Good day, and 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. Ian Ross. Please go ahead, sir.
Thank you. Good afternoon. Good morning. Welcome to the Golar LNG Second Quarter 2018 Results Call. My name is Ian Ross.
I'm joined today by the GLNG CFO, Graeme Robjohns and our Head of Investor Relations, Stuart Buchanan. And we also have Tor Olav Proyme on the line from Oslo. I think this call is notable in that after 4 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, and we're now focused on the next wave of project investments. So 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. And on the basis of this stability and firmer markets ahead, today the GLNG Board is pleased to announce an increase of the dividend to 0.125 dollars per share. Let me hand over to Graeme to go through the numbers and we can come back to the business review and outlook. So over to you Graeme.
Thank you, Iain, and good day to everybody. We'll start the financial part of the presentation on Slide 3. 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 and collectively this resulted in a 16,400 a day reduction in daily time charter equivalent earnings from 36,000 in Q1 to 19,000 600 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 $41,700,000 in Q1 to $42,900,000 in Q2. And of the total Q2 amount, dollars 24,800,000 is derived from vessel and other operations and $18,100,000 from FLNG operations.
Vessel operating expenses increased by 2 point $1,000,000 to $20,500,000 in Q2. FLNG operating costs for the Hilli's 1st month in operation amounted to $3,600,000 which is roughly in line with expectations and operating costs for the rest of the fleet fell by $1,500,000 offsetting some of this increase. As a significant part of our G and 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, an increase of $3,300,000 in Q1 to $7,900,000 in Q2. The FLNG project development expenses of are predominantly represented by fee expenses incurred in respect of FLNG conversion project for the BP's Kosmos Tortue projects.
And most of the $1,100,000,000 vessel and other operating related project costs are recharged to affiliates Golar Power and Golar LNG Partners. The Brent linked component of Heli FSAO's invoice fees generates additional operating cash flows of approximately $3,000,000 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 3 month look back at average Brent crude prices. This high component for June amounted to $3,000,000 and is being paid in July. The fair value of the derivative asset I.
E. The value as of June of the potential future cash flow from the oil linked high component increased by €94,700,000 during the quarter with a corresponding unrealized gain at the same amounts. The fair value increase was driven by changes in the market expectations of future oil prices and of course Brent's 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 3,000,000 this results in 97,700,000 realized and unrealized gain on FLNG delivered derivative instruments. Depreciation and amortization increased as a result of the Hilli Becerra becoming depreciating asset and for the rest of the fleet was pretty much in line with the previous quarter.
Interest expenses increased by $10,000,000 to $24,000,000 mainly due to the interest on borrowing costs in respect of the Hilli no longer being capitalized post acceptance and the general increase in rates and an increase in the amortization of deferred debt related expenses. Other financial items reported a Q2 gain of 1,800,000 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 $300,000 Moving over to Slide 4 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 $650,000,000 of which 375,000,000 was unrestricted. The increase from $172,000,000 free cash as at March 31 is as a result of having drawn down the post acceptance $960,000,000 lease financing facility for Hilli Episeyo and having repaid the $640,000,000 construction financing facility.
It should be noted that Q3 during Q3, twenty thirteen, we expect 2018, we expect to pay approximately $130,000,000 out to settle final Hilli capital commitments as well as amounts due to minority shareholders Keppel and Black and Veatch. As a result of the commencement of operations of Hilli, the asset has moved from assets under development to vessels and equipment and we also have a movement between short term and long term debt and a net decrease in debt as a result of the drawdown of the new facility. Moving over to Slide 5, we now are in a pretty strong financial position with 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 affiliates capital commitments are fully funded and we have $375,000,000 worth of free cash as at June 30. We're also well progressed with work on financing our new and 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 heavy financing.
However, we still have $538,000,000 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 2 sale and leaseback 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 and 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. And finally, in the bottom right of this slide, we've shown an analysis of our debt between security class and our net debt position.
So thank you. And with that, I will hand back to Iain to carry on with the rest of the presentation.
Thanks, Graeme. I'll now go through our business lines of FLNG Carriers and Power starting with FLNG on Page 6. So Heli, fully accepted by our charter on the 2nd June with our effective date at the end of May. All four trains have been commissioned and tested to above nameplate capacity. Hilli has and continues to operate with 100 percent commercial availability.
We're very pleased with the way that we're progressing with the vessel. The crews becoming comfortable with the facility, learning as we go, and of course that experience becomes invaluable for the next project. We've successfully offloaded 5 cargoes to date and as we speak are currently offloading the 6. We'll continue to focus on production uptime and optimization, demonstrating we are ready to receive more gas from our charter at Perenco when they feel it's the right time to increase production and utilize the 3rd and potentially 4th 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. And 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 an FLNG vessel, but also includes an upstream subsea development, an FPSO and a large breakwater.
So we're 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 7, in the last 3 months, we've taken control of the FLNG portfolio that was held within 1 LNG 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 start up. 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. So Golar can create viable early production systems and monetize stranded gas in a way that's now proven and derisked 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 healthy performance is giving some project sponsors more confidence in our solution. We have 2 or 3 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 in 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.
And on the Fortuna projects, could you say something about that? Fortuna continues to be work. 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. So 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 2 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. And 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 Graeme 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 Q1. But then we saw rates pick up again late May early June, which we'll see in our Q3 earnings. And so we 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. And in addition, unsolicited offers are also being received for the purchase or potential purchase of individual steam and TFDE carriers. So we're seeing similar dynamics to those that played out in the second half of twenty ten 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 2, 3 years.
You can see from the graph in the bottom left hand side on Slide 8 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 start up. We currently have over 2,000 workers on-site installing the main GE supply turbine modules, pipelines and other transmission infrastructure that you can see in the photos on Slide 9. 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.
The project is fully funded, equities 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 $70,000,000 of cash back to Golar Power on completion drawdown of that facility, which you see that joint venture self funding their near term development. Our share of expected EBITDA is around $100,000,000 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 2 options 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 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 tenors 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 the diesel powered electricity. These things are all demand for gas and we've been looking at our options to monetize spare FSRU capacity, 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. So 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. And with Sergipe due to come on stream beginning in 2020, the potential to fix 1 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. And with our proven low cost and fast LNG concept leading to 1 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 $0.125 per share. Further dividend growth should be expected as the shipping market improves and cash flows from long term contracts and Golar Power commence.
So thank you. Before we hand back to the operator for questions, I'd now like to introduce our Chairman, Tor Olav Troyim, who's kindly joined us on today's call to say a few
words. Thank you to Graham and Ian for the presentation. I have a Chairman in Golar been asked to have 3, 4 minutes on the before the Q and A. It was commented after the last call that from several of the large shareholders that I have Chairman and big promoter of the Schlumberger Ventures should have been there on the call to take heed from the Schlumberger divorce. Divorce from Schlumberger was sad, and I really believed in the concept of working together with a great upstream partner.
However, in a partnership, we 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 an evaluation of what they were doing together with us.
As stated by Ian, the termination of the firm buyer agreement has opened new doors and 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 4 and is obviously showing significant better return with LNG price at 8. 100 percent uptime and delivery is significant on the budget is in addition a great testimony to the Golar staff in commencement with the Ilya operation. It's probably the best advertising for FLNG Solutions to monetize stranded gas. Perenko'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 big firm believer in LNG Solutions. Today, I will accept that we started far too early. At the same time, no, it's happening. The parity to oil is broken.
The first line of company have placed their LNG newbuilding orders. China is delivering as many L and D trucks as Tesla delivering cars and the big trains from Australia and America is commencing. L and D is today both cheaper and cleaner than alternative fuel uses. As stated in our Capital Markets 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 generally believes 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 this 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 of today nearing completion of a $4,000,000,000 investment phase and moving to a cash flow phase including Hilli, improved shipping market and the Sadeep and Anouk commencement. We are fully financed for all the existing activities and we had as of June 30 the cash position including restricted and unrestricted cash in excess of $650,000,000 In view of this, the Board agreed to increase the dividend 150 percent 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 contract 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 the process, 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 unwinded 1 LNG and Golar Power.
But I hope we over time can make it more transparent and easier to understand. However, the most important thing for me as a shareman of this company and beneficial owner of more than 5,500,000 shares, including shares I bought also this year, is that we're coming to a start of the cash flow period. This includes unique projects like the Serdipe and NUK projects, which will start next year, generating cash flow of more than $1,000,000 a day for the next 25 years. Golar's LNG shares of that cash flow is more than $100,000,000 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 you complained about my no show in the last call that our Chairman and large shareholders 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 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 hope this gives some evidence that kind of the whole team of Golar are super excited by what's going on. It is trading from time to time the time it takes to do deals.
But when you can do deals with fixed term cash flow of over $1,000,000 a day per day in 25 years, I think it's all understood by everybody and it takes a little bit of time. Thank you. And I hope some of the confidence Ian 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. And with that, I'd like to hand back to the operator to start the Q and A.
Thank We will take our first question from Jon Chappell from Evercore. Please go ahead. Your line is
open. Thank you. Good afternoon, guys. Graham, first one for you, kind of technical, but hopefully important. Can you just help us understand how this spread linked part works?
I mean 94,000,000 dollars addition to the derivative in 1 quarter seems pretty significant. And I know Brent was significantly above $60 but still, is this kind of your forecast over the 8 year term of the contract? Is this over a 1 year period? How do you get to this $94,000,000 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?
Yes. Sure, John. So 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 $3,000,000 a year in cash flow. So Brent's at $61,000,000 we earn 3,000,000 dollars etcetera, etcetera. And that will come in over the 8 year term on a monthly basis.
The derivative movement is because on the U. S. GAAP, that element of the contract is deemed to be what's called an embedded derivative. And 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. So it's an NPV movement of the total potential value of that element of the contract over the whole contract period.
Okay. And are you using an oil curve for that or is that an internal estimate?
It's an oil curve, yes.
Okay. All right. I understand. Thanks, Graham. And then second one for you, Ian.
Can you just provide a bit of an update on Train 3? I mean, it seems 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 holdup may be?
Well, I think you summarized it quite well, John. I mean, 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. And you've got to think that it's a strong economic prospect for Perenco.
But other than I can't say any more than that until we've got something firmer to discuss.
But just to be clear, they have enough gas also to fill Train 3, right? I mean, I was always under the impression that if you were to fill Train 4, they may have to tap into an adjacent field. But based on the current field, as it sits through Trains 1 and 2, that could also fill train 3. So maybe it's an offtake issue not an investment decision on Perenco's part?
Yes. I think it's quite a complicated story because they've got their gas 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 this call. So 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 time line on it right now.
Okay. I understand. Thanks, Ian. Thanks, Grant.
Thanks, John. Thanks, John.
We'll now take our 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, so 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 earnings 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 windows 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 that you guys are positioned kind of in an interesting position being a U. S.
Listed company that's levered to global projects as opposed to being levered to kind of the U. S. Tariff muck. So I'm just curious whether you guys are feeling that now. And if not, how you would expect that to trend over the next 6 to 9 months?
I'll take that. So look, 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, and we would feel that that's a positive for us for our West African FLNG opportunities.
We don't think that the tariffs necessarily impact the demand side, so the LNG has got to come from somewhere. And if there's no negative impact on the U. S. Gulf Coast, then it's still a positive for us as we believe we've got the cheapest LNG solution. So at worst it's neutral and at best it's a positive for us.
Okay. That's helpful. Around Goldwater Power, at the Investor Day, you guys had talked to some late August kind of 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 kind of an additional FSRU in Brazil, as well as the extension potential extension of your Golar power project in Sergipe?
So what I can say is that there are yes, there are 2 auctions coming up. 1 is later this month and the next week, I think, and then there's another one in November. And we're looking at our options and tactics around both of those. It's quite a complicated scenario, but we remain committed to engage in those options and try and get our best outcome. So we 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 we can't share any more than that with you at this time.
Okay. And if you forgive me just to jump back to John's question and I'll hop off. Around Train 3, your export license or Franco's export license in the country is volume based over 8 years. And is it fair to assume that the green light at Train 3, we would need to see documentation go to the Cameroonian Energy Ministry to up that license? And is that kind of 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, yes.
And do you know
if that process has started yet or no?
I don't believe. I don't know because it would be going from Perenco. So we're not privy to that level of interaction between for any kind of government.
Right. You're already ready to go. Okay. All right. I appreciate the time, guys.
Thank you very much.
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 the your comment earlier, I think it was either Graham or Ian's, on the BP financial commitments. You said the banks were very willing to move forward on the BP line. And just wondering what happened that is different there versus the Ophir move to get financing. I mean, it seemed like that that was dragged on by just a financing question. So was 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 and Jim may choose to add something. I mean there's a fundamental difference between the two projects. One is a project that's well was supported by Schlumberger obviously in the process of replacing them, but it's in a country with probably a lot more perceived political country risk in EG than anywhere else. And 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.
Yes, no, I think that's right. And 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 the Hilli. I think that's helped a bit as well.
Great. And then just following up on the cash side. But is there still restricted cash tied up to the Hillier now that it's turned live? Is the whole large amount of kind 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 $175,000,000 relates to that Hilli LC security. And that will, as you said, will trip out over time, but not there'll be some amount that will come out in about a year's time and then a big amount that comes out in a couple of years after that.
So it's more time focused than kind of 3rd, 4th train ramping up?
No, it's purely time, yes.
Okay.
All right, great. Thank you.
We will now take our next question from Fotis Giannakouloulis from Morgan Stanley. Please go ahead. Your line is open.
Yes. Hello and thank you. Ian, 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 debt financing?
And what would that mean for your the expansion of your pipeline and the potential projects that you could realize if you have the backing of Chinese Inc, both on the construction and also on the financing side?
So that's a fair it's a good question. I mean, it's exactly what we're talking about as one possible scenario here. And 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. And obviously, if a solution linked Chinese construction, Chinese financing and potentially Chinese offtake, then that makes for a nice little circle to help some of these opportunities that we're looking at going forward.
So, yeah, that's why we're considering a broader sweep builds, if you like. And I just reinforce that it's a Mark II design if we were going to move to do something different. So hopefully that answers your question.
Yes. Is there a timing when think you should have a good confidence that the Chinese they can build this FLNG and provide financing?
We already have confidence that a Chinese solution for FLNG is viable. We've already done that work in the art.
Thank you, Ian. One more question about the shipping market. The rate environment is significantly better than it was a quarter ago and 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?
So 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 is 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. So it's still 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, Ian.
We will now take our next question from Greg Lewis from BTIG. Go ahead. Your line is open.
Yes. Thank you and good afternoon. A and A, 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 Barcelona. Is there any can you provide any update or color around the potential for this project as we look forward over the next 12, 18 months?
So Bahrain has one of several locations that we're looking at as potential sites for obviously FSRU combined with Power Station. And if you recall the previous question around the auctions, that's how we get into those. So 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. And Bahrain is one of them. And we're currently juggling a number of those opportunities.
And obviously, with the options coming up, it's not appropriate that I give any more detail on that just now. Vaca Arena remains a very attractive project opportunity for us amongst several others. So we'll just have to see how those options play out. And just to it is quite complicated. It's all driven by the requested demand on the auction side and that depends what we bid in at time of the auction and where we bid it in from and the terms in which we are prepared to bid it in from.
So it's quite a complex moving feast of opportunities. But Vaca Arena 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. And then on Fortuna, realizing you can't comment much about it, but I think at one point it was talked about moving the Gondria and starting the conversion process. Has that process actually been started? Or is that sort of on is that on hold at this point?
So Gandria is currently in the Keppel shipyard in Singapore. And all we've really done is ship surveying and preparatory work. We kind of put things on pause a little bit with Schlumberger's exit until we can find a new, I guess, co sponsor for the project. So the survey work's been done and the ship's sitting there, but we're not currently pushing ahead with any physical activity on the ship, pending resolution of how we take the project forward.
Okay. So and 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 will be very easy.
Okay, perfect. Thank you very much.
Thank you.
We will now take our next question from Herman Hilden from Clarksons. Please go ahead. Your line is open.
Hello, guys. Thank you very much for taking my question. So the first question, obviously, up until this point, I guess, the big discussion point with your counterparties has been obviously the viability of the technology and everything. And now you've proven that, that works. What's is financing kind of the kind of the main obstacle these days to execute F and G project?
Is that fair to say?
It depends which project you're speaking about, Herman. If you look at Viti, 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. So I don't think there's a particular barrier there other than BP's desire to take that project forward. And 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 3 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. But what we do know is that as time goes on, we're relatively confident that if you let me go back a bit. 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. And 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 2 or 3 years chosen a particularly difficult project in Fortuna to get going from a financing point of view. I don't know that's necessarily representative of the whole suite of opportunities.
Yes. If you look at those 23 projects that you list kind of on the F and G opportunity side, first of all, like what's the time span on expected FIDs on those 23 projects? And the other one as a follow-up question on that, obviously, now there's been some quite a lot of I mean, it's been some 30 LNG ships ordered. And I think now you're looking at 2021 delivery if you're doing a new building. So kind of the LNG market has flipped upside down, I guess, both from the commodity point of view and the yard capacity and delivery schedules and with rates strong even before we go into the winter.
So I'm just kind of curious, obviously, you're soon in a position to cherry pick the projects that you want to pursue, I guess, and just kind of how's your feel on your position in relation to all these different projects?
So I would hope that in the next 12 months, we get 1 or more FID approvals for FLNG projects. We are not in the short or medium term contemplating doing anything other than either a single source tolling basis or co developing the project. And 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. And we want to try and get close to project proponents that are serious about taking LNG as their solution, floating LNG as a solution. And we work with them to kind of 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 in the project side.
Yes. Very final question also target return on capital for new growth. Could you give some guidance on what we should expect there?
When you say new growth
More integrated. Yes, I know it's a very wide answer to that. But let's say, from a pure tolling solution to a more integrated solution, solution, what kind of range are you looking at in terms of return on capital to get you interested?
Well, for FLNG products, which I assume you're referring to, we're looking at the mid teens plus, plus depending on the exact structure of the deal, whether it's kind of straight towing or there's something more complicated. But I think that's 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 and for the reasons that the returns on LNG are much higher obviously.
Okay. Thank you very much and congratulations on Hillier.
Trains 1 and 2, obviously, the first 50% were dropped. What is the timeline for the remaining 50% drop to GMLP?
Well, as we referred to in the earnings release both in GLNGs and GMLPs, we have restarted discussions, if you like, post precise timeline on it. I don't think we can give you a precise timeline on it though.
Could that be a 2018 event?
Well, everything is possible.
Okay. That's fair. Now looking at the dividend, what drove that decision to kind of increase it? I know it's basically a payout from $20,000,000 to $50,000,000 on an annual basis. So not a huge change, but is that kind of a sign of confidence in your available liquidity, balance sheet strength?
And then I know Tor mentioned that possible further increases are a possibility. So would that require additional projects coming online? Or could we see that in the coming quarters?
Well, I think just kind of reiterating what Toril has said, it's 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 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. And of course, we've got the Nanook and G Pay cash flow coming in the sort of short medium term. And we're coming from a very financially secure position.
Everything's fully financed and we've got cash on the balance sheet. So that's really what's driving our decision. And as we build the business out, I think shareholders should rightly expect that distribution to increase over time.
Okay. And then one quick question. So you mentioned your fleet utilization was above 60% in 2Q 'eighteen. What has it been this summer?
It has been I think we referred to the fact that we were expecting the time charter equivalent rates to more than probably more than double in Q3 versus Q2. That is a function of headline rates 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
Q2.
Thanks.
We will now take our next question from Jason Gabelman from Cowen. Please go ahead. Your line is open. Yes.
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 8 years with the given resource available from Perenco or would it potentially require an additional investment from Perenco to fill full capacity over 8 years?
I think we've already covered that, and it's largely Perenco's business. So we will see how that plays out.
All right. Then 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? And do you see EBITDA generation from those ships being similar to what Hilli could produce EBITDA wise at full capacity?
So first part of your question, we're focused 100% on getting the first LNG, FLNG FID away. We're not considering the second one of us. 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 and that will circle that obviously that links into the finance as well. So until all of that work is done, we won't finalize 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 FLAG. 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? And as you explore the dropdown of the second 50% of Hilli, are you exploring it at a multiple different from the first dropdown to kind of 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, and we own 32% of it. So 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 and that will come out in due course.
We will now take our next question from Wayne Cooperman from Global Capital. Please go ahead. Your line is open.
You got some on already, so 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 Chris Wetherbee from Citi.
Please go ahead. Your line is open.
Hi, guys. James on for Chris. I had a question just about David's 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 gasification opportunities?
Sorry, Chris. 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.
So the answer is yes. I mean the Fortuna project is a classic example of that 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. But it's our whole business model to participate at that end of the gas ultimately into power and obviously we were talking more about the small scale distribution.
So we want to participate where we can along that whole gas chain where it will add money to our business and to our shareholders. And the upstream part of that is remains firmly part of that strategy.
It appears 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. So just in closing, thank you all again for listening, tuning in 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. So 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.