New Fortress is a fully integrated medium-scale gas-to-power 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 Jamaica, Puerto Rico, Nicaragua, Mexico and Ireland
It was founded in 2014, and its IPO was in 2019
|Company data (27/06/20)|
|Market Capitalization||2’000 Mill $|
|Revenue FY19||189 Mill $|
|EBITDA||-173 Mill $|
|Debt||945 Mill $|
What is the business of the company:
New Fortress is in the business of bringing power to emerging markets, transforming LNG into electricity.
The world has a shortage of power, namely in the emerging markets. Natural gas offers a way to provide a cleaner and less expensive source of electricity. Overall, there is a huge demand for power and a massive surplus of natural gas in North America which drives prices down.
Why it is an interesting company?
It’s a win-win. The primary growth driver for NFE is replacing high-cost energy and power with lower-cost electricity. In many developing or isolated economies, diesel is the primary fuel source for electricity generation and industrial energy consumption. Relative to a $50/ barrel oil price, by switching to imported natural gas provided by NFE, these countries could save more than 20% on energy consumption. Consequently, not only are these regions able to expedite development, but they can do so cost-efficiently.
Cheap Energy. NFE has its own liquefaction plants in the US. Consequently, It buys the gas in the Henry Hub and does all the process on its own (liquefaction, transport and regasification) obtaining cheaper costs than its competitors. Currently, this is not happening because they build facilities 2-3 times bigger than the MW signed in its first contract. Nevertheless, once that they build the power plant, as they sign long-term contracts, they start to sign contracts with locals and increase the utilization. This is what is starting to happen now and it is going to increase in the next years.
Big Opportunities. NFE has its plate full with respect to the ramp-up of the current slate of projects, but there are numerous smaller markets spread throughout the Atlantic Basin that it can simultaneously address, especially ones located in high energy cost environments throughout the world.
What is the business model of the company?
- The natural gas being supplied at favourable prices and cheaper than traditional alternatives
- Contracts are for multi-decade deals
- Barriers to entry are high owing to NFE’s existing asset base
- Scalability of infrastructure should reduce counterparty risk over time.
They have facilities operating in Jamaica ( Montego, Old Harbour and Jamalco), Puerto Rico (San Juan), México (La Paz) and Nicaragua. Moreover, they will start building a power plant in Shanon (Ireland).
They have over-ambitious expansion plans (in my opinion), but they will expand its presence considerably in the world in the coming years.
The volume continues increasing but they have to tackle the problem they have with the COGS. In 2021 NFE finishes its current contract and they will be able to sign better terms.
Moreover, as the volume is increasing (the utilization rate when they build the plant is around 40% and it increases over the years) the COGS are getting smaller.
The utilization rates of the power plant they built in 2016 has a utilization rate of 85%. However, the rest of the facilities was built in 2019, and the utilization rates are around 40-50%.
*Data from Bloomberg
In general, it has an attractive valuation. It is true that is growing lower than expected because of two things. First, it signed a contract to obtain the natural gas at $2.5 MMbtu in 2019 and because of Covid and oversupply in the US, Brent price has continued going down (diesel depends on Brent price and it is the substitute of natural gas). Second, Covid is delaying some of its new contracts. However, the gas contracts finishes in 2021 and if prices continue like today, the new contract is going to be very appealing for them. In addition to that, it has expansion plan in Africa and southern Asia. Moreover, it is signing new deals in the countries where it already has presence. These new deals increase hugely the margin for the company because they have a minimum cost (the central is already built) and the margin are huge.
I believe that it will be a very attractive company as soon it solves its current GNL contract and continue increasing its utilization rates. NFE is in a sector which is booming and they can take advantage of it in the coming years.