Goin’ Golar: A Thematic Analysis of LNG, Geopolitical

SumZero/[email protected]

Goin’Golar:AThematicAnalysisofLNG,GeopoliticalEconomics,andTheFutureofEnergy

Introduction

Inorder tounderstandwherewe’regoing,weneed to lookatwherewe’vebeen.The liquefiednaturalgasbusinessisnottoounlikethatofthecrudeoilbusiness–bothwereshapedbygreed,competition, andmost notably, war. Over the last week, I have spoken with academics, policymakers,andoilmen-allofwhichindifferingpartsoftheworld-despitetheirdifferingviewsofthefuture,noonedisagreedwiththefactthatworldwillsoonwitnessarevolution;overthenextfouryears,wewillseethelargestincreaseeverinLNGexportcapacity.

TheRevolution

What if I told you that I could balance the federal budget, end the trade deficit, bringmanufacturingjobsbacktothestates,satisfyenvironmentalist,andmakea30percentannualizedreturn during the process? No, I’m not running for president – I’m talking about natural gas.Despite Wall Street’s addiction to instant gratification – rewarding those companies whomsacrificelong-termsurvivaltomeetimaginaryguesstimates–(some)energycompaniesthinklikecountries,indecadesandcenturies,notmillisecondsandquarters.

The companieswill soon experience an industrial cleansing – the countries, an unconventionalwaronenergy; tothevictorcomesthespoils.ThispaperwillnavigatethroughGolar’sbusinessmodel,takeatop-downviewontheLNGsector,andmostimportantly,explainwhythiscompanyispoisedtobenefitfromtheinevitablerevolution.

AfewquickfactsaboutGolarLNG(“GLNG”):

§ ThroughhisholdingcompanyWorldShipholdingin2000,Fredriksentook-overthecompanyOspreyandtransferredtheirLNGbusinesstoGolarLNG–GolarwassubsequentlylistedontheOslostockexchangein2001andtheNASDAQin2002underthetickersymbolGLNG.

§ GolarLNGowns19MsharesofGolarLNGPartners–aMasterLimitedPartnership–alongwitha2percentinterestintheGeneralPartnershipaswellas100%ofGMLP’sIncentiveDistributionRights(“IDR”).

§ GolarLNGoperatesinthreecoreareas:LNGTransportation(“LNG”),FloatingStorage&RegasificationUnits(“FSRU”),andFloatingLiquefaction(“FLNG”)

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TheCatalyst

This paper will navigate through several core factors that we believe will lead to 100 percentreturn over the next 12 to 18months. For themost part, the equity is highly correlated withnaturalgas futures– inaddition, twoof thethreebusinessescanbevaluedaccordinglywithoutmuchspeculation.Thecatalystontheotherhand, ishighlyspeculative–however, thisbusinesshas,andalwayswillbe,speculative.

§ FloatingLiquefactionNaturalGas (“FLNG”)vesselspresenta revolutionaryopportunity inthe energy sector. These water-based vessels bring both environmental and economicadvantages that can be used to extract gas from energy rich areas that were previouslyoverlookedduetopoliticalandfinancialreasons(e.g.,WestAfrica).

§ LowPremium:Perour calculations, theNAV for theLNGandFSRUbusinesses is$2.42B~$24.47pershare(thisgivesapremiumof~$13 for the futureFLNGbusiness).Between thefuturecash flows, thedropdownto theMLP,and the futuredistributionsvia theMLP,eachFLNGprojectcouldcontributeupto$25pershare.

§ Asymmetric Risk: If we use conservative probability estimates on the future projects anddiscountbackthedividends,theequitywouldyield$32~13%downsiderisk.

§ Infrastructure: several infrastructure projects will come to market within our investmenttimeframe,whichwillincreasethedemandforshippingvessels,andthus,addtop-linegrowthoftheremainingbusinesses.

Between 2014 and 2030, the US Energy Information Administration (“EIA”) hasprojected that global energy consumption will increase by 44 percent. By 2035,promoted by demand in the growing Asian market, natural gas will move intosecondplaceintheglobalenergymix,behindoilandsupersedingcoal.i

Lackoftransmissionnetworksandthefactthatfouroutofeveryfiveinfrastructuremegaprojects fail in theirobjectivesdue to longdevelopment times,highcostandsubstantial budget overruns, floating liquefied natural gas units are increasinglybecomeseenasthesolutiontothefutureofnaturalgassupply.

What’sthebigdealaboutaFLNG?Lessismore.

§ LessCost:theFLNGunitsreducethenumberofelementsintheLNGsupplychain,andcostlyancillaryinfrastructuredevelopmentsthatarenecessaryforonshoreterminalsandsubjecttoindividualcostoverrunsanddeadlines.Thisleaner,morecost-effectivechainalsomeansthattimetofirstproductionisalsogreatlyreduced.

§ LessPolitics:naturally,energyisfoundinuneconomicalareas–FLNGhelpsthisproblem.Inmostcases,landaccessgrants,delaysonconstructionpermits,andgeopoliticalissuescanaddyearstoanLNGproject(SeeAustralia).TheseabornenatureofFLNGcanhelpcircumnavigateseveralofthesefundamentalproblemsthatareubiquitousforonshoreterminals.

§ LessEmissions:LNGisbyfarthecleanestfossilfuelandthus,theFLNGprojectswillhavetheabilitytoreducecarbonemissionssubstantiallywhencomparedtoonshoreplantsandotherfossilfuels.



FLNG–TheFutureMarket

Despitebeingheavilydebatedoverthepastmillennia–sizedoesnotmatter–it’sthemotionoftheocean;thismotionhasaconsiderableamountofinfluencewhendealingwithaboatholding175Olympic-sizepoolsworthofmethane.Unlikethefirstcoupleofprojects(i.e.,Shell’s$13BPreludethat will travel to Western Australia for a 25-year contractii), the majority of FLNG’s will beconceivedtomonetizesmallmarginalgasfieldsandwill,therefore,havetobeofsizeandcosttocomplementtheeconomicprofileofboththecompanyandthefield.

Top3reasonswhythisisimportant:

1. FLNGvessels are theoptimal choice inextractingnatural gas in aneconomic fashionwheredemand ishighest:SoutheastAsia.SmallerversionsofFLNGprojectswillhave theability todevelop smaller marginal gas fields in this region (e.g., Malaysia) and market the energyregionally.

2. FLNG will be able to relocate and be a prime solution for those gas fields that lackinfrastructureaswellasforareasthatarenotwellpreparedsuchasPapuaNewGuinea–anareathatGolarwilldevelopwithOphirEnergy.iii

3. FLNGprojectswillbelocatedamongthecoastlineoftheworld’sfastestgrowingpopulations–this ismonumentalshift inbothenergyanddemographics;naturalgas in turnreflects thesepopulationsinasense:longhistory,exponentialgrowthinrecentdecades,andakeypartofourworld’sfuture.

NaturalGasThesisAsecularbearmarkethascurtailedgrowthinthesupplyofnaturalgasanddemandhasincreasedduetoelectricitygenerationandindustrialdemand.Asabyproductofoildrilling,thesupplyofnatural gas will fall further as many oil companies discontinue operations when oil priceseventually push high-cost producers out of the market. Unlike oil, natural gas prices will risethroughoutthedecade–changingtheentirelandscapeoftheworldenergymarket.

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NaturalGasPrice



ThePartnership

Withgreatcomplexityoftencomesgreatopportunity– if thisclaimis true,Golarshouldbeonehelluvaanopportunity.Mynaturalpredilectiontoshort-sellinghasmadethisthesisaninterestingcase–Ihavespentcountlesshoursfindingthesourceofthesetransactionsasthecorporateshellgameamongstpartnershipstypicallyraisemorequestionsthancapital.Myconclusion–althoughnaturallybiased–wasasurprise:theshellgameisonenotofdeceit,butofsurvival.Duringtheseuncertain times, opportunities are abundant – value however, is few and far between – Golar,withoutquestion,isoneofthegreatestvalueopportunitiesinthemarkettoday.

A Master Limited Partnership is a common legal structure found in the energysectorthatconsistofa limitedpartnersandageneralpartnership;MLPspaytheirinvestors throughquarterly requireddividends; typically, thehigher thequarterlydistribution paid to limited partners, the higher themanagement fee paid to thegeneralpartner.

A GP in anMLP beginswith a small stake in the partnership (~2%) but is givenincentive distributions (“IDRs”) from net income after the quarterly distribution(NOTE:Sincethesedistributionsarenormallypaidintheformofincreasedequityclaims,theGPmayattainanincreasedshareoftheMLPownership.)

GLNGownsapproximately19,000,000shares(~29.8%)ofGMLP,twopercentoftheGP,andalloftheincentivedistributionrights–theserightsentitlethecompanyto25%ofGMLP’sdistributions- will go to 50% after the drawdown of the FRSU Tundra (The Tundra is currently underconstruction and will be delivered in December 2015 – dropdown should be Q4 of 2016).Typically,thecompanytransactswithGMLPasfollows:

Asofwriting,GLNGholdsthefollowingvessels(lessGMLP):

§ 11operatingLNGcarriers(10moderntri-fuel+1oldercarrier):allbuttwoofthesecarriers(CrystalandFrost)operateunderspotcontracts,thepreviouslytwomentionedarecontractedwithNigeriaLNGthrough2015.

§ 3ancientcarriersthatwillbeconvertedtoFLNGpost-FID(Gimi,Gandria,andAbuja).o TheAbujawaspurchasedfromBonnyGasTransport–theshippingcompany

associatedwithNigeriaLNG(purchaseprice:~$20M)§ 1FLNGConversion(Hili):90%ownership,Keppelowns10%stake(60%complete).§ 2FSRU(Tundra&Newbuild)–underconstructionuntillate-2015and2018,respectively.

GLNGconstructsavessel

GLNGsecuresalong-termcontract(>5y)

GLNGsellsvesseltoGMLPat~7xEBITDA



TheVesselsofGolar

Before navigating through the financials, it is important to familiarize yourselfwith the vesselswithin thepartnership.As for theMLP, thedarkblue indicatesa long-termcontract; theblue isindicative of extension options; robin’s eggs blue indicates spot contract. Going forward, asweanalyze thesevesselsandtheirpotentialcash flow,eachship isassociatedwithan independentcredit facility – all with differing contract structures, debt organization, andmost importantly,futurecashflows.

Ship Built Charterer 2015 2016 2017 2018 2019 2020 2021 2022 Golar MLP Methane Prin. 2003 BG Group

Golar Winter 2004 Petrobras

Golar Spirit 1981 Petrobras Golar Mazo 2000 Pertamina Golar Freeze 1977 DUSUP

N.R. Satu 1977 Nusantara Golar Grand 2006 BG Group Golar Maria 2006 Eni SpA Golar Igloo 2014 KNPC Golar Eskimo 2014 Jordan Golar LNG Hilli 1975 Converstion Gimi 1976 Candidate Gandria 1977 Candidate Golar Arctic 1980 Candidate Golar Seal 2003 Spot Golar Celsius 2013 Spot Golar Crystal 2013 Spot Golar Glacier 2014 Nigeria LNG Golar Penguin 2014 Spot Golar Bear 2014 Spot Golar Frost 2014 Spot Golar Kelvin 2014 Nigeria LNG Golar Snow 2014 Spot Golar Ice 2014 Spot Golar Tundra 2015 Spot FSRU New 2017 Construction

AFewQuickFacts:

§ Post-2000vesselshavecapacityrangingfrom140,000-162,000§ TheGolarMazoisjointlyownedbytheChinesePetroleumCorporation(~40%)§ Thecurrentspotrateis$40K/day–downfrom$120K/dayin2012§ 80%ofLNGshippingbusinessisdonevialong-termcontracts§ VesseleconomicsunlikelytoimproveuntilcapacityrampsupinAustralia/U.S(2017).

Golarhasoneoftheyoungestfleetsinthemarket–thisqualitycontributestotheeconomicsasnewershipstypicallyhavelowerfuelexpenses.Forthefirstpartofouranalysis,wewillplaceavaluationon the existingbusiness– aplatformwewill use to analyze thedownside riskof thetradeaswellastheasymmetricopportunitythatwebelievehaspresenteditselfinGolarLNG.



Valuation:LessFLNGOpportunity(downsideprotection)

The valuation of this company less the FLNG opportunity can be readily quantified as sell-sideanalyst readily cover this industry and the majority of business is completed via long-termcontracts. Although we could go through the complicated structures and forecast potentialspreadsandspotprices,weareneithercommoditytradersnorshippingexecutives;therefore,ourassumptionsarebasedonthosewhoare.

TheTri-FuelDieselCarrier(“TFDE”)valuationwasbasedonindustrycompsanddatacompiledbythe sell-side, we see little fluctuations as these prices are well known and can be quantifiedwithoutmucharithmeticasvesselsupplyandcapacityprojectsarewellknown.

Golar LNG Valuation: LNG + FRSU + GMLP

Vessels Value Total TFDE (2013/2014) 10x $200M $2,000M LNG (Arctic) 1x $115 $115M FSRU (Tundra & Newbuild) 2x $270M $540M Less: Rate Guarantee $50M Fleet Value ~$2,605

Shares GMLP Price

Shares 18.9Mx $20.36 $384.80 Cash Flow Multiple

GP/IDR $17.70 20x $354 GMLP Value $698.5M

Cash $375 Loan GMLP ($120M Paid) $100

Remaining CAPEX: Newbuild ($257) FLNG Payment (Hili & Gimi) $470 Total Debt ($1,666) NAV $2,325.00

Shares Outstanding 93.4M

Value Per Share $24.90

Note:Value&MultipleAssumptionsviaJamieBurke’sSumZerowrite-up.

The consensus valuation for this business amongst analyst comes in around ~$27.5 per share($25-$30),wefeelthatitisonthelower-endofthatspectrum.Currently,thedividendyieldstands~5 percent~$0.45 per sharewith a $37 average share price. Despitemy distaste of stress-testscenarios, it appears that the dividend should theoretically stay intact under a multitude ofdisastrouscircumstances(didnottestasinkingship).Giventhemoataroundthisbusinessalongwith themost respectedmanagement team in the industry, thedividend is safe.Downside riskcomesinat~25%withabackdropofasteady5%yield.



TheOpportunity:GoFLNGProjects

PerencoCameroon

§ ProjectwillbegininQ22017–eight-yearprojectlife(opportunitytobringremainingtwotrainson-line,theoddsofthisoccurringistoospeculativetocommenton)

§ Perencowillutilize2of4trainsonFLNG.PotentialtoutilizeothertrainsifGDFSuezlooksforalternativesinnearbyKribiGasField.

§ BothKeppelandBlack&VeatchhavetakenequitypositioninHiliasprojectiscominginaheadofscheduleandunderbudget.iv

§ SocieteNationaledeHydrocarbures(“SNH”)isJVonproject.v

§ Projectcouldbringin$170-$300EBITDAinfirstfullyearofoperation

§ Extremelylowbreak-evencost.

ThetotalcostoftheHiliconversionisexpectedtobearound$1.2B~$475/ton($846MinCAPEX+$304 CAPEX on Jetty and contingencies). As with similar LNG projects, free cash flow can bederived from modeling the tolling fee with liquefaction metrics; tolling fees are flexible andcorrelates with Brent Crude prices – ranging from a floor of $60/bbl to a ceiling of $102/bbl(we’regoingtogoaheadandassumethelatterwillnotbetakingplace).

Each shipwillmost likely be financed by the following: drawdown of 70% from credit facility($800M)andissueequityfortheremaining30%($370M);interestcostwillbe$44.3Mperyear,andwe’llassumeafeeof$25M.Usingthesemetrics,whichwewillillustratelater,willequatetoaround$122Minleveredcashflowforthefirstoperatingyear(FCFyield~33%).

Asmentionedearlier,itisanticipatedthatthegasreserveswillbeproducedatarateof1.2milliontonnesofLNGperannum(“mtpa”).Forsimplification– if that’sevena thingat thispoint– thetolling contract usesMMBtu (“trillion btu”); to convert trillion btu tomtpa,wemultiple 1.2 by50.2,givingus60.24trillionbtuperyear.Lastly,wemultiplyourexpected$3.30tollingrateby60.24M,givingus$198.8Minrevenues.vi

Somequickfacts:

§ The fixed-cost forPerenco is$4.80perMMBtu; thevariable transportationcostranges from$0.69 forEuropeand$1.73toAsia.Therefore, thebreakevencost forspotprices is$5.49 inEuropeand$6.53forAsia;bothare$6.30and$8.50,respectively.

§ GoLNGvesselsareextremelycost-efficientrelativetocompetitors,Hiliwillcostapproximately$475/ton.



EquatorialGuinea–Ophir

§ Projectwillcommence1H2019,contractwilllast20years.vii§ LNGwillbemarketedbyOphir’spartner–GEPetrol.§ FIDisexpectedtotakeplacein1H2016–followingFEEDstudy.§ EBITDAinfirstfullyearofoperationcouldbearound$350M§ Managementpurportslifespanofprojectcouldbeupto30years–thiscouldincreasethe

contractlifeby50percent.

Accordingtomanagement,thepuregasandgentleseainthisspecificarea(Block-R)isoptimalforGolar’sFLNGtechnology;unliketherelativelyshallowconditionsintheCameroonproject,thegasinBlock-Risdeep–reallydeep,like1,200m.Fortunately,OphirwillpayGolarfortheadditionalcapitalcostneededtoextractgasatsuchlevels.Asmentionedearlier,thereisanupstreamFEEDstudytakingplacethatshouldconcludein1H2016–theFIDwillfollow.

TheEquatorialGuineaprojectisfivetimeslargerthantheoneinCameroon–2500Billioncubicfeet vs. 500Billion cubic feet, respectively.With such a larger field, the company anticipates toproduce2.2mtpaperyear.Ata$3.30tollingfee,thisprojectwouldbringin~$365Minrevenues–or about$280 in levered free cash flow (this assumes$40MOPEX/Maintenanceand$44M ininterestwithsimilardebtcost).

WestAfrica-Gimi

InMarch2015thecompanyannouncedtheirintentiontoenterintonegotiationswithKeppelfortheconversionoftheirthirdFLNGvessel–theyshouldannounceapartnerwithinthenextseveralweeks/months. According to management, despite in discussions with Russia’s Rosneft andCanada,theupcomingprojectwillmostlikelynotbeintheirtimetableandwillmostlikelybeinWestAfrica;however,itisunlikelythatitwillbeintheCameroon/Guineaarea.ThisFLNGprojectisonscheduletobedeliveredin2018.



LatinAmerica–PDVSA/Rosneft

§ July2014:RosneftandPDVSAsignsaCooperationAgreementtoimplementoffshoreprojectsinRio-CaribeandMejillonesBlocks(PhaseIIoftheMariscalSurceProject)

§ March 2015: Golar announces a Memorandum of Understanding with Rosneft to developopportunitiesforuseofGoFLNGtechnologyinVenezuela.

§ Capacity&Tollingagreementslikelytobeintheneighborhoodofpastdeals–2.5mpta.§ Start-updatescouldpotentiallybein2019/2020.§ ThepartiesaretargetingthesigningofTWOFLNGcontracts.

According Wells Fargo Analyst, Michael Webber – “Depending on the specifications and riskinvolved, we could see a similar tolling level to Golar LNG’s other projects of $4.00/MMBtu –althoughitremainstobeseen–withthosetollsequatingtoanunleveragedinternalrateofreturnof 15-20%”. For this specific project, the LNG capacity is expected to be 4.7mtpa – this is thereasonforthetwoseparate,four-trainprojects.

“ThismeansGLNGwillhavecommodityexposure,reducingtheriskprofile.ItseemsGLNGisnowmorefocusedonsecurityvisiblecashflowsthroughtollingfees.Thismakessensetousasthecurrentpricingofgaswouldleavelimitedupsidetogasownership.”

Rosneft holds a tremendous amount of reserves –most ofwhich is in Russia; namely, Russia’sNorthPacificRegion,thiscouldbedevelopedasa ‘FarEasterLNG’projectwith~5mtpa(thisishighlyspeculative,bothworthnoting).Inadditiontothesereserves,RosneftalsoownssignificantresourcesinVenezuela–includingvolumesfromflaring.AccordingtoanErikStavseth,ananalystatArcticSecurities, “The fact thatpartof the fieldsare flaringgas todayunderpinsGolarLNG’sstrategytohelpdevelop‘zerovalue’gas”.



CedarLNG–Canada

Althoughyearsdowntheline,Canada’sLNGindustrycould–andmostlikelywillbe–oneofthemajorplayersintheunconventionalenergyrevolution.Golarrecognizesthis–thecompanyisindiscussionswithCedarLNG–anexportdevelopmentcompanyownedbyCanada’sHaislaNation.The Haisla people have occupied the Haisla territory, located on four million acres of BritishColumbia’swestcoast,forover9,000years–soyeah,they’rereadytomonetizeit.

In September, the Haisla-owned company applied for an export license to the National EnergyBoard for threeproposed liquefactionprojects– themarketing focuswillbeonAsia,obviously.This istheperfectopportunityforGolarfromamultitudeofperspectives–thiscouldalsobeinthesamevicinityofafutureRosneftdevelopmentinoffshoreRussia.

Theexportlicenseapplicationeachrelatetoaproposalforvolumesofupto2.9mtpa,witha15%annual tolerance, over a period of 25 years. The point of export would be at the outlet of theloading arm of the liquefaction terminals, which would be located in the Northern DouglasChannel,nearKitimat.Themetricsaresimilar topastdeals,analysthaveattachedabouta40%probabilitythatthisprojectwillcometofruition–whichisprettydamngood.

Left: Currently, there are a totalof 26 applications for an exportlicense. Despite the relativelylarger number, the resourcepotentialinthisareaisequallyasmassive. Cedar’s threeapplications amount to a totalexport capacity of 2Bcf/d. Weexpect a decision on theseprojects in early 2016 – theycouldpossiblycomeonlineattheendofthedecade2020/2021.

Right: As illustrated by the graphic totheright,themarketingforthisgaswillfocusonSoutheastAsia. Youknow thepossibilities here – we’ll save you themind numbing financials. The point isthat confidence and inquiry is buildingin this technology – and mostimportantly, this company isbecomingless correlated with the price of LNG.Welikethat,especiallyasthearbitragebetweenmarkets tightenanddomesticpricesriseoverthenextdecade.



PartnershipReview

Pertheillustrationbelow,approximatelyonequarterofcompany’sequityisownedbytwolargeinstitutions:CapitalGroupandFMR.Furthermore,asdiscussedpreviously,thecompanyholdsasignificant position in the partnership,which is followed by a short list of institutionalmoney;namely,GoldmanandOppenheimer.Despiteourtrustinmanagement/BOD,webelievethattherearetwosignificantcharacteristicsthatshouldbetakenawayfromtheshareholderillustration:1)both companies are owned by large institutions; and 2) with a 13 percent yield from thepartnership,we should be able to protect our downside risk aswell as be paid towait for thefuturecatalystwithinourtimeframe.

17%

9%

4%4%

3%3%

2%2%

42%

GolarLNG

CapitalGroup

FMR

BHR

TorOlav

SteinbergAsset

Jana

BOA

TaubeHodson

BarrowHansley

41%

12%9%

9%4%

4%3% 18%

GolarLNGPartners

GLNG

Goldman

KayneAnderson

Oppenheimer

Salient

Cushing

Heuber

Other

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GolarLNGLtd.(Nasdaq:GLNG)



Valuation

Ourvaluationtechnique isasmethodicalas it isspeculative;ourmostvulnerableassumption isthe belief that current projects will continue on schedule – a broad assumption. For eachprospectiveproject,wewilldiscountthefuturecashflowsasprojectedbyourownassumptionsand then combine these metrics with the partnership – we will use past transactions as abarometertogaugebothmultiplesanddistributions.

OurfirstmodelforecastthefuturecashflowsfromHili–theprojectsareforwhat iscontractedonly,wearenotspeculatingonthepotentialrevenuesfromadjacentfieldsortheutilizationoftheremaining two trains. The 8-year contract is worth about $7 per share, andwill eventually bedropped down to GMLP at 7.5x EBITDA~ $1.2B. This amount is equal to the present value offuturecashflowsovera25-yearlifespan–lessthepresentvalueoftheconstructioncostspreadoverthethreeyearsofconstruction($1.2B).

Although the sum is $686.3M for the three-year contract, remember that Keppel owns a 10percentstakeinthevessel–thus,thediscountedcashflowswouldactuallycomeoutto$617.67.Inthetablebelow,youwillhowwecalculatedthesefigures:

Hili Project 2018 2019 2020 2021 2022 2023 2024 2025

EBITDA $170 $170 $170 $170 $170 $170 $170 $170

Utilization 95% 95% 95% 95% 95% 95% 95% 95%

Depreciation $42.21 $42.21 $42.21 $42.21 $42.21 $42.21 $42.21 $42.21

EBIT $119.29 $119.29 $119.29 $119.29 $119.29 $119.29 $119.29 $119.29

Tax $4.77 $4.77 $4.77 $4.77 $4.77 $4.77 $4.77 $4.77

NOPLAT $114.52 $114.52 $114.52 $114.52 $114.52 $114.52 $114.52 $114.52

Salvage Value $18.00

Investments (Dry Dock)

$9.94 $10.14 $10.34 $10.54 $10.76 $10.97 $11.19 $11.41

CF to Total Capital

$146.79 $146.59 $146.39 $146.19 $145.97 $145.76 $145.54 $163.32

Factor of Discounting

10.95% 10.95% 10.95% 10.95% 10.95% 10.95% 10.95% 10.95%

DCF to Total Capital

$119.25 $107.33 $96.61 $86.95 $78.25 $70.43 $63.38 $64.11

Sum $686.30

In thenext table,wewill use a similarmodel to value theGimiProject. UnlikeHili, thisprojectcomesundera20-yearcontract.Iwasunabletocalculateareasonablescrapvalueforthisspecificvessel,sotakethatforwhatyouwill.Asinthepreviousproject,weusedataxrateof4%alongwithadiscountrateof10.95%.Ofcourse,asinbothmodels,theinvestments(drydock)feesareupdebate–welookedatcomparableprojectsandaskedseveralanalysts,it’sareasonableamountthatshouldnotveryimmensely.



Gimi Project 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028

EBITDA $365 $365 $365 $365 $365 $365 $365 $365 $365 $365 Utilization 95% 95% 95% 95% 95% 95% 95% 95% 95% 95% Depreciation $42.21 $42.21 $42.21 $42.21 $42.21 $42.21 $42.21 $42.21 $42.21 $42.21 EBIT $304 $304 $304 $304 $304 $304 $304 $304 $304 $304 Tax $12.18 $12.18 $12.18 $12.18 $12.18 $12.18 $12.18 $12.18 $12.18 $12.18 NOPLAT $292 $292 $292 $292 $292 $292 $292 $292 $292 $292 Dry Dock $10.14 $10.34 $10.54 $10.76 $10.97 $11.19 $11.41 $11.63 $11.85 $12.07 CF to TC $324 $324 $324 $323 $323 $323 $323 $322 $322 $322 Discount 10.95% 10.95% 10.95% 10.95% 10.95% 10.95% 10.95% 10.95% 10.95% 10.95% DCF to TC $237 $213 $192 $173 $156 $140 $126 $114 $102 $92

2029 2030 2031 2032 2033 2034 2035 2036 2037 2038

EBITDA $365 $365 $365 $365 $365 $365 $365 $365 $365 $365 Utilization 95% 95% 95% 95% 95% 95% 95% 95% 95% 95% Depreciation $42.21 $42.21 $42.21 $42.21 $42.21 $42.21 $42.21 $42.21 $42.21 $42.21 EBIT $304.54 $304.54 $304 $304 $304 $304 $304 $304 $304 $304 Tax $12.18 $12.18 $12.18 $12.18 $12.18 $12.18 $12.18 $12.18 $12.18 $12.18 NOPLAT $292 $292 $292 $292 $292 $292 $292 $292 $292 $292 Dry Dock $12.20 $12.43 $12.66 $12.90 $13.14 $13.38 $13.63 $13.88 $14.13 $14.39 CF to TC $322 $322 $321 $321 $321 $321 $320 $320 $320 $320 Discount 10.95% 10.95% 10.95% 10.95% 10.95% 10.95% 10.95% 10.95% 10.95% 10.95% DCF to TC $83.50 $75.21 $67.74 $61.01 $54.94 $49.48 $44.57 $40.14 $36.15 $32.55 Total $2,096

Forourtotalvaluation,wecalculatedthediscountedcashflowsforallvessels–we’llsaveyouthemind-numbingspreadsheets(ifinterested,pleasee-mailusandwe’llsendthemover).ForthosevesselsundertheMLP,wemultipliedthepresentvaluebythepartnershipinterest(~41.4%)torealizethosediscountedcashflowsowneddirectlybyGolarLNG.Furthermore,derivedageneralcostforbothLNGandMLP,thesecameto$282Mand$70,respectively.However, inthecaseofGLNG,thosecashflowsowedbyGolarareonly$29MfortheMLP($70Mx41.4%).

Less the debt and add the cash, the value of the equity comes out to around $65 per share ~doublethecurrentshareprice.Ofcourse,thefuturecashflowsfromtheLNGcarriersarehighlyspeculative,webelieve that spotpricesarebottomingoutandshouldnotgobelow thealreadydepressedrates–despitethis,wedonotagreewiththeconsensusthataveragespotrateswillbe$70K-$80Koverthelifeofthevessel.

As for theFSRUvessels, thecash flowsaremorequantifiable–mostof thesevesselsareunderlong-termcontractswithintegratedoilandgascompanies.Furthermore,thisprojectiondoesnotincludeanyspeculationonfutureFLNGprojects;namely,theconversionofGandria–aprojectwethinkwillbeannouncedwithintheyearandgointoproductionin2018.

With these assumptions andmetrics in place,we agreewith analyst estimates that each FLNGvessel could add approximately $25 per share to GLNG: $17 from distribution rights afterdropdown,$5viapremiumfromGMLPsell,and$1-$3inMLPshareappreciation.



Vessel Ownership DCF P.I. (~41.4%) DCF to GLNG

FSRUs Golar Spirit 100% $212.60 $88.02 $88.02 Golar Winter 100% $268.41 $111.12 $111.12 Golar Freeze 100% $180.56 $74.75 $74.75 N.R. Satu 100% $125.84 $125.84 $125.84 Eskimo 100% $350.00 $144.90 $144.90 Golar Igloo 100% $350.00 $144.90 $144.90 Golar Tundra 100% $350 N/A $350 Golar Newbuild 100% $350 N/A $350 Carriers Methane Princess 100% $172.54 $71.43 $71.43 Golar Mazo 60% $120.00 $49.68 $49.68 Golar Grand 100% $241.72 $100.07 $100.07 Golar Maria 100% $212.95 $88.16 $88.16 Golar Arctic 100% $241.56 N/A $241.56 Golar Seal 100% $300 N/A $300 Golar Celsius 100% $300 N/A $300 Golar Crystal 100% $300 N/A $300 Golar Glacier 100% $300 N/A $300 Golar Penguin 100% $300 N/A $300 Golar Bear 100% $300 N/A $300 Golar Frost 100% $300 N/A $300 Golar Kelvin 100% $300 N/A $300 Golar Snow 100% $300 N/A $300 Golar Ice 100% $300 N/A $300 Abuja 100% $20 N/A $20 FLNG Hili 90% $617.67 N/A $617.67 Gimi $2,096.80 N/A $2,096.80 Ganderia N/A General Cost GLNG ($282.35) ($282.35) GMLP ($69.72) ($28.86) ($28.86) Total est. DCF $7,363.69 Debt ($1,666) Cash $375 Net Value of Equity $6,072.69 Shares 93.4M Est. USD $65.02

Note: Chinese Petroleum Corporation holds the reaming 40% of Golar Mazo

§ Thenamesofallpost-2000vesselsarearcticrelated,couldbeahint?Probablynot.§ ThefuturefortheAbujaisunsureatthispoint;thecompanyacquiredthevesselfor$20M–a

$4MpaymentinMarchand$16MpaymentinApriltothepreviousowner,NigeriaLNG.§ TheGeneralCostisbasedonprojectedadministrationexpensesthrough2064;$35Mfor2016,

$22Mfor2017,andincrease2%peryearthereafter–projectactivityshouldbelighterafter2017,hencethereduction.

§ WecalculateWACCrangesfrom10.47%-10.95%;wewentwiththehigher.



TheDistributionAsdiscussedearlier,thedropdownofafuturevesselwillbenear-termcatalystfortheequity,asthe increased dividends will double the marginal percentage distribution from 25% to 50%.Additionally,thedropdownmethodhaspreviouslyattractedscrutinyasthemajorityshareholderscould play a shell game to manipulate the accounting; and thus, increase the distributionartificially.Ageneralcontentiontowardsthisargumentwas,“Ifthisisfraudulent,thenalllimitedpartnershipsarefraudulent.”Thisisanexampleofafallaciouslogicandincompetence.The reason why this is not fraudulent is because GLNG relinquished legal control of thepartnershiptoboardofGMLP;andno, it’snot thesamepeople.This isgreatdeal,withanevengreaterfuture.

Golar LNG Partners (GMLP): Distribution Targets - Marginal Distributions to GLNG

Marginal Percentage Interest in Distributions

Distribution Target Unit holders General Partner IDR Holders Minimum Target $0.3850 98% 2% 0%

First Target $0.3850 > x > $0.4428 98% 2% 0%

Second Target $0.4428 > x > $4813 85% 2% 13%

Third Target $0.4813 > x > $0.5775 75% 2% 23%

Thereafter <$0.5775 50% 2% 48%

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GMLPDistribution:ComparetoMarginalDistributionTable



TheDropdownDespitesoundinglikeDwayne“TheRock”Johnson’snexttheatricalbombshell–thedropdownislessadventurousandslightlymorecomplicated.Thedropdown–or,ThePeoplesElbow,tocarrythe analogy further – is based several broad, yet extremely conservative, assumptions andmodeledsimilarlytoindustry-wideanalyst.Anoteworthyquantitativefactorisourmodelisthefinancialsarebasedonanoil-saturatedenvironment;no,we’renotallocatingashipwreck,we’resayingassumingthattheBrentCrudemarketwillstayinwithinthispricingrangethroughouttheendofthedecade.Whichletsfaceit,thisisextremelyspeculative–conservative,bustspeculativenonetheless.Anecdotally,justashortfourteen-monthsago,analystwerecallingfor$200oil–now,ayearlater,the same analyst are calling for 1/10th of that – like I said, speculative.viii The chart belowillustratesWTIPrices aswell as the standarddeviation (Yes, I know– the contract isbasedonBrent,wehaveaforecastonWTIaswellasthecrackspread).

Brent Spot $60 $75 $90 $102 % Change N/A 25% 50% 70% EBITDA $170 $216 $263 $300 % Change N/A 27% 55% 76% Per Share Value N/A $2.28 $4.55 $6.37

Assumptionsbythenumbers:

§ 93,400,000:SharesOutstanding§ $20.00:GMLPSharePrice§ $42.21:AnnualDepreciation§ $20.21:Post-DropdownSharePriceofGMLP§ 1.05:CoverageRatio

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GoFLNG @ Dropdown Hili Gandria Total Bear Base Bull Base Base

Dropdown Acquisition Price $1,150 $1,820 $2,380 $2,450 $4,270 Less: Construction $1,150 $1,150 $1,150 $1,150 $2,300 Gain ($M) $0 $670 $1,230 $1,300 $1,970 Ownership Interest 90% 90% 90% 90% 90% Dropdown Profit $0 $603.00 $1,107 $1,170 $2,300 Per Share $0.00 $6.46 $11.85 $12.53 $19 Distribution Value LP Units $10 $17.35 $21 $25 $42 IDR $15.43 $39.28 $36.76 $65.12 $104 Total CF Distributions to GLNG $25 $56.62 $58 $90 $147

Yield 5% 5% 5% 5% 5% Value of Distributions $502.81 $1,132.41 $1,150.01 $1,802.01 $2,934 Per Share $5.38 $12.12 $12.31 $19.29 $31 Total Value $5.38 $18.58 $24.16 $31.82 $50.40 Years 1 1 1 1 1 Rate 10.95 10.95 10.95 10.95 10.95 PV of Value for GLNG $4.90 $16.91 $21.99 $28.96 $45.86

Depreciable Life 20 20 20 20 Scrap Value $80 $80 $80 $80 Annual Depreciation $42.21 $42.21 $42.21 $42.21 Total Replacement & Maintenance CAPEX $42.21 $42.21 $42.21 $42.21 Acquisition Multiple 6x 7x 8x 7x GMLP Acquisition $1,150 $1,820 $2,380 $2,450 % Debt 50% 50% 50% 50% Debt 575 910 1190 1225 Equity 575 910 1190 1225 Interest Cost 5% 5% 5% 5% New Units Issued 30.26 47.89 62.63 58.98 GMLP Units Before Drop 61.61 61.61 61.61 109.50 PF Units 91.87 109.50 124.24 168.48 168.48

Project Cost $1,150 $1,150 $1,150 $1,150 EBITDA $170 $260 $300 $350 Less: Interest 34 52 60 70 Less: Taxes 6.8 10.4 12 14 Less: Maintenance CAPEX $42.21 $42.21 $42.21 $42.21 DCF $87 $155 $186 $224 Distributed Cash Flows $82.64 $147.62 $176.50 $212.60 New LP Units 57.50 91.00 119.00 122.50 GP on New LP Units $9.71 $17.35 $20.74 $24.98 Remaining Cash Flow $15.43 $39.28 $36.76 $65.12 $104.88



TheCarrierBusiness:Panamax’sParadoxOn April 24, 2006, Then-Panamanian President Martin Torrijos proposed the Panama CanalExpansion project (AKA Third Set of Locks Project) – he would later say this project wouldtransformPanamaintoaFirstWorldcountry,turnsout,hewasprobablyright.Thisprojectwillallowmuchlargervesselstoflowthroughthecanal;thissizeisrefereedtothePanamax.So, what in the hell does this have to do Golar? Everything. Let’s think about the logic here,SoutheastAsia/Japanhasfouroptions:Qatar,Australia,Canada,andtheUnitedStates.Priortothecanalexpansion, a round-tripvoyage fromSabinePass,Louisiana (ChenierEnergy) toFukuoka,Japancostsabout$11.4M(~63.6Days)togothroughtheAtlanticandtransitaroundAfrica.Post-Expansion,thatsametripwillcost$8M(~43.4Days)–a30%pricereduction.Logically, this should reduce revenues for the shippers, right?Not exactly, the $11.4M tripwasneveranoption– if thiswasthecase,Asiawould look forcheaperalternatives(theotherthreelocations) and Sabine Pass would market gas to Europe – which would obviously mean lessrevenuefortheshippers.However,sinceHenryHubpricesaresocheap,AsiawouldopenuptradewiththeGulfCoast–thus,theshipperswillmakemore,astheiralternativewouldbeshippinggasfromAustralia/Qatar/CanadatoAsia.Trustme–it’slegit.Let’scheckoutthechartbelow–thisillustrationrepresentstheglobalmarketforLNG.Asyoucansee, spreads are ludicrous; in 2011, LNG in Asiawas 8x higher than that at HenryHub. In thefuture, as gas trades between countries easier – the spreads will compress; the market willbecomemoreefficient,andGolarwillbeextremelyprofitable.

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LNGJapancif LNGAverageGermanimportpricecif*NaturalgasUK(HerenNBPIndex)* NaturalgasUSHenryHub†NaturalgasCanada(Alberta)‡



“There are twopoints to bemadenow. First, the scale of AmericanLNG exportswill be naturallylimitedbythecompetitionfromotherexistingsuppliersaroundtheworld,aswellasbynewsuppliescomingrecentlargegasdiscoveriesoffshoreofEastAfricaandIsrael.Second,isalargercontext.TheU.S. is successfullypushing Japan to reduce itsoil imports from Iran,oneof the largest traditionalsuppliers.Atthesametime,Japan..isbuyingexpensiveLNGfrombothspotmarketsandtraditionalsupplier in theMiddleEast andAsia to replacenuclear power for generating electricity.How canAmerica,havingaskedJapantoreduceIranianoil imports, turnaroundandprohibit theexportofsurplusnaturalgastothiskeyally?”ix–DanielYergin

AlookthroughthespecsofGolar’sexisting11LNGcarriersshowsthatwhilenoneofthemcouldfit through the canal today, all of themmeet the new Panamax standard. The Panama projectsuppose to be completed by January 2016 – the same time that the Sabine Pass liquefactionprojectwillbecomeon-line.

As capacity comes on-line, spot rates should emerge fromdecade-low spot rates and return toprofitability.Additionally,theimprovedpricingenvironmentwillbeasurprisetomanyandwillthus create an opportunity for thosewho can navigate through Panama’s Paradox. In the nextchart,wewilltakeadeeperlookintothesupply&demandmetricoftheLNGcarriermarket;withthisdata,wefullyexpectspot-ratesthroughoutinvestmenthorizon–anadditionalcatalystandsafetynettoouroverallthesis.

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MiddleEastLiquefaction AustralianLiquefaction OtherSupplySources

U.S.Liquefaction CanadaLiquefaction U.S.PotentialLiquefaction

EurasiaPotentialLiquefaction E.AfriaPotentialLiquefaction AsianLNGDemand



Accordingtothecurrentorderbook,61vesselsweredeliveredbetween2014-15and–naturally–supplyovertookdemandandutilizationfell.Asthechartillustrates,LNGfleetsareexpectedtorebalancethrough2016andtightenin2017asnewexportsupplycomesonline.Spotpricesandutilization rates are both around the thirty-three area ($33K/Day ~ 33% utilization), thecombination of increased capacity and vessel deficit should double the current rates to morefavorabletermsinthe6-18months.

The downward momentum seen in the future surplus curve is due primarily to the futurecapacity; namely, from Eastern Australia and the Gulf of Mexico. In fact, by 2017, Australia ispoisedtoovertakeQatar–theworld’slargestLNGproducer–atmorethan10billioncubicfeetcapacity.However,thisengineeringmarvelhasnotcomewithoutitstroubles–costoverrunsanddelayscontinuetoprolongtheconstructionphase.Thisinherenthurdleisubiquitousthroughoutthe industry – most industrialists are pessimistic about the majority of projects; however, themisfortuneofothersoftenbecomesthetreasureofothers.NorthAmericaisnottoounlikeAustralia– inregardstoLNGprojectsanyways.In2015,SabinePasswillfinallymakeitsdebutandhasbeenapprovedbytheDepartmentofEnergyforFTAandNon-FTAExportation(FreeTradeAgreement“FTA”)x.In2017,CameronLNGandCovePointwillfollow; both are in 20-year agreements with Japan. As Australia runs intomore problems andNorthAmericacomeson-line,shippingcompanieswillbenefitmaterially.Onthenextpage,we’lltakealookatthecurrentgeo-politicallandscapeaswedissecttheworldintocountrieswithFTA(green), thosewithproposedbilateral/multilateralagreements (orange),and thosewithoutanytypeoffutureagreement(grey).

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Inadditiontofuturedemand,theingenuityofthemanagementshinesoncemoreasGolarenteredintodefinitiveagreementswithbothGaslogandDynagastocreatewhatwillbeknownastheCoolPool.xiHopefully,thereissomecleverreasoningbehindthecoinedgroupname–ifnot,weshouldprobablyrethinkourtrustinmanagement.Despitethegenericnessofthename,webelievethatthisgroupwillincreaseutilizationinthenear-termandimprovetheatrociouseconomicswithinthecarrierbusiness.Herearesomethoughts:§ Improveutilizationthroughbetterscheduling;oneofthelargestproblemsinthisbusinessis

being at the right place at the right time (it’s like getting a girl friend inhigh school, it’s allabouttimingthebreak-ups–orinthiscase,positioningthevessels).

§ Allcontractsarelimitedtochartersofoneyearorless.§ Willprovidemoreflexibleandinnovativesolutions,mostly,viacontractleverage.

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Wow,minimalismatatimelikethis?Thepointtothechartaboveistonotmaketheeconomicsofthisprojectharderthanitis–GoFLNGcandoitcheaper,alotcheaper.Speakingofeconomics,theproposedprojectsoftenencounteradetrimentasmarginalreturnsdiminish–meaning,biggerisnotalwaysbetter.Ifwetakealookatthenumbers,GLNGestimatesHiliwillcomeinat$480/ton–theclosetcompetitorHoegh,comesinat$750/ton–over50percentmorethanGoFLNG.ThisiswhattheLNGValueChainlookslike:

GoFLNG

SabinePass

SakhalinLNG

MozambiqueLNG

LakeCharlesLNG

FreeportLNG

CovePointLNG

CameronLNG

Prelude

Tanzania

PacificNorthwestLNG

AngolaLNG

APLNG

WheatstoneLNG

QueenslandCurtisLNG

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CumulativeGasProduction(mtpa):BreakevenPrices/Production

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LNGValueChain



Let’stakeacloserlookatthevaluechain:

§ Purchase of Natural Gas: the advent of US LNG exports paved the way for the use of USdomesticgaspricesasanalternativetotheJapaneseCrudeCocktail(“JCC”)–ablendofvariouscrudesimportedtoJapan.CheniereEnergysignedaHenryHubplus-dealonwhichpricingwas1.15xHH+anegotiatedconstant.

o The 0.15x premium to HH reflects the fuel spent for cooling the produced LNG,whiletheconstantisCheniere’spaymentfortheliquefactionwork.

§ Liquefaction Cost: this cost is also known as the tolling fee, which we estimate to be$3.5/mmBTU,plusthefuelcost(thisincludescapex,opex,andstoragecost).Industryinsidershavesaidliquefactionisanaturalcandidateforcostcutting.Duetothecurrentoilenvironment,Engineering Procurement & Construction (“EPC”) contractors will be hurt as they lackalternativeprojects;therefore,projectsshouldabletonegotiatemorefavorablecontractsandthusreducecapex–capitalcostisobviouslythelargestexpense.

§ FuelCost:thegascostisactuallyavitalcomponenttotheliquefactionprocess.Analystsbelievethat one potential way to cut this cost is from agreeing on a lower price for fuel gas thanexportedgas.FromwhatIhaveseen,theruleofthumbtocalculategascostistotake10%ofthegasvolumesliquefiedtoproduceLNG.Therefore,ifwehave$4/mmBTU,thegascostwouldbe$0.40/mmBTU.

§ TransportationCost: there is limitedpotential for cutting transportation cost.DNBMarketsestimates transportation cost from theGulf ofMexico toAsia (Korea) to be $2/mmBTU, thisassume the use of a modern Tri-Fuel Diesel-Electric (TFDE) vessel and transit through thePanamaCanal($1M).

§ Regasification Cost: as illustrated in the chart, the regasification process is a non-materialcomponent of the value chain. The typical regasification cost for LNG is $0.30-0.40/mmBTU,which includes storageofLNGat the receiving facility.About95%ofall regasifiedvolume iscurrentprocessedon-shore;theremaining5%isregasifiedatanFSRU.

Production Gas Liquefaction(andstorage) LNG Shipping

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Pandora’sPonzi:AShortStory

Ifyouarestillreadingthisresearchpaper,youaremostlikelywellawareofPine’sstrategy:top-downmacro,event-driven,andupuntilthisinvestment,voraciousshort-seller.ThisproclivityforpessimismleadsmetoasksimilarquestionswhenitcomestoGolar–biasisavirus,let’sleavethetongue twistersand takea lookat thebook.For this analysis, I asked severalprominent short-sellers(naturally,theychosetoremainanonymous)fortheiropinion–IneverdisclosedthefactthatIwaslookingatalongposition–youknow,torefrainfromthebias.Question: The distributions of Golar LNG Partners (GMLP) look a little Ponzi-ish, aren’t thedividendsarepaymentofcapitalinvestedratherthanareturnoninvestment?Answer:Thisisagreatquestion,andonethatIstruggledwithinitially.However,tostart,Ithinkmostpeoplethatlookatthiscompanystartwithafalsepremise:GMLPisnotaMLP–Iknow,itsoundssketchyright?Here’sthedifference,GMLPisincorporatedintheMarshallIslands–likeallof the subsidiaries (vessels) and shipping income is generally untaxed by local jurisdictions;therefore,theyarenotrequiredtopayout>90%ofincometounitholderstoqualifyfortax-freestatus.Weagree–thetickershouldprobablybechanged.Here’sthepointthough:thecompanyoperateslikeanMLP,butwithholdsasufficientamountofcashflowtosustainoperations–somethingthatseveralMLP-likecompaniesshould takenoticeof (Iwouldname-dropacompany,but I’m fromTexas–oddsareIknowatleastonepersonthatworksthere,notveryTexan-like).Question:Howdo theygetawaywith sellingvessels toGMLPat inflatedprices? It looksas if themajorshareholderisplayingashellgame–Imean,theminorityholdersaregettingscrewed.Isn’titodd that the ‘independent valuation’ used to sell the vessels are provided by the same firm thatunderwrotetheGMLPIPO?Answer:Let’sbehonest–sellingvesselsat>8xEBITDAisexpensive,andmostimportantly,ahellofa lotmorethanwhatGLNGpaidfortheconstruction.Here’sthethingthough,thereisahugelucrativecontractattachedtothesevessels–weshouldn’tvaluetheseassetsbytheirconstructioncost.Themajorityofthesevesselswillstillhavehalfoftheiruseful lifepost-contract, ifwetaketheNPVatareasonablediscountrateandaddthevalueofthevesselpost-contract,thevaluationisn’tcrazyatall.Question:Thequalityofearningsisterrible–plus,Golardoesn’texactlyhaveaperfecttrackrecordfornewprojects.Whywouldyouthinkthefuturewouldbeanydifferent?Answer:Thequalityofearningsisterrible–that’sreadilyapparent;paradoxically,thisprovesourpointinourbeliefinmanagement.DespiteashittyLNGshippingmarket–we’readultshere,let’scallitwhatitis–thecompanyhassteadilypaidgreatdividendsandhasdoneanincrediblejobofadaptingtotheenvironmentbyturningtrashintotreasure(e.g.,Hiliconversion).Ofcourse,theirrecorddoeshaveblemishes,buttheseweresmallasymmetricgambles–somedidn’tpayoff,butthese are severalmillion dollar bets – I hope they keep taking them. Furthermore, they’ve hadsomeincrediblesuccesstoo–one’sthattransformtheindustry(e.g.,FSRU).



NegativeCatalyst1. Fredriksen’s departure and apprehension towards FLNG technology could point towards

futureproblemsandshinelightoninternalproblemspost-downfall.2. Natural Gas becomes drastically oversupplied as global infrastructure/capacity comes to

fruition; LNG drops below breakeven prices, situation becomes exacerbated as Brent Crudestrugglestofindfloor.

3. Golar’scounterpartiesarenot integratedoilcompanies–but in fact,smallerE&Pfirms(e.g.,OphirEnergy);duetoamultitudeoffactors,thecontractscouldnotbefinalized(i.e.,FID)

4. If one of these catalyst are true, GLNG has massive contracts with the shipbuilders – thecompanywouldbeout theirmassive investmentas thecontracthasplacedGolar’snuts inavice.

Fredriksen’sFarewell–WTF?

Argument: The founder of the company, John Fredriksen – one of the richest persons on theplanet–hassoldoffamajorportionofhisholdingsinGolarLNG;thissell-offbeganinthemiddleoflastyearastheoncedubbed“DynamicDuo”FridriskenandTorTroim,decidedtodivorcetheirbusinessrelationship.Albeitirrelevant,it’sworthnotingthatTroim’sdeparturefromSeatankersGroup – Fredriksen’s holding company, and more importantly, the nucleolus to this nebulousdivorce– landedhimaseverancethe included3MsharesofGLNGand2MsharesofSeadrill,orabout$267M.

So, as I am sure you’re wondering – why would the largest shareholder, and founder for thatmatter, liquidate his holdings just as his company is on the precipice of making a shit-ton ofmoney? Zero clue, what makes this odd is that Fredriksen is known for his iron-stomach andtakingspeculativerisk–thereisobviouslyinformationtherewesimplydonotknow.FromwhatIhaveread,thisdivorcebeganwithGolar–FredriksendisagreeswiththeFLNGmarket.

Ofcourse,wecannotspeculateonthemood-swingsofaNorwegianShippingMagnate–however,we canassume thatFredriksenwouldnot liquidatehisposition if hewas fully confident in thefutureofGolar;thisobviouslyleavesuswithmorequestionsthananswers.

Rebuttal: Let’s not get it twisted;we’re talking about a guy – JohnFredriksen –whomadehisfortunebytransportingoil in/outofbattle-strickenareasduringtheGulfWar(i.e., theIran-IraqWar), Ihardlybelievethathisdivestment isduetoriskynatureinFLNG.If thereisanyonethatshouldbeworriedaboutprojectdevelopment, itshouldbetheonshorefacilities–nottheFLNGvessels.Theventureobviouslyhasitsrisk,butthat’sinherentinanyopportunity,wehaveyettofindanyevidencethatthisisanythingmorethantwobusinessmenpartingways.

LNGOvercapacity

Argument: there’s no argument here – when these operations come on-line, there will be asupply-gut,notquestionabout it. In theUSalone,60MtonsperyearofLNGcapacity isalreadyunder construction; internationally, there is about 140M tons per year in the works (currentmarket is forabout250Mtonsperyear).However,despite themathematical axiom, companiesarestillmovingforwardwithplanstoputanother100Mtonsperintoconstructionthru2017–whatinthehellaretheythinking?PerWoodMackenzie,iftheseprojectsarerealized,thesupplygutcouldlastthrough2025.



Theproblemisthattheproposedprojectsdidnotcomeeasily–mosthavebeenintheworksforyears,workingwithlocalcommunities,environmentalregulators,andthefederalgovernment,thecompanies will shelve these projects until they lack any other alternative. Furthermore, thissupply gut is forecasted without a slowdown in China – obviously, that scenario is definitelypossible.

Rebuttal: in a perfectworld, the above contention appears logical; however,we don’t live in aperfect world, and people – most of the time anyways – do not throw goodmoney after bad.DespitethebullishexpectationsonLNGcapacity,amultitudeoffactors(e.g.,HUGEcostoverruns,poorplanning,andskinnymargins)willmostlikelyshelvecountlessprojectsacrosstheworld.AsUS LNG exportation, the shale playerswill most likely be able to continue to supply relativelycheap gas to the rest of the world for the foreseeable future – most analyst undermine thispossibility because they fail to consider the rapid evolution of technology. If necessity is themotherofinvention,expectshaleplayerstofindwaystobecomemoreeconomical.

Moreover,theovercapacitywillleadtocost-cuttinginitiatives;namely,intheliquefactionprocess–aprocesswhereGoFLNGisamongthelowestcostproviders.Furthermore,fallingLNGpricesinAsiawill actually stimulatedemand– it’s just likeoil: thebest cure for lowoilprices is lowoilprices.ThelargestconsumersofLNGareamongthemostprice-sensitive;inparticular,ChinaandIndia–implyingthattheLNGmarketcouldactuallyexpandmorerapidlythanpreviouslythought.

TheFSRUsegmentshouldalsobenefitfromovercapacity/lowprices,thesevesselsprovideafast,cheap,andflexibleapproachprovidesregasificationservicestoareasthatlackanexistingimportinfrastructure.

TheCounterparty

Argument:OphirEnergy’sstockpriceisdown~65%overthelasttwelvemonths;theirmarket-cap is justover$600M– theFortunaFLNGprojectalone isestimatedat+$800M, there ismoreriskherethanpeoplethink.Thecompany’scapitalstructuremustbeextremelyflexible,beingabletoscalebackcapex immediately if thingsworsen– if theFIDdoesn’tcomethrough,Golarcouldfindthemselvescompletelyscrewed.

Rebuttal:Relative toExxon,yeah–OphirEnergy is a smallE&PPlayer;buthell, relativeSaudiAramco–ExxonMobileisasmallenergyplayer.Inthiscase,it’snotaboutthesize,it’sabouttheliquidity, it’s about the numbers – nothing more, nothing less. Although we’ll get back to thecapitalrequirements–thisisOphir’sCOO,BillHiggs,onGolar:

“…we’vemaderealprogressinde-riskingtheproject[EquatorialGuinea]throughthefirsthalfoftheyear.EGisessentiallya$60MoptiontoFIDtorealizeamultipleofthe$600Minvestedintheprojectto date.We continue in very live discussionswith numerous gas buyers that are attracted to theproject.AndIjustremindedeveryonethatourgoal,withthe2.2milliontonsperannumoff-take,isthat we’re trying to sell <1% of the global LNG demand. And we see the project has very, verycompetitivecoststack,whichmakesitcompetitivewithprettymuchanyprojectouttherethat’sinthemarkettoday.”xii



Projecting Ophir’s success is beyond the scope of this thesis – however, the economics of thisproject will attract JV and Upstream partners. They will most likely have to sell down equityand/ordebt but the cost structure really is unlike anyproject on theplanet – the likelihoodofreceiving a FID in mid-2016 is ~90%. Even with the modifications needed for this project,liquefactionshouldbelike≤$3.75/mmBtu.

Whointhehellisholdin’thebag?

Argument:thedollar-sizeofthismarketisgigantic,however,themarket-sizeisnot;meaning,iftheprojectdoesnotgoasplan,thereisonlyashortlistofpotentialbuyers.Furthermore,thesell-sideunderestimatestheengineeringthatwillhavetogointothisbuild–we’retalkingaboutoneofthemostcomplexconstructionchallengesofthedecade,whathappensiftheycan’tdeliver,allthecomponentstiedtothisprojectaretiedtothepriceofoil–ifthepricecollapsesfurther,Golarcouldbetheoneholdingthebag.

Rebuttal:asIanClarkepointedoutinhisKeppelresearchthesis,thecontractisactuallyinGolar’sfavor–nottheshipbuilder.Ifaneventwastooccur(e.g.,Keppelcannotcompletethedesign–theengineeringiskindofafeatinitsown),Golarcancancelandwillberefundedtheirdownpaymentandmilestonepayments,lessasetcancellationfeeofcourse.Furthermore,Keppelholdsanequityinterest in these projects – I would contend that it’s on top of the priority list; per the recentpresentation,theprojectisunderbudgetandaheadofschedule.

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DelivertoAsia<$7/mmBtu

FOBCost(Breakeven)(US$/mmBtu) ShippingCost(US$/mmBtu) Breakeven



Conclusion

Despite being coined a revolution – this technological renaissance is actually an evolution, anaturalprogressiontogreaterefficiencies,forbotheconomicaswellasenvironmentalreasons.Ifhistoryisindicativeofourfuture,it’slikelythatthenaturalgaserawillevolvemuchlikethefossilfuel before it – oil was a byproduct of Kerosene, in the early days, drillers would drain oil innearbyriverastheydidnothaveauseoraninfrastructuretosellit.NaturalGasbeganmuchthesameway–infact,inlastyearalone,over$1BworthofnaturalgaswaswastedinNorthDakotaalone.Thepicturebelowillustratesjusthowmuchnaturalgasisbeingflared.

Aswithany investment, this trade isnotriskless– that’sapparent.ThetechnologythatGolar isbettingonisunlikeanythingseenbefore;bothanalystandengineershavecalledthemcrazyforconsidering this investment. However, to put things in perspective, investors thought GeorgeMitchellwasinsaneaswell–hewouldlatergoontopioneeranewwaytoeconomicallyextractshalegas,anindustrynowknownashydraulicfracturing.

It’s easy to call this analogy an over-generalization, but it’s truly not – the majority of peoplecannotconceivetheevolutionof technology.Peran industry insider,andagreat friendofmine,“We’reabout toexperience thenextgreat shift in technology– theenergysector isabout togofromthetransistortotheintegratedcircuit,thenextSiliconValleycouldverywellbetheBrazosValley– turningthe industryon it’shead, findingwaysnot todrillmoreholes,but to findwaysdrill less.” (Note:BrazosValley is inCentralTexas–hometoTexasA&MUniversity,andwithinshortdrivingdistanceoftheUniversityofTexasandRiceUniversity)

Recommendation:wearebearishonBrentCrudeinthenear-term;therecentrallywillbeshortlived.WerecommendbuyingtheequityofGolarLNG(GLNG)asoilbottomsthroughouttheendoftheyear.Thetimeframeforthisinvestmentis2+years,afterthedealsareannouncedandfuturecashflowsbecomereflectedinthestockprice.Ourmidtermpricetargetis$65–withalong-termtargetof~$100.



Income Statement 2010 2011 2012 2013 2014 TTM

Revenue 244 300 410 100 106 116 Cost of revenue 85 69 97 58 77 116 Gross profit 159 231 314 42 29 0 Operating expenses Sales, General and administrative

23 34 25 23 19 26

Depreciation and amortization 65 70 86 37 50 61 Other operating expenses 4 6 1 -65 -38 -99 Total operating expenses 92 110 111 -5 31 -12 Operating income 66 121 203 47 -2 12 Interest Expense 33 26 32 14 46 Other income (expense) -36 -27 847 69 -46 7 Income before income taxes -3 68 1018 116 -62 -27 Provision for income taxes 1 -2 3 -3 -1 -2 Other income -1 -2 -1 16 19 20 Net income from cont. ops. -5 68 1014 136 -41 -6 Other 6 -22 -43 -2 -7 Net income 0 47 971 136 -43 -13 - available to shareholders 0 47 971 136 -43 -13 Earnings per share Basic 0.01 0.62 12.09 1.69 -0.5 -0.16 Diluted 0.01 0.62 11.66 1.59 -0.5 -0.16 Weighted average shares outstanding

Basic 67 75 80 81 87 Diluted 67 75 84 85 87 EBITDA 95 165 1135 153 2 80



Balance Sheet 2010 2011 2012 2013 2014

Assets Cash and cash equivalents 165 67 425 125 191 Short-term investments 22 28 2 23 74 Total cash 187 95 426 149 266 Receivables 9 8 10 21 29 Inventories 6 3 2 12 8 Prepaid expenses 3 1 3 Other current assets 437 Total current assets 204 106 440 182 743 Non-current assets Property, plant and equipment Gross property, plant and equipment 1962 2375 1208 1811 2158 Accumulated Depreciation -343 -480 -201 -232 -164 Net property, plant and equipment 1619 1895 1007 1579 1993 Equity and other investments 28 23 919 822 815 Deferred income taxes 1 0 Other long-term assets 226 209 48 82 441 Total non-current assets 1873 2127 1974 2484 3249 Total assets 2078 2233 2414 2665 3992

Liabilities and stockholders' equity

Short-term debt 106 64 18 31 116 Capital leases 6 6 Accounts payable 16 23 10 13 11 Deferred income taxes 3 Accrued liabilities 21 15 11 17 31 Deferred revenues 10 Other current liabilities 98 147 48 30 198 Total current liabilities 247 256 87 91 370 Non-current liabilities Long-term debt 692 627 491 636 1264 Capital leases 406 400 Deferred revenues 16 Pensions and other benefits 33 40 39 Minority interest 189 78 2 Other long-term liabilities 100 193 32 134 21 Total non-current liabilities 1420 1299 563 771 1341 Total liabilities 1667 1555 650 861 1711 Stockholders' equity Common stock 68 80 81 81 93 Additional paid-in capital 300 598 854 856 1512 Retained earnings 78 34 849 874 670 Treasury stock -2 Accumulated other comprehensive income -33 -35 -19 -7 5 Total stockholders' equity 411 678 1764 1804 2281 Total liabilities and stockholders' equity 2078 2233 2414 2665 3992



Cash Flow 2010 2011 2012 2013 2014 TTM

Cash Flows From Operating Activities Net income -5 68 1014 136 -41 -6 Depreciation & amortization 65 70 86 37 50 61 Amortization of debt discount/premium and issuance costs

1 -5 -5 -2 -1 -5

Investment/asset impairment charges 4 0 0 0 0 2 Investments losses (gains) -4 -1 0 3 Stock based compensation 2 2 1 0 2 5 Accounts receivable -2 5 2 0 -11 Inventory 1 2 0 -10 -1 Prepaid expenses -18 -4 -8 -51 28 Accounts payable -7 -13 -1 3 -2 Accrued liabilities 0 8 11 3 14 Other working capital 17 -2 -1 4 23 52 Other non-cash items -3 -16 -866 -53 -36 -156 Net cash provided by operating activities 52 117 234 68 25 -44

Cash Flows From Investing Activities

Investments in property, plant, and equipment -34 -289 -343 -734 -1153 -1085 Property, plant, and equipment reductions 0 Acquisitions, net 120 155 114 Purchases of investments 0 -4 -20 -18 Sales/Maturities of investments 399 1 99 207 Other investing activities -6 72 -432 -275 Net cash used for investing activities 365 -299 -291 -533 -1429 -1038

Cash Flows From Financing Activities

Debt issued -230 104 642 306 1223 1423 Debt repayment -110 -135 -331 -9 -240 -229 Common stock issued 6 661 -1 Warrant issued 19 Cash dividends paid -46 -78 -208 -109 -156 -201 Other financing activities -13 194 312 -22 -17 -21 Net cash provided by (used for) financing activities

-374 84 415 166 1470 972

Net change in cash 42 -98 358 -299 66 -110 Cash at beginning of period 122 165 67 425 125 485 Cash at end of period 165 67 425 125 191 375 Free Cash Flow Operating cash flow 52 117 234 68 25 -44 Capital expenditure -34 -289 -343 -734 -1153 -1085 Free cash flow 18 -173 -109 -666 -1128 -1129 Supplemental schedule of cash flow data Cash paid for income taxes 1 2 1 1 Cash paid for interest 48 31 11



Sensitivity Analysis of NAV to FLNG investment tolling fees (USD/share) USD/mmBTU for FLNG 4.25 4.00 3.75 3.50 3.25 3.00 2.75 2.50 2.25 2.00 1.75 1.50

Cash gain drop down 25.4 23.2 20.9 18.7 16.4 14.2 11.9 9.7 7.5 5.2 3 0.7

IDR (at 6.5% yield) 17.3 16.2 15.1 14 13 11.9 10.8 9.7 8.6 7.6 6.5 5.4

Sum (USD/Share) 42.7 39.4 36.0 32.7 29.4 26.1 22.7 19.4 16.1 12.8 9.5 6.1

Hili 35.3 32.5 29.8 27 24.3 21.5 18.8 16.1 13.3 10.6 7.8 5.1

Gimi 32.1 29.6 27.1 24.6 22.1 19.6 17.1 14.6 12.1 9.6 7.1 4.6 (Disc. from ’17-’18)

NAV ex FLNG at x0.7 21.2 21.2 21.2 21.2 21.2 21.2 21.2 21.2 21.2 21.2 21.2 21.2

Hilli 80.3 77.8 75.3 72.8 70.3 67.8 65.3 62.8 60.3 57.8 55.3 52.8

Gimi 88.5 83.3 78.1 72.8 67.6 62.3 57.1 51.8 46.6 41.4 36.1 30.9

Gandria 120.6 112.9 105.1 97.4 89.7 81.9 74.2 66.4 58.7 51 43.2 35.5 Source: DNB Markets, Pine Assumptions



CorporateStructureatIPO



GMLP–FSRU:Winter&Spirit



GolarSpirit:TheFSRUProcess



i“AnnualEnergyOutlook2015”April14,2015:http://www.eia.gov/forecasts/aeo/executive_summary.cfmii“PreludeFLNG”:http://www.shell.com/global/aboutshell/major-projects-2/prelude-flng.htmliii“AppointmentofGolarLNGasMidstreamPartnerforFortunaProjectinEquatorialGuinea”–May5,2015:https://www.ophir-energy.com/press-release/appointment-as-golar-lng-as-midstream-partner-for-fortuna-flng-project-in-equatorial-guinea/iv“PreliminaryFourthQuarterandFinancialyear2014Results”:http://www.golarlng.com/index.php?name=seksjon/Stock_Exchange_Releases/Press_Releases.html&pressrelease=1897012.htmlv“GolarsignsHeadsofAgreementwithSNHandPerenco”–December24,2014:http://www.reuters.com/article/2014/12/24/golar-lng-brief-idUSASN00060K20141224vi“GolarandPerencoagreethematerialcommercialtermsforthefloatingliquefiednaturalgasexportprojectinCameroon”–December24,2015:http://www.golarlng.com/index.php?name=seksjon/Stock_Exchange_Releases/Press_Releases.html&pressrelease=1933144.htmlvii“OphirEnergyplcappointsGolarasMidstreamPartnerforFortunaProjectinEquatorialGuinea”:http://www.golarlng.com/index.php?name=seksjon/Stock_Exchange_Releases/Press_Releases.html&pressrelease=1918697.html

viii“IfIragioilgoesoffline,$200oilisnext”–MarketWatch,June17,2014:http://www.marketwatch.com/story/if-iraqi-oil-goes-off-line-200-oil-is-next-2014-06-17

ix“DanielYergin:TheRealStimulus:Low-CostNaturalGas”–WallStreetJounral,October,23,2012:http://www.wsj.com/articles/SB10000872396390444734804578062331199029850

x“NorthAmericanLNGImport/ExportTerminalsApproved”–August6,2015:http://www.ferc.gov/industries/gas/indus-act/lng/lng-approved.pdf

xi“Dynagas,Gaslog,andGolarformLNG‘CoolPool’”–August18,2015:http://www.seatrade-maritime.com/news/americas/dynagas-gaslog-and-golar-form-lng-cool-pool.html

xii“OphirEnergy’sCEONickCooperon4Q2014onEarningsCallTranscript”–March19,2014:http://seekingalpha.com/article/3015006-ophir-energys-opgyf-ceo-nick-cooper-on-q4-2014-results-earnings-call-transcript


Documents

Goin’ Golar: A Thematic Analysis of LNG, Geopolitical