As my Portfolio Manager says, New Fortress is the perfect example of a company which is always putting shareholders expectation out of turn, and it never fulfils those expectations on time. However, after some quarters of undelivered promises (since its IPO in 2019), now investors can feel that something has changed. Its shares are up almost 500% since the March low, and NFE has really done some important steps to in the right direction:
- Cancelled Centrica procurement contract
- Merged class A and class B shares
- Issued 5 years bond (6.75%)
- $0.1/share quarterly dividend (we are more sceptical about it, but it can attract more investors)
- Hydrogen fairytale
- Expansion into Asia (Philippines MOU)
Moreover, last week NFE did an AK for $150MM (which represent around 15% of the total shares). Obviously, they took advantage of the share price, and investors reacted well as they trust the potential of the company. The plan is to continue expanding aggressively with new projects mainly in emerging countries in Asia and new technologies (Hydrogen and ISO Flex containers)
Regarding New Fortress Energy 3Q20 results
NFE continued improving the operating margin significantly. Although, New Fortress is still losing money. This is normal due to its business model where they build the terminals when they sign a “small” contract and try to sign more contracts after that to increase the utilization. New Fortress wants to take the infrastructure, the logistics, the people, personnel that they have in place and go aggressively into these markets because they have a competitive advantage. It will allow them to develop economies of scale and rocket their profits.
The utilization rate is still a bit low (29%), but natural gas is much less expensive than diesel (its main competitor) and in emerging markets, this is a key advantage for them.
The recent AK makes us think about the execution of some portfolio opportunities in the short term. Particularly, NFE is thinking about building 300, 400, 500 megawatts in projects and then do that over and over because the economies are big and growing. NFE is also investing in a new ISO Flex technology, which allows NFE to diminish its cost and access to more clients.
NFE debt is $1000MM, having $128MM in cash and still burning free cash flow. The next two quarters are going to be key to assess the free cash flow they are able to generate once its five terminals are operative.
NFE currently has 5 terminals (apart from Miami which is very small).
This is a table from the company to illustrate the economies of scale we talked before. I do not expect New Fortress to produce 2.7 gpd in 1Q21 neither 3.4 gpd in 2Q21, but I do expect them to obtain these numbers in 2021.
The two next terminals are expected to start operations in the next 6 months. La Paz(135MW) is expected to be online 1Q21 and Puerto Sandino(300MW) in 2Q21.
Apart from that, NFE will start to build a new terminal in Philippines and it has negotiations undergoing with several companies across different countries, mainly in emerging Asia.
Without any doubt, NFE has started to deliver the results that it has been dreaming for the last years. Moreover, NFE is starting to focus on Hydrogen and replicate its successful business model in more countries.
Nevertheless, and to be honest, I believe that New Fortress Energy is a bit overpriced as it still needs to prove that it is able to generate a consistent free cash flow. On the other side, it has a terrible momentum and the run in the last six months have been memorable. We find the business model very interesting and we plan to maintain our position until the new IPO of Hygo (1H21). At that time, we will analyse the situation of both companies and maybe we divest here to invest in Hygo.
Obviously, this is not an investment advice.