New Fortress Energy Stock: Do Not Ignore Its FLNG Units’ Potentials

In the past six months, New Fortress Energy’s (NASDAQ:NFE) stock price decreased by 33%, making it more attractive than before. The company has been able to optimize its portfolio and improve its operating margins. In the third quarter of 2022, NFE reported a net income of $56 million, after reporting a net loss of $178 million in the previous quarter. The main driver of NFE’s net income in the following quarters will be the deployment of FLNG 1 which is expected to happen in a few months. As a result, I expect NFE to be able to reward its shareholders by issuing dividends and buying back shares and also paying its debt. According to NFE’s dividend policy, it targets an annual dividend equal to 40% of its adjusted EBITDA per year. NFE stock is a buy.

3Q 2022 results

In its 3Q 2022 financial results, New Fortress Energy reported revenues of $731.9 million, compared with 2Q 2022 revenues of $584.9 million. In 3Q 2022, NFE’s operating revenue and vessel charter revenue increased by 27% QoQ to $632.7 million and 24% QoQ to $92.9 million, respectively. The company’s cost of sales increased from $272.4 million in 2Q 2022 to $393.8 million in 3Q 2022.

The company’s net loss of $178.4 million in 2Q 2022 turned into a net income of $56.2 million in 3Q 2022. Also, the company’s adjusted net income decreased from $145.7 million in 2Q 2022 to $85.6 million in 3Q 2022. NFE reported an adjusted EBITA of $290.7 million in the third quarter of 2022, compared with $283.5 million in the previous quarter. New Fortress Energy’s total segment operating margin increased from $327.4 million in 2Q 2022 to $339.3 million in 3Q 2022, driven by higher terminals and infrastructure segment operating margin, partially offset by lower ships segment operating margin.

“We are on track to achieve our Illustrative Adjusted EBITDA Goal of ~$1.1 billion for 2022,” the company stated. Relying on the deployment of two of its FLNG units, its new contracts, and the LNG market outlook, New Fortress expects its adjusted EBITDA to increase to more than $2.5 billion in 2023.

The market outlook

According to the Gas Exporting Countries Forum (GECF), due to geopolitical events, declining in domestic natural gas production in some of the Asia-Pacific countries and Europe, and pipeline exports decreasing to Europe, LNG trade is expected to surpass pipeline volumes by 2026. Figure 1 shows that LNG trade is expected to increase at a fast pace in the following years, and pipeline volumes are expected to decrease slightly to below 600 billion cubic meters per year. Also, it is worth noting that due to the reopening of China, its LNG demand is expected to increase by 9% to 14% YoY, which causes global LNG imports to surpass 70 million metric tons (up 11% YoY) in 2023. Figure 2 shows that in the past months, LNK imports by Asia have been increasing. However, due to lower-than-normal temperatures, LNG imports by Europe decreased in January 2023. Moreover, As a result of dropped natural gas prices, JKM prices dropped.

Figure 1 – Global natural gas trade by flow type

Figure 2 – LNG imports by Asia and Europe

According to Figure 3, U.S. LNG gross import decreased from 0.06 Bcf/d in 3Q 2022 to 0.05 Mcf/d in 4Q 2022. EIA expects U.S. LNG gross import to increase to 0.1 Bcf/d in 1Q 2023, then decrease to 0.04 Bcf/d. U.S. LNG gross export increased from 9.74 Bcf/d in 3Q 2022 to 10.49 Bcf/d in 4Q 2023. EIA expects U.S. LNG gross export to increase to 11.23 Bcf/d in 1Q 2023 and 11.63 Bcf/d in 2Q 2023. As the Freeport facility is expected to go back online soon, U.S. LNG gross export is projected to increase by 11% YoY in 2023 and by 7% YoY in 2024.

Figure 3 – U.S. natural gas supply and consumption

Thus, for the sake of the increasing demand for U.S. LNG worldwide, New Fortress Energy is well-positioned to benefit from the current market conditions. The company expects the deployment of FLNG 1 in the first half of 2023. “Construction of our Fast LNG units is progressing rapidly, with the first FLNG unit expected to achieve Mechanical Completion in March 2023 and commence Operations by mid-2023,” the company stated in its 3Q 2022 financial and operational result. New Fortress has 5 FLNG units under deployment that will increase its LNG supply significantly in the following quarters (see Figure 4). According to Figure 5, the deployment of FLNG 1 and FLNG 2 is estimated to increase New Fortress Energy’s LNG supply by 41% in 2023 and 195% in 2024. It is worth noting that the company’s supply contracts (excluding FLNG volumes) increased from 88 TBtu in 2022 to 114 TBtu in 2023.

Figure 4 – NFE’s FLNG units

Figure 5 – NFE LNG supply projections

NFE performance outlook

Since the first quarter of 2022, the company’s cash and equivalents decreased by 11% to $138 million in 2Q 2022 versus its amount of $156 million at the end of 1Q 2022 and increased back to $364 million in 3Q 2022. On the other hand, a slight increase in total debt, combined with cash generation, caused its net debt to stay almost constant at $4460 million in 3Q 2022. Albeit NFE’s total equity improved slightly to $2310 million in 1Q 2022 compared with its previous amount of $1994 million at the end of 2021, it decreased back to $2002 million at the end of the third quarter of 2022. Also, the company’s net debt is over 18% higher year-over-year versus its level of $3776 million in 3Q 2021. Unfortunately, NFE’s cash generation and total equity are far beneath its net debt amount. However, according to the company’s investments and increasing supply contracts, and the company’s FLNG 1 mechanical completion in March 2023, their supply volume will be improved astonishingly and bring a scope of benefits for its shareholders and assimilate upcoming risks (see Figure 6).

Figure 6 – NFE’s capital structure (in millions)

Notwithstanding a negative operating cash flow in the third quarter of 2022, it does not necessarily equate to loss but reveals temporarily mismatched expenditures and income. Moreover, the company’s cash in hand was $818 million on November 2022 compared with its previous amount of $138 million in 2Q 2022, which indicates the company’s expected cash generation in the future. New Fortress Energy’s capital expenditures boosted by 82% to $345 million in the third quarter versus its amount of $189 million in the first quarter of 2022, which shows its focus on fostering growth and new investments. Ultimately, higher Capex combined with lower operating cash flow led to a negative free cash flow of $(425) million. In capital-intensive markets like the Energy market, some companies may report negative free cash flows as a result of constant reinvestments that may be compensated with accelerated growth in the future (see Figure 7).

Figure 7 – NFE’s cash structure (in millions)

To wrap up the company’s performance outlook, I analyze New Fortress Energy’s liquidity by considering its cash and current ratios. Notwithstanding shortcoming cash generation results, NFE’s liquidity analysis indicated an encouraging picture. A considerable increase in NFE’s assets from $736.6 million in the second quarter to $1044.6 million in the third quarter of 2022, combined with a slight decrease in liabilities, affected the company’s current ratio of 1.24 in 2Q 2022 to increase by 47% to 1.83 in 3Q 2022. Furthermore, for an increase in the company’s cash balance in 3Q 2022, its cash ratio improved to 0.64 in the third quarter of 2022 from 0.23 at the end of 2Q 2022. In short, New Fortress Energy’s liquidity position paved almost an improving path during the previous year (see Figure 8).

Figure 8 – NFE’s liquidity ratios

Summary

The deployment of FLNG 1 is expected to happen in 1H 2023 and it will add to New Fortress Energy’s LNG supply considerably. The company has announced an adjusted EBITDA of more than $2.5 billion in 2023, compared with $1.1 billion in 2022. According to its contracts, the progress of its FLNG units, and the strong market outlook for LNG, I see NFE’s expectations come true. The stock is a buy.