Stifel’s Ben Nolan commentary.... Target $19
September 25, 2020 Maritime
Summary
Yesterday the IPO of Hygo Energy Transition (HYGO) which is 50% owned by Golar was delayed after an announcement of an investigation of the CEO for bribery at a previous company dating back to 2011. We expect given the extremely transparent nature of the Brazilian power market, that there is little risk of any wrongdoing on the part of the company, but the overhang is likely to have an impact on the valuation of Hygo and potentially their ability to win incremental business. Even at a lower multiple, we estimate there is still nascent value in GLNG shares that could be 3x the current price, but the path to realization could be longer with increased risk given the need to refinance debt and partners preferred equity. Despite the increased risk, we believe the upside potential is substantial and would remain buyers.
Key Points
Investigation. Brazilian authorities have launched an investigation into Golar Power/Hygo CEO Eduardo Antonello’s activities while an executive at Seadrill allegedly paid bribes worth 1.5% of the $2.7 billion in Petrobras contracts. While there is no suggestion that Golar has done anything wrong, nor that there was any impropriety with any of Golar's Brazilian contracts, Golar will undertake an internal review in an “abundance of caution.” Ultimately, the Hygo IPO is likely delayed on this news, which should act as an overhang for Golar until at least the internal investigation is complete. Limited direct risk. The Brazilian power market is perhaps the most transparent in the world, and having been to the Sergipe facility (see note with cool pictures) and over the years having done channel checks, we expect this risk of actual impropriety on the part of Golar Power to be extremely remote. Indirect Risks. Hygo needs money and a good reputation to grow. Currently, there is a land grab taking place in LNG development and timing is everything. Thus a delay in the Hygo IPO and subsequently the capacity to fund growth could cause the company to loss potential new business. Furthermore, the taint of impropriety, even if proven wrong, could have an impact on Hygo valuation which then impacts its value to Golar. Similarly, until the stigma is removed it could be challenging signing new business and push growth across the finish line further impacting value. Credit Risks.
There are three major credit events for Golar. We view the first two as relatively insignificant, but the convertibles due in early 2022 are more sensitive. 1. Golar has a $150M term loan due in Nov-20. This should be no problem at all to refinance
as the current cash flow is not in question. 2. On June 2021, Stonepeak's $100M worth of Hygo preferred shares matures, increasing
the dividend from 8.5% to 11.5% and the cumulative cost to convert the preferred shares to common increases from $180M to $200M. A slowdown in the timing of an IPO could GLNG
become more expensive relative to Golar's position. 12Volume (Mil.) Price (USD) 3. Golar has $402 million converts due in Feb-22. A solidly proven value of the assets with a 10Hygo stake worth $800M-$1.2B would likely not only increase the value of Golar but also
8reduce credit risk and make refinancing relatively simple. No IPO and questions about the 6value of Hygo make refinancing more challenging. 4Thinking about valuation. The current weakness in shares could be an absolute gift to buyers, 2but again there could be unrepairable value destruction as well. Even after adjusting for this value destruction, we are hard-pressed to come to a sum-of-the-parts less than $20/share.
The three catalysts to close the value gap are 1) Hygo IPO, 2) Hilli contract extension, 3) Gimi Price Volume
contract clarity. While Hygo is certainly more of a question market, the second two are very much still in play. The primary risk is that none of the three are resolved before the converts come due. At <$7/share, that is a risk we like.
