Excelerate Energy: Europe’s LNG Crisis Demands Focus (NYSE:EE)

The chaos and speculation, and more recent formal accusation of sabotage, surrounding the rupture of the Nord Stream pipelines is another reminder of how important energy security is right now. Ever since Russia’s invasion of Ukraine, Europe has been scrambling to find new sources of energy. Among the companies working to provide access to alternative liquefied natural gas is Excelerate Energy (NYSE:EE). Despite numerous catalysts I outlined in my previous article, the company’s share price (along with other solid LNG plays like FLEX LNG (FLNG) has fallen, as oil has retreated. This disconnect between the ever-increasing importance of LNG and declining share price presents an opportunity.

Macro Environment Still Strong as Ever for Gas, Despite Sentiment and Selloff

The rupture of both Nord Stream pipelines this week, following the prior indefinite shut-off of the Nord Stream’s flow to Europe, has once again triggered concerns about Europe’s reliance on Russian gas. Additionally, spot rates have soared for LNG vessels – above $200,000 amidst record tightness and demand for LNG. Despite all of this news that supports a historically-good market for LNG import projects and FSRUs, Excelerate’s share price has fallen as the market has taken a risk-off approach with oil (CL1:COM) dropping and Excelerate has followed other energy stocks to be the worst-performing sector in the past few weeks.

Compare Excelerate’s one-month chart and you will see the company closely tracking the price of oil downwards.

With both oil and Excelerate selling off roughly 13%, it is clear we are seeing a market correction in energy (though oil is down more over a longer period from its peak).

However, as I will illustrate, Excelerate has a number of strong projects that are unlinked from spot prices that should support improved earnings for the company despite the increasingly-hostile macro environment we seem to be in.

The good news for Excelerate is that energy security always comes first, with recent moves by countless governments to guarantee supplies of gas and cap prices for consumers while still paying the market price to suppliers.

Excelerate’s Increasing Importance to European LNG Supplies

In addition to the arrival of one of Excelerate’s vessels in Finland in December, I have previously discussed the company’s plans to turn Albania into a new gas hub for Southern Europe. Though little has changed in Finland, the Albanian project is getting closer to realization. We still lack a formal contract or terms for the project in Albania, but recent developments point to one coming soon. Albania and Serbia’s energy ministers signed a memorandum of cooperation on energy in early September, primarily relating to the construction of an Albanian LNG terminal. North Macedonia also joined in an agreement to work on making a working group for joint strategic projects, including a new Balkan gas hub. At the Southeast Europe Energy Forum on September 12, Albania’s Minister of Infrastructure and Energy said:

“[The US Embassy in Albania] enabled us to make contact with prestigious American companies such as Excelerate Energy, which is working very closely with us for the project of the thermal power plant and the LNG terminal in Vlora”

This all suggests the project is moving along, and with recent events only further strengthening Europe’s resolve to secure alternative natural gas sources, I am confident we will have more details on this project by the end of the year. Which should be a boon to the company’s share price. There was another development in early September with Excelerate signing a term sheet with Engie (OTCPK:ENGIY) to deploy an FSRU to Germany for five years, adding another reliable counterparty to the company’s list.

New Business Plans Elsewhere Too

Currently, Excelerate’s main revenue source is Brazil, since the company is actually involved in distribution there. A risk that I previously discussed, is the end of the company’s contract with Petrobras (PBR) at the end of the year. However, Excelerate seems to be positioning this as an opportunity for the company to further expand in Brazil, either through rechartering its FSRU elsewhere or continuing to be a gas importer for Brazil. Additionally, the company’s Vice President for Latin America suggested the company is aiming to enter the gas-to-power and small-scale LNG markets in Brazil.

Another project Excelerate has been working on for some time now is a new LNG terminal in the Philippines. As of September 27, the company is still waiting on a permit from the Philippines Department of Energy. Though it may be several months more before construction begins, this project would have a capacity of 5 million tons of LNG per annum, which would be significant.

Valuation Update Amidst an Adverse Market

As mentioned earlier, Excelerate’s share price has fallen considerably in the past few weeks. Even just retaking the recent high of $28.23 gives us a 20% upside. The company is currently trading at less than 10 times forward earnings, according to my estimates (laid out here). I think that the company will earn close to $2.40 in 2022 if the Albanian project is able to come online in the second half. A fair valuation of the company at 15 times earnings would give us a share price of $36, for a sizeable 50% upside.

Risks

The risks have hardly changed from my previous, extensive write-up on the company, but I will quickly recap and update them here.

The company’s revenue concentration in Brazil is slightly less concerning with such strong demand coming from Europe and the new German deal. Additionally, it is now clear that the company has plans to continue doing business in Brazil, which was previously more ambiguous.

The organizational risk, with Kaiser as a controlling interest, has not changed and remains one of the drawbacks of Excelerate as an investment. At the same time, I do not think it completely writes off the company as his shares to not receive dividends and will eventually be converted or canceled.

Fluctuations in LNG spot prices, as previously mentioned, have little to do with Excelerate’s business model but investors should pay careful attention to the terms of new deals. Finally, Excelerate’s business is highly politically-involved given the nature of energy security and infrastructure. Thankfully, the company is well connected and the global energy crisis has put the company’s services in high demand meaning finding another country as a client is hardly a task at all.

Takeaway

In a hostile macro-environment, where investors are increasingly derisking and moving away from energy as oil prices fall, putting energy stocks at the bottom of the S&P 500, Excelerate Energy remains an attractive buy. The company’s stock sometimes trades like oil, but the company’s business is far from linked to spot-price fluctuations. In fact, its contracted nature provides not only security but near-term upside. Once the contracts for the Albanian and Philippine LNG import terminals are concluded, the company will have a much-improved revenue profile. In the end, while inflation may put pressure on oil and risk seems high, gas to heat homes will still be needed, and that’s what Excelerate Energy facilitates.

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