Hygo Energy IPO postponment an overhang for Golar LNG share price?

Golar LNG’s share price nosedived recently after reaching a peak of USD 13.91 per share on 18 September. The company’s share price has declined 29.5% in the last one month and 49.4% YTD. Following allegations against Hygo Energy’s chief executive, Golar LNG has reportedly delayed Hygo Energy’s IPO. However, in our view, the end of force majeure on Gimi FLNG is a positive news. We aim to decode the recent fall in the share price and assess whether visibility on Golar earnings has improved.

Golar LNG’s stock performance is lacklustre
Golar LNG’s share price has slumped 45.2% YTD compared to a 32% fall in Drewry LNG shipping index and a 34.9% decline in Baltic LNG index during the same period. The broader equity index has gone up 6.7% YTD. While all LNG stocks have been impacted by the weak LNG prospects, comparatively higher decline in Golar LNG’s share price is attributed to the recent deferment of Hygo Energy’s IPO as well as the company’s high exposure to the spot LNG shipping market. All the company’s 10 LNG vessels trade in the spot market where rates have been feeble for most of 2020. The company’s share price had reacted positively to its plan to launch an IPO of Hygo and then list Hygo Energy on NASDAQ market.

Delay in Hygo Energy’s IPO to affect Golar LNG’s expansion plans in Brazil
Golar LNG was expected to receive net proceeds of USD 420.9mn from Hygo Energy IPO based on the IPO price of USD 19.50 per share (mid-point of the offering price range). Hygo, which is Golar LNG’s joint venture with Stonepeak Infrastructure (previously known as Golar Power), planned to use the net proceeds for expansion in Brazil. Of the total proceeds, about USD 80mn capex was meant for Barcarena LNG Terminal which included acquiring remaining equity interests in the Barcarena terminal, USD 40mn capex was related to the Santa Catarina regasification terminal and USD 180mn for the redemption of preferred shares owned by Stonepeak. The remaining proceeds from the IPO were to be used for working capital and general corporate purposes.

Golar LNG has been increasing its presence in Brazil’s energy utility sector through Hygo Energy. Following the delay in Hygo Energy’s IPO, we expect Golar LNG’s growth plans in Brazil to be hampered. Furthermore, according to a recent media report, Golar LNG was disqualified from a Petrobras terminal tender.

Lifting of force majeure on Gimi FLNG increases cash flow visibility
We view the recent news positively of Golar LNG reaching a revised project schedule with BP for Gimi FLNG as it increases the visibility of future cash flows for Golar LNG. According to the revised timeline, Gimi FLNG connection date has been extended by 11 months to sometime in 2023. Golar indicated that the terms of the lease and operate agreements are unchanged.

Golar had entered into a 20-year lease and operate agreement with BP for the charter of Gimi FLNG to service the Greater Tortue Ahmeyim project. FLNG Gimi will be designed to produce about 2.5 mtpa of LNG. The FLNG is expected to generate an EBITDA of USD 215mn per annum with an upside for overperformance. The construction cost of FLNG Gimi is expected to be about USD 1.3bn, excluding financing costs.

Investors await further clarity on Hygo Energy’s IPO
We believe the recent allegations against Hygo Energy’s CEO have been a dampener to investor sentiment. Meanwhile, investors await further clarity on Golar’s LNG plan to revive Hygo Energy’s IPO and fund expansion in Brazil. While the end of force majeure on Gimi FLNG is positive news, cash flows have been pushed back by one more year and the company continues to pay interest on the debt already raised for this project. Golar LNG needs to enter into revised terms with Keppel Shipyard for the construction of Gimi FLNG and with banks for amending financing schedules.
Source: Drewry