New Fortress acquired last 13th January Hygo (including Suape Terminal) and Golar LNG Partners in a $5bn transaction. This deal allows NFE to enter in the Brazil market and to own its fleet of FRSU. New Fortress will pay Hygo with $580MM cash and $1.6bn in shares – 31.4MM shares. By contrast, NFE will pay for Partners all in cash (refinancing the debt).
New Fortress Terminals
Terminals are the main business of New Fortress. Currently, there are 4 terminals in operation + 2 under development which will be in operation in the next 1-4 months. The business here is to have good LNG supply contracts to obtain wide operating margins for doing the regasification and sell the natural gas to clients. The terminals in the Caribbean area have around $4.5 operative margin and Sergipe is around $2.
Apart from that, New Fortress is working to sign agreements to develop new terminals. It has a goal to finish 2021 with at least 15 terminals in operation/under construction/ FID made. In our experience, NFE is usually 3-6 months late to fulfil its commitments. Probably, NFE will reach this number at some point of 2022 (Still good news).
The key point here is the supply agreements NFE inks to obtain the LNG. In the past, it had a bad experience with Centrica as it signed a $7.13/MMBtu and the HH price drop, making its COGS very expensive. NFE cancelled this contract and now there is a new contract with Shell plus a couple of other providers (1.15HH + 2.5) which can make NFE to obtain around $4-5 operating margin.
Economics for the terminals are quite simple. NFE inks some long term (20-25 years) contracts and it builds a terminal considerably higher than the needs they have at the moment. Then they are focused on increasing the utilisation. As the fixed costs are important, NFE gets “exponential” returns as soon as they increase the utilisation.
New Fortress FLNG – Golar Hilli
The company has acquired a 50% stake in Trains 1 and 2 of Golar Hilli. This interest will provide NFE $79.4MM per year plus a potential bonus if Brent is higher than $60 ($3 per each $ that Brent average higher than $60 with a cap of $100). The contract finishes in 2026 plus 2-year option.
New Fortress FRSU segment
The vast majority of vessels will go to NFE terminals as soon as they finish their current contracts. The only two exceptions will be Nusantra Satu and Eskimo. Both vessels do not finish their current contracts until 2026 / 2025.
Thanks to the acquisition of Golar LNG Partners, NFE will diminish the logistics (FRSU) costs. The savings between owning and renting will be around $5MM per vessel per year (NFE guidance = $6MM)
New Fortress Power Plants
There are several power plants in operation and other under construction and planned. However, power plants are not a pillar in the NFE’ strategy. NFE will probably sell them to invest in terminals if they need money as to grow its terminal business.
Sergipe – 1.5GW – 25 years contract – In operation at low utilisation rate
Jamalco – 100MW – 25 years contract
Puerto Sandino – 300MW – Under Construction
La Paz – 125MW – Under Construction
Barcarena – 605MW – Planned to 2025
Suape – 288MW – Planned to 2022
New Fortress valuation
There are so many assumptions underlying the valuation of the company. In the end, the most important thing is the process itself and not the result. As it allows the investor to differentiate the key aspects which can affect the price more heavily.
The variable with more weight in the NFE valuation is the utilisation of the terminals. We have assumed they reach 70-85% utilisation in 2025 and then maintain a plateau for the rest of the useful life of the assets.
The current margins in the Caribbean countries are in the $4.5 – $5 range. The logistics and good contracts signed are making this possible. However, we have been more cautious with Hygo and with the potential projects ($2 operative margin). Our feeling is that these $2 OM from Hygo will increase to $3-$4 once they renew the current supply contracts.
In terms of expansion, we have modestly assumed four new projects for 2022. This assumption affects the Capex, debt, revenue and EBITDA. If NFE signs 4 new projects this year to start in 2022, it will be out of its forecasted 15-20 terminals range. However, we are assuming that Edens(CEO) is over-optimistic by nature. The size of these four hypothetical new terminals would be like the La Paz one.
We are only assuming income for Hilli until 2028 (2026+2 years option). The most probable outcome for Hilli is to continue generating income in a new project. Therefore, this assumption is ultra-conservative. Plus $63 Brent price since 2022 adding 10MM.
Last but not least are the power plants, which are not a strategic asset, NFE is looking for long term contracts and sell them to mature infrastructure companies (our feeling), obtaining enough money to continue growing. So far Jamalco and Sergipe are producing revenue as soon Puerto Sandino, Mexico and Suape will be. Once all of them are in operations, It is forecasted to produce around $300MM EBITDA.
We maintain the position after acquiring Hygo. It has been a wise movement from NFE and we think this grow tale is still in its first chapters.
Current valuation under these assumptions is $47.94 (DCF Model – WACC 9.39%). We understand this as an intermediate scenario because the assumptions regarding the utilisation of the terminals are a bit aggressive. However, all the other assumptions are quite humble. There is nothing related to the hydrogen department included in the analysis as we also consider that it is very soon to take this into account.
In terms of EV/EBITDA 2022, taking 13x (peers), the valuation would be higher ($60.53). This number varies a lot depending on the assumptions taken. Our main takeaway is that if things continue following the NFE guideline, even 3-9 months later, there is potentially a significant upside for the coming years. However, we should keep an eye over the utilisation rates and the number/conditions of the terminals signed in the future. Expectations are high enough to be easy to disappoint.