael.
Hey, wanted to touch on, I guess, one macro question and then on Golar Power. At a high level, we've been hearing a lot this earning cycle around the impact of Chinese tariffs on the LNG story broadly, and there's certainly a case to be made that more expensive U.S. gas on a relative basis should make global projects that much more competitive. I'm curious, maybe this is a good question for Tor, but are you feeling that yet in your discussions with customers and counterparties, maybe a heightened sense of urgency from them around the idea that, hey, the window's open a bit more now where some of these projects are more competitive globally while the U.S. is dealing with tariffs? I'm just curious.
You guys are in an interesting position being a U.S.-listed company that's levered to global projects as opposed to being levered to the U.S. tariff muck. I'm just curious whether you guys are feeling that now, and if not, how you would expect that to trend over the next six to nine months.
Maybe I'll take that. It's hard to see how the tariffs will bite, but if there is a negative impact on the U.S. Gulf Coast export projects, we would feel that that's a positive for us for our West African FLNG opportunities. We don't think that the tariffs will necessarily impact the demand side, the LNG's got to come from somewhere. If there's no negative impact on the U.S. Gulf Coast, it's still a positive for us as we believe we've got the cheapest LNG solution. At worst, it's neutral. At best, it's a positive for us.
Okay. That's helpful. Around Golar Power, at the investor day, you guys had talked to some late August, a key energy auction that was going on around this time. I'm just curious whether if you can maybe speak to a bit more detail around the progress or likelihood of both an additional FSRU in Brazil, as well as the potential extension of your Golar Power project in Sergipe.
What I can say is that there are two auctions coming up. One is later this month, in the next week, I think, then there's another one in November. We're looking at our options and tactics around both of those. It's quite a complicated scenario, we remain committed to engage in those auctions and try and get our best outcome. We'll have to just wait and see. I just can't tell you any more than that over this line. Obviously, how we choose to play and plan to participate is our tactical positioning, and I really can't share any more than that with you at this time.
Okay. If you forgive me just to jump back to Jon's question, and I'll hop off. Around Train 3, your export license or Perenco's export license in the country is volume-based over eight years. Is it fair to assume that to green light a Train 3, we would need to see documentation go to the Cameroonian Energy Ministry to up that license? Is that a fair way to look at the progress there?
I imagine so. I think as part of the journey, they probably have to do that, yeah.
Okay. Do you know if that process has started yet or no?
I don't know, because it would be going from Perenco. We're not privy to that level of interaction between-
Right
Perenco and the government.
Right. You're already ready to go. Okay. All right. I appreciate the time, guys. Thank you very much.
Yeah. We're done. Yeah. There you go.
We will now take our next question from Ken Hoexter from Merrill Lynch. Please go ahead. Your line is open.
Hey, good afternoon or good morning. Just wanted to follow up on your comment earlier, I think it was either Graham or Iain, on the BP financial commitments. You said the banks were very willing to move forward on the BP line. Just wondering what happened that is different there versus the Ophir move to get financing. It seemed like that was dragged on by just the financing question. Is there a difference in project commitment from the start, or just wondering why the difference where they seem to be getting the financing approval from your comments earlier at an earlier stage?
Maybe I'll start, Graham may choose to add something. There's a fundamental difference between the two projects. One is a project that was supported by Sembcorp Marine, obviously in the process of replacing them, but it's in a country with probably a lot more perceived political country risk than Egypt than anywhere else. In the other project, you've got BP substantially standing behind the financing package, which makes it obviously better country risk and a more appealing security package for the lenders. Graham?
Yeah, I think that's right. It's exactly as Iain says. Also I think that we have seen generally improving confidence in the financing of FLNG units following the start-up and successful operations to date of Hilli. I think that's helped a bit as well.
Great. Then just following up on the cash side. Is there still restricted cash tied up to Hilli, or now that it's turned live, is the whole large amount of stair-step function of releasing of the restricted cash, has it all been released at this point?
No, it hasn't. On the balance sheet, the long-term restricted cash of $175 million relates to that Hilli LC security. That will, as you said, referred to, will drip out over time. There'll be some amount that will come out in about a year's time, then a bigger amount that comes out in a couple of years after that.
It's more time focused than a kind of third, fourth train ramping up.
No, it's purely time. Yeah.
Okay. All right. Great. Thank you.
We will now take our next question from Fotis Giannakoulis from Morgan Stanley. Please go ahead. Your line is open.
Yes. Hello, and thank you. Iain, I want to ask about your press release. You mentioned that you are in the process of evaluating alternative shipyards that they can offer more attractive payment and financing terms. I'm wondering if you are implying Chinese shipyards. If you think that you could build FLNGs in China, and these shipyards they can provide that financing. What would that mean for the expansion of your pipeline and the potential projects that you could realize if you have the backing of a Chinese inc., both on the construction and also on the financing side?
It's a good question, Fotis. It's exactly what we're talking about as one possible scenario here. I referenced the Mark II design, which is a modular construction. It's easier to build and lends itself to a variety of different yards that could compete for it. Obviously, if a solution linked Chinese construction, Chinese financing, potentially Chinese offtake, then that makes for a nice little circle to help some of these opportunities that we're looking at going forward. Yeah, that's why we're considering a broader sweep of builds, if you like. I just reinforce it that it's the Mark II design if we were going to move to do something different. Hopefully that answers your question.
Yes. Is there a timing when you think you should have a good confidence that the Chinese, they can build this FLNG and provide the financing?
We already have confidence that a Chinese solution for FLNG is viable. We've already done that work and bid to the yards.
Thank you, Iain. One more question about the shipping market. The rate environment is significantly better than it was a quarter ago, the market seems to keep improving. I know that in the past, there were some discussions about spinning off the shipping fleet or even merging with another one of your peers. Is this something that you're still considering? How such an event could happen, and when would you position the timing?
We continue to consider everything that will add value to the shipping fleet, including a combination of all sorts of structures. What I would say, it's easier to get real about these things when the rates are actually up rather than when we think they might be going to go up. It's still something under consideration of what we do with the ships. We're certainly looking forward to them producing more EBITDA in the short term, that's for sure.
Thank you very much, Iain.
We will now take our next question from Gregory Lewis from BTIG. Go ahead, your line is open.
Yes. Thank you, and good afternoon.
Great. Bye.
Yeah, Iain. In your prepared remarks, you mentioned Brazil as a ripe opportunity set for Golar Power. I'm just wondering, I think the last time we spoke, you mentioned the potential opportunity in Barcarena. Can you provide any update or color around the potential for this project as we look forward over the next 12, 18 months?
Barcarena is one of several locations that we're looking at as potential sites for, obviously, FSRU combined with power station. If you recall the previous question around the auctions, that's how we get into those. We've got to go through a fairly elaborate process of becoming qualified for any of the power auctions and determining where we can, if you like, bid that supply from. Barcarena is one of them, and we're currently juggling a number of those opportunities. Obviously, with the auctions coming up, it's not appropriate that I give any more detail on that just now. Barcarena remains a very attractive project opportunity for us amongst several others. We'll just have to see how those auctions play out.
It is quite complicated, but it's all driven by the requested demand on the auction side, and that depends what we bid in at the time of the auction and where we bid it in from, and the terms in which we are prepared to bid it in from. It's quite a complex, moving feast of opportunities. Barcarena is an attractive project for us, and I'm sure we'll get in there over time, whether it's this auction or one further down the road.
Okay, great. On Fortuna, realizing you can't comment much about it, I think at one point it was talked about moving the Gandria in and starting the conversion process. Has that process actually been started, or is that on hold at this point?
Gandria is currently in the Keppel Shipyard in Singapore. All we've really done is ship surveying and preparatory work. We put things on pause a little bit with Schlumberger's exit until we can find a new, I guess, co-sponsor for the project. The survey work's been done, and the ship's sitting there. We're not currently pushing ahead with any physical activity on the ship, pending resolution of how we take the project forward.
Okay. Just to follow up on that, as I think about that unit there, is there the potential for it to actually leave the yard? In other words, how easy would it be for you to move the Gandria to another facility?
It would be very easy.
Okay, perfect. Thank you very much.
Thank you.
We will now take our next question from Herman Hildan from Clarksons. Please go ahead. Your line is open.
Hello, guys. Thank you very much for taking my question.
No problem.
The first question, obviously, up until this point, I guess the big discussion point with your counterpart has been obviously the viability of the technology and everything. Now you've proven that that works. Is financing the main obstacle these days to execute the FLNG project? Is that fair to say?
It depends which project you're speaking about, Herman. If you look at BP, I think it's just time. We've got to work through a series of FEED update issues, conclude the financing, conclude our contractual deals both up and down that supply chain. I don't think there's a particular barrier there other than BP's desire to take that project forward. I think we've talked about Fortuna, that financing has been a barrier in the past. What I can say is we feel we've made progress in the last three months on financing, and we're continuing to get interest from different project participants to move into the slot that Schlumberger had. In other opportunities that we're looking at, it's too early to say whether finance will be an issue.
What we do know is that as time goes on, we're relatively confident that. If you look at the FPSO market and the financing appetite for FPSOs, when they were first introduced, there wasn't much appetite, and some of the constraints around financing were fairly significant. Now it's very easy to get FPSO financing. We think FLNG will go the same way with confidence. It just so happens that we've, for the last two or three years, chosen a particularly difficult project in Fortuna to get going from a financing point of view. I don't know that that's necessarily representative of the whole suite of opportunities.
Because if you look at those 23 projects that you list on the FLNG opportunity side, first of all, what's the time span on expected FIDs on those 23 projects? The other one as a follow-up question on that, obviously now there's been some 30 LNG ships ordered, and I think now we're looking at 2021 delivery if you're doing a new building. The LNG market has flipped upside down, I guess, both from the commodity point of view and your capacity and delivery schedules, and with rates strong even before we go into the winter. I'm just curious, obviously, you're soon in a position to cherry-pick the projects that you want to pursue, I guess. Just how's your feel on your position in relation to all these different projects?
I would hope that in the next 12 months we get one or more FID approvals for FLNG projects. We are not, in the short or medium term, contemplating doing anything other than working on projects where we co-develop the opportunity. We're not bidding anything. We're doing it on either a single source tolling basis or we're co-developing the project. To that extent, we are choosing or cherry-picking the opportunities that we want to take forward. The key here is if you look at that slide with all these dots on it, we could employ a team of 150 people doing endless studies for everyone that's interested in FLNG at the moment, and we don't want to do that.
We don't want to waste money, we want to try and get close to project proponents that are serious about taking FLNG as their solution, for floating LNG as a solution. We work with them to co-develop how we move that forward. In relation to the shipping market, the shipping market will just be a boost for us as we go along, providing additional to the company over the next few years and help us with what we want to do on the project side.
Very final question also, target return on capital for new growth. Could you give some guidance on what we should expect there?
When we say new growth-
Obviously tolling and more integrated. Yeah, I know it's a very wide answer to that, but let's say from a pure tolling solution to a more integrated solution, what kind of range are you looking at in terms of return on capital to get you interested?
Well, for FLNG projects, which I assume you're referring to, we're looking at the mid-teens plus. Plus, plus, depending on the exact structure of the deal, whether it's straight tolling or there's something more complicated. I think that we've talked before a little bit about where we think we should be deploying our capital, and it comes FLNG number 1, FSRU number 2, and shipping number 3. For the reasons that the returns on FLNG are much higher, obviously.
Yeah. Okay, thank you very much, congratulations on Hilli.
Thank you.
We will now take our next question from Randy Giveans from Jefferies. Please go ahead. Your line is open.
Hey, thanks. Good morning, gentlemen. A few quick questions here. For the Hilli, Trains One and Two, obviously the first 50% were dropped. What is the timeline for the remaining 50% drop to GMLP?
As we referred to in the earnings release, both in GLNG's and GMLP's, we have restarted discussions, if you like, post acceptance and proof of concept, et cetera, and those discussions are ongoing. I don't think we can give you a precise timeline on it.
Could that be a 2018 event?
Everything is possible.
That's fair. Looking at the dividend, what drove that decision to increase it? I know it's basically a payout from $20 million to $50 million on an annual basis, so not a huge change, but is that a sign of confidence in your available liquidity, balance sheet strength? I know Tor mentioned that possible further increases are a possibility. Would that require additional projects coming online, or could we see that in the coming quarters?
I think, just reiterating what Tor Olav said, trying to sort of summarize that very simply, we come from a situation where we've had negative cash flow to positive cash flow. We see that cash flow increasing significantly in the short term with, obviously, the ramping up of a full quarter's cash flow from the Hilli next quarter and the shipping market rapidly improving, and we see that improvement being sustained over the next couple of years. Of course, we've got the Nanook and Sergipe cash flow coming in the sort of short, medium term. We are coming from a very financially secure position. Everything's fully financed, and we've got cash on the balance sheet. That's really what's driving our decision. As we build the business out, I think shareholders should rightly expect that distribution to increase over time.
Okay. One quick question. You mentioned your fleet utilization was above 60% in 2Q18. What has it been this summer?
I think we referred to the fact that we were expecting the time charter equivalent rates to probably more than double in Q3 versus Q2. That is a function of headline rate, and it's also a function of utilization. I can't give you a precise utilization number, but it's going to be higher than the second quarter.
All right, that's fair. That's it for me. Thank you.
Okay.
We will now take our next question from Jason Gabelman from Cowen. Please go ahead. Your line is open.
Yeah. Hey guys, how's it going? Just a couple of questions. Firstly, on Hilli Train 3, is it fair to say that if you contract Train 3, it will also be able to run for eight years with the given resource available from Perenco? Or would it potentially require an additional investment from Perenco to fulfill full capacity over eight years?
I think we've already covered that. It's largely Perenco's business. We will see how that plays out.
All right. If I could just turn to Tortue for a second. What is the probability of a second FLNG being announced for the Tortue project in the next year or soon after the first one takes FID? Do you see EBITDA generation from those ships being similar to what Hilli could produce EBITDA-wise at full capacity?
First part of your question, we're focused 100% on getting the first FLNG FID away. We're not considering the second one. Whilst that's clearly an option that BP has. Secondly, we're not in a position yet to declare what our financial position is likely to be because we haven't concluded the FEED work, which means we haven't concluded our commercial positioning. That little circle that obviously that links into the finance as well. Until all of that work's done, we won't have finalized our deal, if you like, and therefore, until that's done, we can't tell you a bit more detail. What you can take away is the comment that Graham made a few moments ago about our target returns from FLNG. That's not a bad starting point.
All right, great. If I could just ask one quick final question. GMLP's value has obviously been impacted recently. How important is GMLP for you as a source of cash to sustain the balance sheet? As you explore the drop-down of the second 50% of Hilli, are you exploring it at a multiple different from the first drop-down to try to improve the proposition for GMLP? Thanks.
I think in relation to the first part of the question, we still very much believe in GMLP as a capital creating vehicle, if you like, for GLNG, we own 32% of it. It is very important to us. In terms of the multiple, I don't think we can really comment on that. We're kind of in discussions, that will come out in due course.
All right. Thanks for the time.
Yeah.
We will now take your next question from Wayne Cooperman from Cobalt Capital. Please go ahead. Your line is open.
You got to mine already, great. Thank you.
Okay, thanks.
Thank you.
It appears there are no further questions at this time. I would like to turn the conference back to you for any additional or closing remarks. Bear with me for one moment, please. Apologies. I see that we have one more question from Christian Wetherbee from Citi. Please go ahead. Your line is open.
Hi, guys. James on for Chris. I had a question just about preference to get access to gas reserves as well as statements around trapped gas. I want to know if you actually had any particular plans on actually owning gas-producing assets as opposed to the liquefaction, transportation, and gas application.
Sorry, James, I didn't quite hear your question, but I think you were asking if we still had plans to own gas or participate in the ownership of gas-producing assets. Is that correct?
Correct.
The answer is yes. The Fortuna project is a classic example of that. Our participation in that would have seen us owning a percentage of that field and then translating that through FLNG. It remains the company's ambition to participate in the upstream side of the business. Obviously, we will do that in partnership on a field-by-field basis with other parties that have subsurface competence. It's our whole business model to participate at that end of the gas supply chain, take it right the way through liquefaction, through the carrier fleet into FSRU, and ultimately into power. Obviously, we're talking more about the small-scale distribution. We want to participate where we can along that whole gas chain where it will add money to our business and to our shareholders. The upstream part of that remains firmly part of that strategy.
Got it. Thank you.
It appears there are no further questions at this time. I would like to turn the conference back to you for any additional or closing remarks.
Thanks, operator. Just in closing, thank you all again for listening, tuning in, and for your questions. The message this time has really been about the shift of Golar from where we've been to confidence in our short, medium, and long-term cash flows through a combination of what we have in place and producing. What we have immediately around the corner in terms of coming on stream and the potential pipeline that we've got for further projects and further developments. Thanks for your interest and continued confidence in us, and we'll leave it there and talk to you next quarter. Thanks again. Bye-bye.