HYGO Energy Transition

Hygo Initial Public Offering

Golar LNG and its PE partner Stonepeak are launching an IPO on its Joint Venture Golar Power. The prospectus was filed last 31st August, and this week (17th September) we have known the details about HYGO Energy Transition (“HYGO”), the new company.

The main bookrunners are Morgan Stanley and Goldman Sachs, but there is a total of 14 investment banks involved in the process.

The company will issue at least 23m shares at between 18 – 21/share, which will imply total proceeds (gross) of around USD 450m at mid-point. Golar LNG and Stonepeak will keep 50MM shares each, resulting in 123MM shares (18.8% free float).

The valuation of IPO would be between $2.2 – 2.6Bn (post-money), far exceeding my valuation of $1.4-1.8Bn (pre-money), taking into account the $450MM that Hygo expects to obtain from the IPO.

HYGO

Source: Golar LNG

Hygo is a company which provides downstream solutions to underserved markets, specifically natural gas in areas where the main source of energy is coal or oil. Currently, Hygo has four projects in Brazil, and it is planning its expansion to other emerging markets facing the same problems such as Ivory Coast, Vietnam and Mexico (Similar approach than New Fortress). Hygo posses power plants, FRSU (regasification) and LNG vessels.

The business strategy is to find long-term gas/power supply agreements (PPA or similar), by doing that, they can make the investment in the power plant/vessel reconversion and obtain IRR around 7-8% the next 20-25 years. Hygo tends to build a power plant with higher capacity to look for other contracts and take advantage of the scale economies along with a terminal which provides the natural gas (FRSU). Hygo also is looking for opportunities where it set only the terminal (FSU) and connect it directly with pipelines.

At the moment there is only one power plant operative (Sergipe – 1.5GW) and the Nanook (FRSU which feeds the power plant). To put this in perspective, New Fortress, its main competitor, builds power plants of 300MW. However, the key point in this business model is the utilisation of the plant, as it is the turning point to higher profitability. In the first years of the plant, it tends to be very low, but then, new contracts start to be signed and the utilisation increases. Currently, Sergipe utilisation is very low (15% 2Q20 which was its first-quarter online), but they are starting to sell merchant power, which is an additional revenue on top of the PPA (fixed income next 25 years). The utilisation will continue increasing over time. 

Hygo has another three projects in Brazil (Barcarena, Sta Catalina and Suape) and it is setting up a small-scale LNG partnership with BR and Galileo to bring LNG to the automobile industry in Brazil. 

Barcarena will follow a similar structure as Sergipe. It is a power plant (605MW) with a terminal (FSRU). They FRSU will start in 2022 and the power plant in 2025.

Sta Catalina project consists of a terminal (FRSU) which will be operative in 2022.

Suape will be an FSU (without regasification). It will start in 2021. In this case, the FSU will put the gas directly into the pipelines.

Hygo Valuation

At this point in time, a significant majority of the Hygo’ valuation is because of Sergipe and Nanook, which is normal because it is the only operative project that they have apart from the two LNG carriers in the cool pool (Penguin and Celsius).

Remarkably, both Golar and Stonepeak have maintained their ownership, this IPO is an AK. In my view, this is quite positive as both of them are convinced about the potential of Hygo in the next years.

Revenues
Sergipe contract is for 25 years 1’600 MM R$ per year adjusted to inflation (50% ownership)
Sergipe has the variable part, it was 83.5 MM R$ for the first 4 months
Nanook is $44MM per year
Barcarena will be 861MM $R / year
Suape (25) and Sta Catarina (pend)
LNG carriers spot before being converted to FRSU

Personal views

The market opportunity for the firm’s hub and its capital and time efficient FSRUs is significant. LNG is growing 8.5% per year, and Hygo has the potential to replicate the Brazil model in other geographies such as West Africa and Southern Asia. Moreover, Hygo has a flashy ESG story that can be helpful to navigate the markets. 

However, I honestly expected a lower valuation. Golar LNG and Stonepeak have wanted to take advantage of the current capitalisation of New Fortress Energy (all-time highs) to do the IPO, and the $2.2Bn-2.6Bn range is higher than expected. If they achieve its goal, it will be fantastic news for Golar LNG shareholders, as its 40.6% ownership in Hygo will represent around $10/share of Golar, meaning that in spite of the last run (134% since the Golar’s article), Golar LNG is still largely undervalued.

What does it mean? It does not mean that Hygo is going to either fail or diminish its initial valuation. It only means that at the current price of Golar LNG, I prefer to have exposition to Hygo through the stock of Golar LNG.

Disclaimer: my views are not a recommendation, they are only my opinion.

Note that Sergipe started its operations on late March 2020, and at the end of June was still at 15% utilisation.