New Fortress Energy – 4Q20 Results Conference Call
These are the notes – and comments – from the New Fortress Conference Call regarding its 4Q20 results.
NFE inked a contract to supply 250,000 gallons a day to CFE in Baja (Mexico). Both terminals in the construction phase (Mexico and Nicaragua) will be operative in May and June.
It is also expected two additional FIDs in the next 3-4 months. Santa Catarina in Brazil (part of the Hygo deal) and Shannon, Ireland – I am not so sure about the last one. There are considerable environmental concerns in Ireland about using natural gas. Activist and some local governments are fighting to cancel this project. The size of Shannon is huge compared to the other non-Hygo terminals
Overall, volumes for in the 4Q20 were a little less than Q3 which is due to two customer-driven maintenance outages. There will be similar a maintenance outage in Q1, Q2 for Unit 5 in San Juan. Moreover, it will also be stopped for the installation of a catalytic reducer – it provides emissions reductions for the power plant.
Talking about the next steps in the terminal business, they say that Brazil is the top market for them (related to the size of the opportunity) followed by South Africa, Indonesia, Philippines and Vietnam.
They have a new project in Southeast Asia ready to start – it is a matter of negotiating contracts. NFE says that they will be able to start there “in a short period of time“. – I bet that the new terminal they say they will start operating in 2H21 is in Vietnam.
The terminals acquired to Hygo generate 4 to 5 times what their other terminals (Caribbean) generate a kind of 50% to 75% of the net margins.
Barcarena will be the sole supplier of natural gas in the region. They say that there is an industrial opportunity, a power opportunity and a small-scale opportunity. Barcarena is ready for construction. It has all the permissions and can be online very early in 2022.
Suape, is different from Barcarena, as they have gas volumes that are potentially significantly orders of magnitude greater than what we’ve seen in isolated regions of the world because what they have is a developed industrial port. great small-scale demand and then, they also have a connection to the TAG pipeline, which basically runs almost the length of the coast of Brazil from sort of the Sao Paulo Rio region. The Suape infrastructure is already put in place
Sergipe terminal is a 1.5 GW power plant, the largest thermal power plant in Latin America. They have a permitted expansion for up to another 1.7 gigawatts – Kind of weird the limited that it is its terminal associated (Nanook). I fear that there is not a lot of upside here, so I believe that as they stated in January, they will sell this part soon to finance other projects
Santa Catarina combines both high volumes like Suape with really best in class margin potential. connected to the TBG pipeline. They will be adding basically critical infrastructure to the TBG pipeline in terms of gas supply and compression at this point in the pipeline.
Suape and Sta Catalina also very far along in development and will be online in the 1H22.
Wes says they have development and commercial teams in place for each one of these terminals now in Brazil.
They say that they are on schedule to close both those transactions in the first half of April. – So EBITDA starts counting then.
The acquisition also solves the NFE long-term ship needs. The plan is to continue with the current charters, and once they expire, NFE plans to use them for the terminals. It would save materially on our executive logistics costs by owning the assets themselves – It would be interesting to understand when they are using FRSU and when ISO (I believe that it depends on the capacity of the terminal, for the large ones FRSU)
FID on their Fast LNG
They say they can produce LNG from $3 to 4$ per MMBtu. Apart from this, they have 50% interest in terminals 1&2 of Hilli. – What type of deal they inked with Golar to use the same FLNG technology with the jackups? If this works, it is a revolution in the sector.
Gas supply is the biggest risk from a financial standpoint of the company. It is a variable cost that if NFE signs at a price and the market falls, their operative margin fall as I understand they sell depending on an index price.
NFE total gas demand is 3 MM tonnes today. They have 1.3 MM tonnes contracted. So, they still need supply for about 55% of their portfolio, 1.7 MM tons of gas demand.
Customers prefer a fixed price supply. That’s something that has not been available in the market to this point. Consequently, they are building the liquefier to fix the supply price
This is much faster and cheaper than the traditional FLNG (Golar style). The Golar one has 2.4 million tonne ship with a cost of around $1 billion which take 4-5 years to be ready. NFE model has 1.4MTPA (<2.4) but it cost 0.5bn and takes 1.5 years to be ready. NFE model can be used in shallow-waters only (jackups). They have already bought two rigs for $30 million each (original cost $500).
They say that it can produce gas for about $3.50. So, $150 million in net margin on a $500 million unit and it gives you tremendous certainty of supply – If this is true, I insist, it is a revolution in the sector.
There is significant resources off the coast of Brazil. West Africa is probably the single greatest supply in shallow water of gas, but it’s really all over the place. our focus now over the course of the next 30 to 60 days will be to identify the gas source for the first of these.
This strategy should become the primary source of gas for NFE, probably starting by Hygo terminals as the previous ones have natural gas supply contracts already inked.
They’re focused on building two businesses along these paths.
The Zero Blue, which they believe is the most commercially viable near-term path – produce hydrogen from low-cost natural resources like natural gas and coal – they are securing an exclusive license for technology that’s capable of up to 99% inherent carbon capture
Zero Green is focused on green technologies, renewable technologies that use renewable power to produce hydrogen by splitting water, H2O. NFE has made its first investment in a technology called H2Pro. H2Pro has a 95% efficiency and extremely low CAPEX, which gives it a significant cost advantage over existing electrolysis and it’s being designed to work with intermittent renewables – first proof-of-concept will be developed within 12 to 18 months and ready to quickly scale up commercial projects very soon after.
New Fortress 4Q Economics
Revenue for the quarter was $146 MM, and the COGS were $85 MM. Operating margin was $60MM. This $60 MM means the best quarter to date – normal, they have just started so thing will keep going from here – 40% margins – good
Their average cost of LNG for the quarter was $4.20, which is within 5% of our estimate. – It used to be higher before breaking the Centrica contract. Even at this price (so cheap and not forever) the Fast LNG is cheaper.
SG&A expense for the quarter was $22 MM (up because of new people working in Mexico and Nicaragua). They say SG&A to be around $80 MM annually for the NFE standalone business and increase to approximately $90 million on an annualized basis with Hygo and Partners.
I will update the model after the results of 2Q21 as I need to see Mexico and Nicaragua running + Hygo and Partners.
Fast LNG could be game-changing. If things continue as expected – we will see in June – I am quite bullish with NFE – Wes is the Elon Musk of LNG (50% joking)