W|EPC: Force Majeure & The LNG Supply Chain: Scenarios For BH, Kiewit, & Venture Global

Reviewing Satellite Images Of Italian Fabrication Yards & Force Majeure Flow Charts

• Supply Chain Overview                                                                                    Pages 1-2
• Satellite Images: BH’s Fabrication Yard In Avenza, Italy                              Pages 2-4
• Implications Of Calcasieu’s Unique Contractual/Structural Dynamics     Pages 3-5
• Force Majeure Flow Charts: Wrapped vs Unwrapped                                Pages 4-5
• Pertinent Questions From Here                                                                       Pages 5-6

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The LNG Supply Chain & Force Majeure Dominoes. Given the continued, rolling implications of the global response to COVID-19, we thought it was worthwhile to examine potential points of friction as it pertains to the implications of Force Majeure (FM) declarations on large-scale, multi-faceted LNG export projects. We believe such a scenario is relevant for Venture Global’s Calcasieu Pass (CPLNG) project given its globally linked supply chain – including its liquefaction modules which are being fabricated at a Baker Hughes (BH) fabrication facility in Avenza, Italy. (Satellite images on Pages 2-4)

Venture Global’s Potential FM Predicament Is Unique. A typical, fully wrapped, EPC contract would typically just keep an owner on the hook for extensions to a contractor’s guaranteed completion date. However, the less expensive, decentralized contracting structure that Venture Global has assembled for CPLNG could potentially expose the project to contractors looking to recover mitigation and prolongation costs. (Pages 2-4)

Implications Of FM Claim For BH, Kiewit, & VG. We believe work on CPLNG’s modules was still progressing last week (with non-essential personnel working from home), given the escalation in restrictions we believe those productivity dynamics are (justifiably) fluid. Should BH file a successful FM claim, it would most likely be granted… (Pages 3-6)

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Tankers Reset As OPEC War Changes Economics

• Market Updates & Thoughts………………..Pages 1-3
• Tanker Trade Dynamics………………………Page 4
• Fuel Spreads, Economics……………………Page 5
• Crude/Product/LPG Rate Changes…………Pages 6-9
• LNG Arb, Freight Dynamics…………………Pages 10-11
• Container Fundamentals……………………Page 12
• Relative Valuations…………………………..Pages 13-19

Tanker Spot Rates Soften Off Of Peak Levels As Saudi Reign In Freight Rebates: Spot rates weakened on slow fixture activity, crude prices bounding from under $25/barrel to ~$30/barrel (Brent), and Saudi Arabia announced limiting freight compensation to 10% of crude’s official selling price. According to TradeWinds, at least 10 VLCC & Suezmax spot fixtures loading Saudi crude had failed last week. VLCC spot rates (TCEs) led the decline with rates falling to $135.3K/day (-52% w/w and +408% m/m), Suezmax TCEs at $70.0K/day (-42% w/w and +166% m/m), and Aframax TCEs firming to $59.5K/day (+39% w/w and +120% m/m). We note rates remain well above consensus.

Roughly Half Of Bahri’s VLCC On Subject Destined For USG: Last week, Saudi Arabia’s Bahri put 25 VLCCs on subject after their announcement to flood the oil market (by increasing its production and lowering its oil price) in response to OPEC+ disbandment (see our OPEC+ Fallout note). VLCC rates had spiked as Saudi Arabia was said to provide freight rebates to some customers for crude transports between Saudi Arabia and Egypt. Bahri owns 41 VLCCs and rarely enters the spot market to charter third party tonnage. In addition to the large number of subjects, the intended destination for these vessels are telling of Saudi’s intent: 10 of the 25 VLCCs are destinated for the U.S. Gulf, 4 are likely going to Europe, 10 are fixed to discharge at the entry point of the Sumed pipeline (Ain Sokhna) which transports crude oil through Egypt to the Mediterranean (likely to end up in Europe). None of the spot VLCCs are fixed to Eastern destinations.

Scrubber Payback Period Upended Following Crash In Crude Prices: The spread between HSFO and LSFO has narrowed to $87/mt in Singapore and $47/mt in Rotterdam (Figures 2 & 3), extending the payback period to ~4 years. A VLCC fitted with a scrubber is able to command a spot earnings premium of ~$4.5K/day, down from nearly $20K/day at the start of the year.

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LNG Canada Update: Shell, Fluor, JGC, & Force Majeure

• **March 18 Update………………………………….Page 2
• Executive Summary…………………………………Page 3
• COVID-19 Impact……………………………………Page 4
• EPC Schedule Analysis……………………………..Page 5
• Site Labor Analysis 6………………………………..Page 6
• Site Labor EPC Cost Impact……………………….Page 7
• Conclusions…………………………………………..Page 8

Update: In light of yesterday’s announcement that the Shell-led LNG Canada project was cutting its staffing levels in half over the coming days, we felt it worthwhile to pass along our LNG Canada Update from late February, along with a slide on our updated thoughts. (Page 2)

COVID-19 Impact Updates
1. The World Health Organization (WHO) officially declared COVID-19 a pandemic on 11-Mar-20.
a. JFJV may have a stronger FM claim now that WHO has declared the COVID-19 a pandemic, to the extent that JFJV specifically has “pandemic” or “epidemic” listed as an FM event in their contract.
b. FM Impact of Chinese module fabrication yards…….Page 4

2. On 17-Mar, LNG Canada and JFJV both announced that JFJV’s on-site workforce in Kitimat would be halved in order to increase social distancing and help prevent the spread of COVID-19. Given that the announcement was made jointly between JFJV and LNG Canada – impact on FM/schedule relief.…..Page 5

3.While JFJV did not announce when the site at Kitimat would resume a full workforce, it took “several” weeks for workers to return to JFJV’s Chinese fabrication yards…..Page 5

LNG Canada Planned Vs Foretasted Progress – Where Were We In February, and Where Are We Heading Now?…..Pages 5-8

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Noisy Neighbors: A Commonwealth LNG Deep Dive & Venture Global’s Engineering Update

Energy EPC: Venture Global’s Engineering Update & A Detailed Look At Their Commonwealth LNG

The Golar Clean Up Trade – Let’s Get Schwifty

Golar Q4 Earnings Preview – Reorg Pressure Ramps

GLNG/GMLP Equity Thesis, SOTP Valuation:                Pages 1-2, 6
Our Expected Golar Reorg Solution:                              Pages 2-4
GMLP: Risk around Eskimo/Jordan Contract?              Pages 2, 7
DCF-Based LNG Carrier Asset Curve:                             Page 5
Asset Level Leverage, Est. Market Values:                     Page 7
Golar Power Updates:                                                        Pages 4, 8

Expectations For Golar Q4 Earnings: Heading into GLNG & GMLP’s Q4 earnings report on Tuesday (2/25), our primary focus is on (1) the timing, scope, and structure of a potential reorganization of Golar’s corporate structure – with our detailed expectations below. This includes a spin of its downstream business (Golar Power), the ultimate placement of its LNG carrier fleet, and what to do with GMLP (34% yield), (2) we expect GLNG metrics (adjusted EBITDA) to be roughly inline for Q4, and (3) the ramping risk profile of GMLP – particularly around its role in a reorg, its credibility as a currency, and (potentially) the quietly rising risk around the Eskimo FSRU contract (page 3).

*It’s worth noting that the GLNG/GMLP Q4 earnings call is endearingly scheduled to overlap with Cheniere’s (LNG, CQP), so street bandwidth may be a bit stretched, at least to the extent that if the reported numbers are a mess, the impact of clarifying (or pacifying) comments from a 10AM earnings call may be bit dampened. To be fair, we guess the reverse is also true. Should be fun.

Getting Constructive On GLNG. The pressure on Golar to reorganize its complex structure has only grown – punctuated by Luxor filing as an activist stakeholder in late January (8% holders). We think Golar likely moves to clean up its structure in the next 6 months, particularly as some of its earlier options (spinning off its LNG carrier fleet with 3rd party involvement) are likely off the table, and more controlled, in-house solutions seem more viable. We run through our expectations on pages 2-4, but here’s the punchline: We’d be long GLNG, and short GMLP in a reorg.

GMLP: Ramping Risk Around The Eskimo FSRU? The Eskimo is one of GMLP’s core assets (~$40MM of EBITDA), and is about to hit the 5-year mark on its 10-year contract with Jordan in May 2020. While it’s typically highlighted as a fixed 10-year contract, there’s actually an out in the Eskimo contract…(Page 2, 8)

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LNG Update: Coronavirus Force Majeure — Context, Data, and Exposure

Corona-Related Force Majeure: Highlights From Our Recent LNG Update

• Chinese LNG Contractual Exposure – SPA Breakdown By Counterparty                          Pages 2, 5-9
• Historical Context – SARS, 6 Previous Global Health Emergencies                                    Page 2
• NT Flash Points – 16 LNG Carriers Set To Call In China, Details                                           Page 3
• Logistical Headwinds – Trucked LNG Data, Breakdown                                                        Pages 4-5     
• Force Majeure Language – Cheniere (LNG)                                                                             Pages 10-12           

Coronavirus Puts Force Majeure In Play For Chinese Contracts: After days of speculation that Chinese LNG importers (CNOOC, Sinopec, CNPC) were considering invoking contractual force majeure clauses in their LNG contracts, CNOOC (China’s largest LNG importer – Figure 1) announced it had issued force majeure notices to their suppliers due to fallout from the coronavirus (nCoV). Total has reportedly rejected CNOOC’s notice of force majeure, setting up what we expect to be a continued string of notices and conflicting rhetoric, as the relatively opaque process plays out in a weakened and nervous LNG market, and amid the Q419 earnings cycle. While the ultimate impact of these contractual disputes is unclear – ranging from timeline delays (EPC), non-payment, and beyond — what does seem clear is that the issue should continue to build. As noted in Figure 3 – there are 16 LNG vessels scheduled to discharge in China over the next 5 business days, and we’d expect additional contractual flash points ahead.

Validity To Be Determined. We hope to get more clarity on the validity of force majeure claims in the coming days — particularly as they pertain to DES (fixed destination) and FOB cargos (flexible destinations — like Cheniere’s) which can be diverted to unaffected markets. We would think it’s less likely Cheniere’s FOB cargoes would be impacted by force majeure issues at the geographical origin of the original purchaser, given their inherent flexibility.

More Than Just A Demand Headwind In China. It’s also worth noting that Corona issues go beyond simply demand destruction within the Chinese market. Given pipeline infrastructure limitations in China, significant volumes of LNG are trucked to end users (Figures 4 & 5), which also brings logistical issues to the forefront, as there’s likely a similar lag in LNG truck drivers returning to work as those in factories and mills following the Lunar New Year holiday and quarantine efforts by the Chinese government. The risks also expand beyond volume-based LNG contracts, with shipyards, hard-asset delay schedules and tangential energy infrastructure also potentially impacted. Late yesterday gas producer Energean noted TechnipFMC had claimed corona-related force majeure on a FPSO meant for an Israeli offshore project

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