Introduction to New Fortress Energy
New Fortress Energy is a fully integrated medium-scale gas-to-power infrastructure provider. 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. New Fortress has a presence in the US, Jamaica, Puerto Rico, Nicaragua, Mexico and Brazil
It was founded in 2014 by Wes Edens. NFE cannot be understood without understanding Mr Edens, his CEO, a successful business man who also owns Aston Villa and Milwaukee Bulks. He owns 35% of NFE and has no salary or stock options (Later, we talk about Mr Edens as knowing him has a vital importance to understand the thesis).
In recent years, New Fortress Energy has grown exponentially. Its IPO was in 2019, since then it has grown its revenues 132% CAGR and its EBITDA from -$179MM to $880MM (own calculations, we will discuss this topic later). Currently, its market cap is $5.3Bn and EV $9.95Bn. However, in their core business segment, the terminals, they have suffered from overpromising as the production timings of several terminals have been significantly delayed.
What is most interesting is that these delays have actually made them earn even more money. Since they had committed LNG supply (based on HH), they have sold cargoes in Europe instead of using them in their terminals. Due to the profit margins (TTF-HH) in 2022, the earnings have been enormous.
There are tremendous catalysts on the horizon for the depressed stock price, after tremendous organic expansion in Puerto Rico, the growth in Mexico, the upcoming launch of their flagship product (Fast LNG in June/July 2023 – a potential game changer) and the start of operations in their new terminals in Brazil (Barcarena and Santa Catarina) and Nicaragua, it is expected that they will continue to grow and leverage their entire built infrastructure, reducing their dependence on trading between natural gas markets.
Just as New Fortress Energy is a company with tremendous growth and potential, it is equally true that it has many peculiarities, and significant effort is required to analyze it based on the limited information it provides about its contracts. Additionally, careful attention must be paid to details that are present (or absent) in the guidance provided by the company. That is why this entire analysis is based on our own assumptions, after closely following this company since its IPO in 2019 Before analyzing its business model, strategy, management, capital structure, capital allocation, risk, financials, valuation and thoughts about it, let’s have a look at its three operating segments & assets
The company operates along the natural gas supply chain:
Upstream – Fast LNG: New Fortress Energy announced in March 2021 the launch of its own offshore liquefaction system – the Fast LNG, to have access to LNG production. This pioneering system, initially comparable to Floating LNG technology (e.g. Golar Hilli), has several advantages over them, such as its fast construction time (about 18 months vs. 3-4 years) and cost ($1 billion). Differently from Floating LNGs, they are designed for shallow water and their capacity is limited to 1.4 MTPA. On paper, the economics are revolutionary (even more so considering the tensions in the natural gas market in 2022 and the possibility of 2 difficulties winters in Europe until Qatar new liquefaction coming online 4Q25).
Additionally, this movement gives NFE the advantage of having full control over the natural gas chain and the ability to choose between selling in the market or using it in their terminals depending on the prices. Like Floating LNG, NFE can sign tolling contracts (charging fees for the infrastructure) or produce as a merchant and sell in the market.
Currently, they have their first FLNG near completion, and it will be installed in Altamira (Mexico) – tentatively in 3Q23 – with a capacity of 1.4 MTPA. Likewise, they are starting to produce units 2 and 3, which are expected to be installed in Altamira by the end of 2024. Lakach in Veracruz (Mexico) and Louisiana (US) (pending permits) are the other two potential locations where there are more prospects for deploying new units in the coming years.
In the economics section, we analyze what these FLNGs could mean for New Fortress Energy (according to our own estimates, not those of NFE)
Midstream – Shipping: The company possesses a fleet of regasification units (FSRUs), liquefied natural gas carriers (LNGCs), and floating storage units (FSUs) from the Hygo & Golar Partners acquisitions in January 2021 (more about that later). These vessels(LNGC) enable them to transport LNG and natural gas to various locations worldwide and regasify the LNG (FRSU). They also charter vessels from third parties and their joint venture affiliate, Energos (20%-80% JV with Apollo).
New Fortress has long-term charter agreements for up to 20 years with 10 of the Energos vessels. These agreements will begin after the expiration of the vessels’ existing third-party charters. As a result, when the current third-party charters expire between April 2023 and August 2027, Energos will charter the vessels to the company for 20-year terms, ending between December 2027 and August 2042.
Energos is consolidated according to the Equity method, so NFE includes 20% of the company’s results in its P&L. However, a portion is eliminated due to intercompany transactions, as several ships are working for NFE.
Note: NFE owns 60% of Golar Mazo (LNGC).
Downstream – Terminals & Infraestructure: They are the main business of New Fortress Energy, and based on that, they have developed the rest of the components (acquisition of Midstream from Golar and recently the launch of FLNG). NFE owns and operates terminals, usually in developing countries with energy deficiencies. The terminals have a greater significance than the Power Plants, several of which have been sold as a capital rotation strategy that we will discuss later.
NFE is present in Jamaica (the initial country), Puerto Rico, Mexico, Brazil, and Nicaragua. They are also in negotiations in Ireland (and in other countries like South Africa, Sri Lanka… which are not considered in this thesis).
As explained later, once NFE signs a contract that allows them to enter a specific geography with guarantees, they oversize their assets and then grow organically (at a faster or slower pace), as recently happened in Puerto Rico, where they will nearly triple their sales starting in 2023
