Long Term LNG Contracts And FLNG Expansion Will Support Stronger Future Earnings Potential

Catalysts

About Golar LNG

Golar LNG owns and operates floating liquefied natural gas, or FLNG, vessels under long-term contracts.

What are the underlying business or industry changes driving this perspective?

• Three FLNG vessels on 20-year U.S. dollar contracts, with around US$17b of EBITDA backlog and most operating costs reimbursable, point to long-duration contracted revenue and clearer visibility on future earnings and free cash flow.
• Hilli, Gimi and the Mark II are tied into long-term LNG export projects in Argentina, Mauritania and Senegal at a time when global LNG trade was around 434 million tonnes in the last reported year and expected industry growth is concentrated in LNG, which can support vessel utilization, revenue and potentially net margins.
• Commodity-linked upside on the Argentina contracts, including profit sharing and the Southern Energy stake, is structured so that every US$1 per MMBtu above the US$8 offtake level is expected to add about US$100m of annual earnings, which directly targets higher EBITDA and net income in stronger pricing periods.
• Proven conversion expertise and confirmed yard availability for three FLNG designs, with conversion timelines of around 3 years and targeted CapEx per tonne that management compares favorably to land-based LNG, create a cost position that can support future project wins, incremental FLNG units and higher long-term revenue.
• Balance sheet actions, including US$1.2b of cash, access to unsecured bonds, asset level bank facilities at over 5x contracted EBITDA and room to refinance Hilli and fund Mark II, provide multiple ways to fund growth projects and still return capital to shareholders, which is positioned to influence future earnings per share and free cash flow per share.

Assumptions

How have these above catalysts been quantified?

• This narrative explores a more optimistic perspective on Golar LNG compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Golar LNG's revenue will grow by 33.5% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 16.7% today to 36.6% in 3 years time.
• The bullish analysts expect earnings to reach $343.2 million (and earnings per share of $3.39) by about May 2029, up from $65.7 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 22.0x on those 2029 earnings, down from 88.0x today. This future PE is greater than the current PE for the US Oil and Gas industry at 14.2x.
• The bullish analysts expect the number of shares outstanding to decline by 2.96% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.14%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The business model is increasingly concentrated in Argentina and on a small number of 20 year contracts, so any long term political, fiscal or regulatory shift in that country or prolonged operational issues at the Vaca Muerta supply chain and associated pipelines could affect offtake volumes and contract enforcement, which would directly pressure contracted revenue and EBITDA over time.
• Management is tying a meaningful part of future upside to commodity linked mechanisms and a 10% Southern Energy stake, so a multi year period of weaker LNG prices or unfavorable Brent or Henry Hub differentials relative to expectations would reduce the US$100m per US$1 per MMBtu upside and could instead expose Golar to the US$28m per US$1 downside in Argentina, which would limit earnings growth and compress net margins.
• The Mark II conversion and Hilli life extension rely on large scale yard work, long lead gas turbines and other equipment where management already points to cost inflation and competition from AI data centers, so extended cost pressures or schedule slips over several years could lift total CapEx above the US$2.2b Mark II budget and US$350m Hilli redeployment estimate, which would weaken free cash flow and delay the timing of higher EBITDA.
• Long term growth depends on adding a fourth and potentially fifth FLNG unit, yet the Board has already chosen to push these projects out toward the period when the current fleet is fully cash generative, so if yard availability tightens further or counterparties take longer to secure approvals, future FLNG orders could be delayed or structured on less favorable terms, which would limit the step up in future revenue and constrain long term earnings power.
• The capital structure includes US$2.7b of gross debt, unsecured bonds and a US$575m convertible, and future plans assume that asset level facilities at more than 5x contracted EBITDA remain available, so a multi year period of higher funding costs or reduced bank appetite for FLNG exposure could restrict refinancing flexibility and force more equity funding, which would impact interest expense, free cash flow and the pace of any planned reduction in shares outstanding.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for Golar LNG is $66.0, which represents up to two standard deviations above the consensus price target of $54.61. This valuation is based on what can be assumed as the expectations of Golar LNG's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $66.0, and the most bearish reporting a price target of just $44.5.
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2029, revenues will be $937.0 million, earnings will come to $343.2 million, and it would be trading on a PE ratio of 22.0x, assuming you use a discount rate of 7.1%.
• Given the current share price of $56.82, the analyst price target of $66.0 is 13.9% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.