New Fortress Energy's Business Model Is Ambitious, To Say the Least

Sector Strategist

Stephen Ellis

Associate Equity Analyst

Adam Baker

Befitting its private equity roots, New Fortress Energy seeks to provide an integrated solution for certain regions that lack where cheap, reliable, and efficient sources of power are scarce, primarily by providing gas or liquified natural gas solutions. It has been reasonably successful at identifying and acquiring infrastructure in countries such as Jamaica or Brazil that are very underutilized because of existing market challenges or relative geographic isolation, and using them to supply gas to the country, often displacing far more expensive and less reliable sources of power. 

New Fortress goes beyond just sourcing and supplying gas to countries that are operating in relative energy poverty. It will build gas power plants and seek to retain control over every part of the value chain, operating similarly to a utility. This approach has secured them several LNG-to-power contracts at relatively high prices, given the cost of electricity in its markets is usually far higher than in more developed countries.

While these contracts address the demand side of the equation, they leave New Fortress exposed to uncertain gas supply costs. Its latest effort, called Fast LNG, is repurposing old offshore rigs for floating liquefied natural gas, or FLNG, needs. It has contracted with Pemex to exploit the Lakach field in offshore Mexico to secure lower and more secure gas supply costs, which can then be used to serve its existing LNG-to-power contracts, improving its margins. We have concerns about whether the Lakash field will continue to grow beyond 2027, suggesting New Fortress may need to invest more in drilling new wells than its initial seven-well plan to support its future needs. Fast LNG vessel costs have increased massively since being announced, as costs now are at $1.3 billion per vessel compared with initial expectations of $500 million each. 

New Fortress also differs from the typical U.S. LNG exporter in that it is more exposed to power and gas spreads than peers. As U.S. and EU gas prices have fallen recently, its illustrative EBITDA forecasts over the next few years have declined similarly to $2.4 billion from over $5 billion.

Business Strategy & Outlook

New Fortress is in the process of building out a fleet of five seaborne liquefaction terminals, which New Fortress calls Fast LNG. These terminals can produce LNG to feed its network of eight import terminals and power generation facilities in five countries, but primarily in the Caribbean and Brazil. Ultimately, power generated by its gas plants is sold to local utilities at a contracted rate. This integrated model is what New Fortress describes as LNG-to-power. In addition, New Fortress has entered into a joint venture with Pemex to develop the Lakach gas field using a Fast LNG vessel to gain below-market-cost gas in order to widen its power contract margins. This allows the company to generate significant adjusted ROIC in excess of its cost of capital, averaging 16.2% versus 10.3% over 10 years. 

Despite the healthy ROIC/WACC spread on average, we do not think that New Fortress has a moat. We have little confidence that it has a durable source of low-cost gas, or that it has locked in high enough power prices via contract to secure a viable spread throughout the commodity cycle, or that it has enough protection built into its contracts in the form of a large, fixed fee or make-whole fees to protect its business during a weak market. ROICs also decline below WACC in the latter stages of our model when we assume the business model reaches more of steady-state status. 

We assign no moat to the terminals and infrastructure segment. Despite forecasting that New Fortress will achieve an adjusted ROIC averaging 16.2% over 10 years, this is almost wholly dependent on it securing a wide enough spread, based on our assumed contracted rate from its downstream consumers as well as highly uncertain gas supply costs. 

Broadly, we have a number of concerns with New Fortress business model and its ability to earn durable returns that contribute to our no-moat rating. Currently, New Fortress terminals are in underserved markets, but as we saw in the aftermath of the invasion of Ukraine, there is a significant ability to bring additional LNG capacity to a region quickly. New Fortress strategy of vertical integration makes sense when the market was less mature and supply/demand mismatch at most stages created headaches. It is not clear how long this situation will remain, but it's not interminable. The U.S. is developing significant LNG export capacity, which should go a long way to solving the lack of LNG available for some of New Fortress markets. It is not inconceivable that this alternative supply may be available at costs competitive to New Fortress, reducing or eliminating any potential cost advantage. 

New Fortress has focused its terminal development in markets that have been ignored or underinvested in and experience acute energy supply problems. The energy supply issues have created very favorable conditions for high power prices. By introducing lower-cost and more reliable gas via LNG, New Fortress is capturing substantial margins. However, as gas increases as part of the overall energy mix for a region, power prices are likely to decline, reflecting the absence of the initial imbalance. As a result, we would anticipate lower spreads and returns for New Fortress over time as its markets develop further and gas penetration increases as a percentage of a country's energy mix. 

There are also substitutes for LNG, which are currently being used in the markets in which New Fortress operates. Coal, gas, and renewables are all at play, but as previously mentioned many of the markets are unable to adequately meet demand with these current sources. The introduction of LNG at first to fill the gap and then displace dirtier and more expensive sources of energy should provide a tailwind for contract negotiations. If these alternative options become more competitive then this will create issues for New Fortress. 

Our concerns speak to the importance of contracts for its terminals, and we are not very enthusiastic here. We expect near-term contracting efforts to be somewhat challenging as LNG prices have declined from 2022 highs with little clarity on how the existing contracts are structured and what kind of power prices New Fortress would be able to lock in as revenue on new efforts. The gap in contracted volumes for its terminals also means New Fortress may not be able to contract power volumes with customers at wide enough margins to support the planned Fast LNG supply volumes. New Fortress only had 6% of its terminal capacity utilized and underdelivered on its contracted volumes by 15% in 2022. Over the next five years we expect that utilization to grow to 30% as new contracts are signed. 

With little clarity into what long-term prices New Fortress has contracted its power for with customers, we currently assume that New Fortress will be able to get a $15-$20 spread indexed to Henry Hub based on current market rates in each of New Fortress major markets (Jamaica, Brazil and so on). Margins like that give the business incredible potential for excess returns, but it can just as easily result in severe financial challenges if they are not realized. With just a 10% reduction to that margin, New Fortress returns less than its cost of capital. 

This level of sensitivity shows that securing low-cost supply can be critical to building a moat around its business. While the Fast LNG model was developed to secure low-cost gas supply versus buying from third parties (Cheniere, Shell, Ocean LNG), it adds substantial fixed costs to the business through higher vessel operating costs that must be covered throughout the cycle versus simply acquiring the LNG as needed from third parties. There are currently only plans for five Fast LNG units to be deployed over the next four years, two at Altamira, one for the Lakach field, and two currently pending permitting approval in Louisiana. If we bring additional units online after these assuming a more normal price environment, value begins to be impaired as the cost of development is outweighing the additional volumes. This forecast shows how the ample ROICs may be an accident of timing, investing heavily during a market upcycle. 

At present, there are no active Fast LNG vessels that would underpin any potential cost advantage. Only three out of the planned five have cleared regulatory approval and if the remaining two are not approved for the U.S. jurisdictions as currently planned, New Fortress will have to find a new destination for them potentially increasing the costs of its operations. 

The first test case for the Fast LNG model is the jointly developed offshore gas field (Lakach) with Pemex. New Fortress has established a JV with Pemex to develop the offshore Lakach gas field providing New Fortress with discounted natural gas for a single Fast LNG vessel. Should this pan out, it could be highly lucrative for both parties, but at present Rystad does not estimate the field to be able to reliably supply both parties needs for more than three years. Additionally, Rystad said in July 23 that the field is “uncommercial due to low reserves in comparison with its cost of development” and unlikely to come online as planned in 2025. This forecast will result in the vessel being underutilized unless additional investment is made or it is relocated, removing any short-term cost advantage provided by the relationship. 

We are marginally more optimistic regarding the two Altamira vessels, but they are only expected to enter operation in 2025, so it still is uncertain whether the model will work efficiently. Two of the Fast LNG vessels that are under contract are actually going to be stationed offshore and are committed to exporting LNG from an onshore pipeline filled with Texas gas. The gas will be delivered to the Altamira site in Mexico, which was built in 2006 and is currently vastly underutilized. This onshore terminal is currently being served by TC Energys Sur De Texas pipeline, which can transport 2.6 billion cubic feet per day from Brownsville, Texas, but is only 20% utilized at the moment. Mexico's state-owned utility, CFE, is already paying a fixed tariff amounting to hundreds of millions of dollars for the unused capacity to TC Energy. Thus, with access already to the gas, CFE has agreed to provide the needed gas and transportation for the two Fast LNG liquefiers (2.8 million metric tons per annum) in exchange for a 10% profit ownership of the first Fast LNG unit and a 15% ownership in the second as part of a 15-year contract. 

We assign no moat to the ships segment. This is a transport business in a highly competitive space that has been re-organized into Energos, a JV with Apollo, which New Fortress has a 20% stake in. Over the longer term, this segment will help support the T+I segment as the vessels existing leases end. This support could serve to bolster any potential cost advantage of the T+I segment, but it would largely depend on the market for the ships being short of capacity over the long run, which we doubt will be the case.

LNGs potential to supplant dirtier oil and coal currently being utilized by many of its less developed markets reduces the immediate carbon concerns and serves as a positive from an ESG perspective. New Fortress is tackling many regions and parts of the energy value chain that have historically presented substantial difficulties to effectively address with low-cost and cleaner energy. The primary negative issue is that management appears to have underestimated permitting and stakeholder pushback. Most projects have experienced permitting delays and stakeholders have pushed back on port dredging project. Management has also been upbeat about its Hydrogen potential, but we see this as remaining noncore and a potential divestiture. The Shannon, Ireland terminal project was pushed by management for its hydrogen potential until it received approval to import LNG.

None

Economic Moat

New Fortress Energy

New Fortress Energy, Inc. is a holding company engaged in the management of integrated gas-to-power energy infrastructure. It funds, builds, and operates natural gas infrastructure and logistics to deliver energy solutions. The company was founded by Wesley Robert Edens on February 25, 2014 and is headquartered in New York, NY.

Earnings data Q3 2023

Revenue

Cost of revenue

Gross profit

Operating expenses

SG&A

Other

Operating income

EBITDA

Net income

Earnings per share

Total assets

Current assets

Cash & equivalents

Receivables

Inventory

Non-current assets

Net PPE

Intangibles

Total liabilities

Current liabilities

Short term debt

Income tax payable

Non-current liabilities

Long-term debt

Total equity

Stockholders equity

Minority interest

Total liabilities & equity

Total debt

Net debt

Book value per share

Cash from operations

Funds from operations

Change in working capital

Cash from investing

Capital expenditure

Purchase/sale of investments

Purchase/sale of business

Other sources

Cash from financing

Change in stock

Change in debt

Cash dividends paid

Cash from other sources

Net change in cash

Free cash flow

The Energy sector has outperformed in Q3, benefiting from rising oil prices and increased demand. New Fortress Energy receives a buy rating despite uncertainties surrounding capex execution and its debt burden. NFE's earnings, valuation, and free cash flow outlooks are seen as improving, but there are some troubling valuation metrics and key risks.

New Fortress: Watching Capex Trends, Shares Remain A Compelling Value

NATICK, Mass.--(BUSINESS WIRE)--Electric Hydrogen Co. (EH2), a manufacturer of advanced, industrial-scale hydrogen electrolyzer technology, and New Fortress Energy Inc. (NASDAQ: NFE) announced today that they have entered into a definitive agreement for supply of EH2's flagship 100 megawatt (MW) electrolyzer system to NFE's green hydrogen project in Texas. Expected to be one of the largest in North America, the facility will be enabled by EH2's ground-breaking advanced electrolysis technology,.

Electric Hydrogen to Supply Electrolyzer Technology for one of North America's Largest Green Hydrogen Facilities

Cheniere Energy

Brunswick

Delta Air Lines

Everest Group Ltd

First Citizens BancShares

Graphic Packaging Hld

Jazz Pharmaceuticals

Nexstar Media Group

Vistra Energy

Some investors place themselves in either the growth camp — focusing on the most rapidly growing companies, no matter how high their stock prices may be — or the value camp, going with slow growers that are trading on the cheap. Today we're screening a group of hundreds of growth stocks to highlight 10 trading at forward price-to-earnings valuations that are less than half that of the S&P 500.

10 growth stocks that are trading at bargain prices, including Delta and Cheniere Energy

New Fortress Energy (NFE) came out with quarterly earnings of $0.58 per share, beating the Zacks Consensus Estimate of $0.56 per share. This compares to earnings of $0.69 per share a year ago.

New Fortress Energy (NFE) Q2 Earnings Surpass Estimates

NEW YORK--(BUSINESS WIRE)--New Fortress Energy Inc. (Nasdaq: NFE) (“NFE” or the “Company”) today reported its financial results for the second quarter of 2023. Summary Highlights Adjusted EBITDA(1) of $246 million in the second quarter of 2023 and $686 million in the first half of 2023 Net income of $120 million in the second quarter of 2023 and $272 million in the first half of 2023 Adjusted EPS(2) of $0.58 on a fully diluted basis in the second quarter of 2023 and $1.48 in the first half of 2.

New Fortress Energy Announces Second Quarter 2023 Results

Direxion Hydrogen ETF

Plug Power

With the uptick in the global alternative energy sector, hydrogen stocks have been thrust into prominence. With the sector flourishing rapidly, there's no denying the potential for high-return alternative energy stocks.

Buy Alert: 3 Hydrogen Stocks Nearing Super Attractive Entry Points

NEW YORK--(BUSINESS WIRE)--Golar LNG Partners LP, an indirect subsidiary of New Fortress Energy Inc. (NASDAQ: NFE), has declared a cash distribution of $0.546875 per unit of 8.75% Series A Cumulative Redeemable Preferred Units for the period from May 15, 2023 through August 14, 2023. This will be payable on August 15, 2023 to all Series A preferred unitholders of record as of August 8, 2023. About New Fortress Energy Inc. New Fortress Energy Inc. (NASDAQ: NFE) is a global energy infrastructure.

Golar LNG Partners LP Series A Preferred Cash Distribution

Cool Co Ltd

Capital Product Partners

Chevron

Excelerate Energy Inc

Flex Lng Ltd

Golar LNG

Nippon Yusen KK

Shell PLC

The LNG market has stabilized, leading to a slowdown in the LNG shipping sector, with the UP World LNG Shipping Index declining 3.79% in Q2. Despite the slowdown, big investors are showing interest in the industry, with recent IPOs, merger deals, and takeovers, and investors maintaining faith in the sector's potential. The worst part of the year for LNG shippers is over, and positive expectations for the upcoming winter season could impact the UPI, potentially pushing it to cross the 155 mark in Q2.

The Second Quarter Provided LNG Shippers With A Stable Base Of Growth

American Airlines

ChargePoint Holdings

JD.com

ReneSola

StoneCo

Teladoc

Many bargain growth stocks with strong fundamentals are now trading at attractive valuations. These stocks have been sold off aggressively over the last two years, and remain under-appreciated.

7 Bargain Growth Stocks to Buy Before They Bounce Back

New Fortress Energy's stock has been upgraded to a buy from a hold due to a solid valuation and improved chart, despite higher commodity prices and financing costs. The company reported a solid Q1, with EPS at $0.90, topping the consensus estimate of $0.83, and revenue up 15% YoY, though it missed expectations. The company faces headwinds such as soft oil and gas prices and high debt yields, but analysts see earnings normalizing above the $4 level this year with gradual increases in the future.

New Fortress: A Better Valuation After Strong Q1 Results, Improved Technicals (Rating Upgrade)

NEW YORK--(BUSINESS WIRE)--New Fortress Energy Inc. (NASDAQ: NFE) (the “Company”) plans to announce its financial results for the second quarter 2023 prior to 8:00 A.M. Eastern Time on Tuesday, August 8th, 2023. A copy of the press release and an earnings supplement will be posted to the Investors section of the Company's website, www.newfortressenergy.com. In addition, management will host a conference call on Tuesday, August 8th, 2023 at 8:00 A.M. Eastern Time. The conference call may be acce.

New Fortress Energy Schedules Second Quarter 2023 Earnings Release and Conference Call

NEW YORK--(BUSINESS WIRE)--New Fortress Energy Inc. (NASDAQ: NFE) announced that it has received an export permit for its Altamira Fast LNG facility from Mexico's Ministry of Energy (Secretaría de Energía (SENER)). Under the permit granted by SENER, NFE is now authorized to export up to 7.8 million metric tons through April, 2028, providing ample capacity to support the operations of the 1.4 million tons per annum (MTPA) Fast LNG facility through the permitted period. Additionally, as previousl.

New Fortress Energy Receives Mexico Export Authorization For Altamira Fast LNG Project

New Fortress Energy Inc. (NASDAQ:NFE ) Q1 2023 Earnings Conference Call May 4, 2023 8:00 AM ET Company Participants Patrick Hughes – Investor Relations Wes Edens – Chairman and Chief Executive Officer Brandon Bonfig – Assistant Vice President Chris Guinta – Chief Financial Officer Andrew Dete – Managing Director, Commercial Conference Call Participants Ben Nolan – Stifel Devin McDermott – Morgan Stanley Sam Margolin – Wolfe Research Chris Robertson – Deutsche Cameron Lochridge – Bank of America Sam Burwell – Jefferies Sean Morgan – Evercore Operator Good day, ladies and gentlemen, and thank you all for joining us for this NFE First Quarter 2023 Earnings Conference Call. As a reminder, all lines are in a listen-only mode, but later you will have the opportunity to ask questions.

New Fortress Energy Inc. (NFE) Q1 2023 Earnings Call Transcript

New Fortress Energy (NFE) came out with quarterly earnings of $0.90 per share, missing the Zacks Consensus Estimate of $0.97 per share. This compares to earnings of $1.13 per share a year ago.

New Fortress Energy (NFE) Misses Q1 Earnings and Revenue Estimates

NEW YORK--(BUSINESS WIRE)--New Fortress Energy Announces First Quarter 2023 Results.

New Fortress Energy Announces First Quarter 2023 Results

The completion of New Fortress Energy's first FLNG unit is expected to happen soon, increasing the company's LNG supply by 29 TBtus and 63 TBtus in 2023 and 2024, respectively. Also, as we get close to the new winter season, the LNG market condition can become more favorable.

New Fortress Energy: Market Outlook, First FLNG Project, And Risks

New Fortress Energy (NFE) doesn't possess the right combination of the two key ingredients for a likely earnings beat in its upcoming report. Get prepared with the key expectations.

Analysts Estimate New Fortress Energy (NFE) to Report a Decline in Earnings: What to Look Out for

NEW YORK--(BUSINESS WIRE)--New Fortress Energy Schedules First Quarter 2023 Earnings Release and Conference Call

New Fortress Energy Schedules First Quarter 2023 Earnings Release and Conference Call

NEW YORK--(BUSINESS WIRE)--New Fortress Energy Inc. (NASDAQ: NFE) announced that its Puerto Rico subsidiaries, NFE Power PR LLC and NFEnergia LLC, have entered into agreements with Weston Solution, Inc. (“Weston”) for the installation and operations of 150 MW of additional power generation at the Palo Seco Power Plant in Puerto Rico as well as the supply of natural gas.

New Fortress Energy Signs Contract To Provide 150MW Of Fast Power In Puerto Rico

The liquefied natural gas company disappointed investors.

Why New Fortress Energy Stock Is Plunging Today

New Fortress Energy Inc. (NASDAQ:NFE ) Q4 2022 Earnings Conference Call February 28, 2023 8:00 AM ET Company Participants Patrick Hughes - Investor Relations Wes Edens - Chairman and Chief Executive Officer Chris Guinta - Chief Financial Officer Andrew Dete - Managing Director, Commercial Cameron MacDougall - Secretary Conference Call Participants Cameron Lochridge - Bank of America Marc Solecitto - Barclays Sam Burwell - Jefferies Sean Morgan - Evercore Greg Lewis - BTIG Martin Malloy - Johnson Rice Operator Good day and welcome to the New Fortress Energy Fourth Quarter 2022 Earnings Conference Call. Today's conference is being recorded.

New Fortress Energy Inc. (NFE) Q4 2022 Earnings Call Transcript

New Fortress Energy (NFE) delivered earnings and revenue surprises of 19.18% and 31.58%, respectively, for the quarter ended December 2022. Do the numbers hold clues to what lies ahead for the stock?

New Fortress Energy (NFE) Q4 Earnings Beat Estimates

NEW YORK--(BUSINESS WIRE)--New Fortress Energy Announces Fourth Quarter and Full Year 2022 Results

New Fortress Energy Announces Fourth Quarter and Full Year 2022 Results

Earnings Preview: New Fortress Energy (NFE) Q4 Earnings Expected to Decline

Energy Transfer LP Unit

FS KKR Capital Corp

Gladstone Commercial

Altria

Medical Properties Trust

If you believe some of the top Wall Street strategists, the 2023 rally is almost over.

Dividend Lovers Are Flying Into These ‘Strong Buy' 7% or More Yielding Stocks

News for New Fortress Energy Stock (NFE)