Golar LNG Limited

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 2/5

A global provider of midstream liquefied natural gas (LNG) infrastructure, offering vessels, floating liquefaction units, and regasification terminals.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Golar LNG Limited (GLNG) operates in the midstream liquefied natural gas (LNG) sector, focusing on infrastructure. They have three core business segments: ownership and operation of floating storage and regasification units (FSRUs), floating liquefaction units (FLNG), and shipping vessels.

Moat Analysis

Golar LNG’s business model is somewhat complex and requires large upfront capital expenditure, making it more difficult for other companies to start operations in the same space. Golar has also been able to grow into a well-established name in the LNG space with several contracts to big clients. However, that is where their moat ends and they face the same risk that all commodity companies face - they rely on contracts and high prices to sustain their business, which opens them up for economic turmoil.

Moat rating: 2 / 5

Justification:

  1. Network Effects: The company does not directly benefit from a network effect as it provides infrastructure rather than a service where a larger user base would create more value.
  2. Intangible Assets: While they have expertise in the LNG business, this is not a differentiated feature. There are many experts in this industry and these are easily transferable from company to company. It does have few limited-term patented designs, but not many, and doesn’t have any strong brand recognition, but this is not enough to classify their moat as having intangible assets.
  3. Switching Costs: While customers might take time in switching providers of LNG infrastructure, they wouldn’t have large enough financial commitments to the company and would be willing to switch, if their services are more competitively priced, which means the switching costs aren’t that high.
  4. Cost Advantages: While economies of scale can be achieved through larger operations, its capital intensive nature can be replicated with newer technologies or greater financial commitments. The cost structure is not uniquely advantageous, though it is fairly well established within the industry. It doesn’t have any obvious advantage over others, apart from having established contracts.

Legitimate Risks to the Moat and Business Resilience

  1. Contractual Risk: Golar LNG’s business is heavily reliant on long-term contracts. If these contracts are canceled, or if customers cannot meet their obligations, this can impact revenue stream and growth.
  2. Competition: The industry has many participants that can provide competitive offers, meaning that the company doesn’t really have pricing power over their existing contracts.
  3. Macroeconomic Factors: Unfavorable market conditions, such as reduction in demand, rising inflation, etc. can negatively impact their operations and growth.
  4. Regulatory Factors: Regulation and environment rules and requirements are something which the company faces a constant battle against.
  5. Technological Disruption: Newer technologies or new sources of energy can make LNG less relevant.

Business Explanation

Golar LNG Limited is a midstream player in the LNG value chain.

  • Revenues are primarily generated from time charters of its FSRUs, FLNGs, and vessels. Contracts are often long-term (often 5-10 years), which provides good predictability of the company’s revenues.
  • Major trends in the industry include increasing demand for LNG, as it is a cleaner alternative to oil, as well as increased usage of floating facilities for a cheaper solution to traditional expensive infrastructure. However, this increase in demand also means, more companies are emerging into this space.
  • Their current business segments include, FLNG (floating liquefaction facilities), FSRU (floating storage and regasification facilities) and shipping.
  • They differ from competitors by providing both liquefaction and regasification infrastructure.
  • Competitiveness depends on technological sophistication, financing strategies, and relationships.
  • They face high competition in the shipping business.
  • Margins are usually tied to the prevailing high LNG prices and they would likely be affected by any adverse market conditions in the commodity space.

Financial Analysis

  1. Revenues and Profitability: The company has experienced significant fluctuations in revenue and profitability due to the volatile nature of the LNG industry and one-off events. This impacts the net earnings of the company. Their operating profit and net income is not necessarily stable and fluctuates quite a bit. In their 2022 yearly report, the shipping segment constituted a larger portion of their total revenues.
  2. Debt: Golar LNG has significant debt, with a debt-to-equity ratio that is quite high. In 2022 their long-term debt was around 2.9 billion and has been growing for the past years. This level of debt exposes the company to rising interest rates and is a concerning factor. They are highly reliant on external financing to conduct operations.
  3. Liquidity: They have relied heavily on short term financing methods with the use of revolving credit facilities. Current ratios of the company aren’t that great.
  4. Cash Flows: FCF is not consistently positive due to capex and high debt obligations, but does reflect the operations of the business.
  5. Operating Segments: They have three operating segments and all three contribute greatly to their revenues with FSRU making the largest contribution to revenue.
  6. Recent Concerns: The company faced a loss in some of the major projects, and also a major write-off. On December 27, 2021 Golar Partners LP and the Company completed a sale of 3 vessels to a buyer which resulted in a loss of €242 million. They have faced problems with their Mark II FLNG and have announced new plans to work through this issue. They also note a change in accounting for debt and impairments on some of their assets, in the 2022 filings. However, according to them, this should have little effect on the financial condition of the company.

Understandability Rating: 3 / 5 The core business of providing LNG infrastructure is somewhat understandable, but the structure of debt and assets, the complex nature of contracts, and the accounting related to their balance sheet makes it a bit complicated to understand, especially for a layperson.

Balance Sheet Health Rating: 2 / 5 Given the high debt levels relative to equity and the volatility of their cash flows, the balance sheet is weak and may pose challenges to the long-term financial standing.