Excelerate Energy investment thesis

Excelerate Energy

Analysis Excelerate Energy

Excelerate Energy is an LNG infrastructure provider focused on the downstream part of the business, including regasification of natural gas and natural gas-to-power. The company has positioned itself to take advantage of the increasing role of natural gas to generate power in the foreseeable transition from fossil fuels to renewable energy during the coming 25 years. Excelerate has a presence in the US, Argentina, Brazil, Bangladesh, Pakistan, UAE, Finland and Germany

Since its founding in 2003, Excelerate has primarily focused on the downstream segment, especially in regasification (owning 20% of the global FRSU fleet & 27% global capacity). In 2021, it began the gas sales business, seeking arbitrage between markets (buying at Henry Hub and selling in other geographies such as South America, Europe, and Asia), taking advantage of the global energy crisis context to launch its IPO in April 2022, where they achieved a valuation of $2.54 billion ($24 per share).

While two years ago we would not have considered it a competitor to New Fortress (only a comparable in the FRSU segment), its recent change in strategy to cover all parts of the LNG value chain to offer an integrated service and to enter into joint ventures to build power plants following in the footsteps of Wes Edens’ New Fortress Energy, and the strategy of entering emerging countries with huge needs for cheap energy (which, given current natural gas prices, could proliferate greatly).

Just as the year 2022 marked a turning point in the strategic priorities of countries regarding securing their medium to long-term energy needs, the “return to normalcy” of prices is benefiting consumers primarily in emerging countries, and LNG has a significant opportunity for expansion in these markets.

Nearly two years later of its IPO, with natural gas having accumulated a >85% decline since then, the company is at its lowest point since going public – Excelerate is only a $1.5Bn marker cap company (we estimate $343MM EBITDA23)with an EV lower that that – and it seems like an interesting time to analyse the company in more detail (which we have been following since its IPO).

Today, we want to analyze the investment opportunity presented by Excelerate Energy, detailing its business model, current expansion opportunities (M&A and organic), capital structure, and finances to arrive at an objective valuation. We will offer our conclusions and strategy regarding the same.

Over the next 4 weeks, we will alternate between other companies in the discretionary consumer sector and another industry, along with 3 LNG theses (probably the sector where we have had the best investment results and our greatest expertise in the last 6 years).

As always, we are available at [email protected] for any inquiries

Before we begin and to recap on the Natural Gas industry (for which we published a guide explaining it and with an attached Excel detailing all existing assets and publicly traded companies linked to the industry):

FRSU – Floating Regasification Unit. It is used to quickly provide infrastructure to a country that has an energy need for natural gas without having to develop a costly structure. For example, Excelerate signed an FRSU in Finland and another in Germany in 2022 to help alleviate the energy crisis.

Arbitrage – As the natural gas market is made up of “energy islands,” it refers to the business of buying in one and selling in another. The common case is buying HH (United States) and selling in Europe (TTF) or Asia (JKM).

Liquefaction contracts – Until 2 years ago, most contracts were $2.5 + 115% Henry Hub, which was implemented by the pioneer Cheniere. Due to the tremendous price differences in recent years, some contracts have started to be made with a sales price where the value of TTF and JKM also comes into play (more beneficial for the exporter), but they have not proliferated much.

Excelerate Energy in the LNG supply chain

Excelerate presence in the natural gas supply chain

As we have discussed, Excelerate was born and has evolved focusing on the core business of FSRUs, which provide the necessary infrastructure for regasifying liquefied natural gas and allow countries to obtain gas without the need for pipeline connections. However, due to the particularities of the downstream business where they sign both the availability of the vessel and the volume to be regasified, they may have surpluses or play with the supply received by the FSRUs to have natural gas available to sell to other players. This encourages the development of a network of buyers at each point where they have an FSRU.

Similarly, this allows for entering into joint ventures for power plant infrastructure (after all, you are the supplier of natural gas to these combined cycle plants that produce electricity), covering LNGC needs with their own ships, or being present in the upstream business to facilitate an integrated service without depending on market volatility (although another solution is also to enter into long-term contracts with suppliers such as Cheniere – as discussed in the previous section today).

As of today, Excelerate is expanding from its traditional FSRU business into areas such as LNG marketing (arbitrage), natural gas sales, power plants, and evaluating potential M&A in other segments:

Terminals (Infrastructure)

FRSU business has been their core business since the company’s inception. Currently, they have 10 ships. All of them tied to long-term contracts (the last one, Sequoia has been used to sell LNG in Bahia (Brazil) for the last years but started its new contract in Jan-24) providing Excelerate with stable and predictable cash flows. The leases contracts (without taking into account the regasification part) have an average remaining life of 6.1 years and around $4bn cash flows in total.

Excelerate Energy FRSU fleet

Notes: In March 2023, the remaining 45% ownership of the FRSU Sequoia was acquired for $265 million. The FRSU Exquisite is the only one not 100% owned; they only have a 45% ownership through a Joint Venture with Nakilat. Additionally, the FRSU Experience is under sale-leaseback. (Unlike what is typically seen, the rest have 0 leverage on them).

Gas Sales

Excelerate began LNG sales in late 2021 to take advantage of high natural gas prices worldwide (in reality, what they need is for the gap between Henry Hub and consumer countries like Europe, Southeast Asia, or Brazil to widen for it to be very profitable for them). However, it is important to highlight that lacking an integrated model (Excelerate Energy does not own the upstream – gas production part), they must acquire LNG in the market (starting from 2023 with long-term contracts – which we discuss later), so margins are narrower in this part of the business.

Noteworthy to highlight that as we will see later, Sequoia alone has generate over $2.4 billion in revenues the last two years selling LNG – The EBITDA margin has been very volatile in previous years due to natural gas volatility (and the nat gas sales Margin is much less than the standard contract as we will see in the financial section).

As of today, it does not appear that the company’s strategy of outsourcing LNG production will change. In recent months, it has signed two LNG purchase agreements:

  • Qatar Energy (1 MTPA from 2026 until 2040) to sell in Bangladesh until 2040 ($15-18MM EBITDA / year)

  • Venture Global LNG (0.7 MTPA for 20 years from February 2023).

Both contracts are of the FOB type, meaning they are delivered directly to the point where Excelerate has the FRSU and not at the liquefaction terminal (Excelerate is responsible for coordinating transportation).

Currently, it has 3 terminals in operation where it also sells LNG:

  • Brazil: through the lease of an LNG terminal in Bahia (from Petrobras) since December 2021. —>Notes on Sequoia later

  • Finland: From the Inkoo Terminal since December 2022

  • Bangladesh (Moheskhali) – Excelerate is the main LNG provider of the country. Furthermore, the country is projecting 3 new terminals in which Excelerate is going to have a relevant role as we discuss later –

$EE natural gas sales

As you may figure out in this graph, there is something important to note (apart from high natural gas prices in 2022)…

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