Early LNG Margin Dependence And Contract Risks Will Restrain Long Term Cash Generation

Catalysts

About NextDecade

NextDecade is a liquefied natural gas company developing and constructing the Rio Grande LNG export facility in the U.S. Gulf Coast, with plans for up to 10 liquefaction trains.

What are the underlying business or industry changes driving this perspective?

• Reliance on early LNG cargo margins of US$3 to US$5 per MMBtu to help repay term loans and move toward a 3 to 3.5x debt to adjusted EBITDA target leaves limited room for weaker pricing or operational hiccups. This could pressure distributable cash flow and delay deleveraging.
• A build out to 60 million tonnes per annum across 10 trains depends on continued appetite for long-dated LNG contracts into the 2030s and beyond. Any slowdown in long term contracting could leave capacity underutilized and weigh on revenue growth from Trains 6 through 8.
• High dependence on global LNG trade flows and potential supply shocks, such as geopolitical disruptions that already affected about 20% of global LNG supply, could increase earnings volatility and complicate efforts to lock in stable net margins on uncontracted volumes.
• Execution risk around commissioning five identical trains, ramping to nameplate production and possibly pushing volumes above nameplate introduces several operational variables. Lower than expected output or higher than expected contingencies would reduce cash available to service corporate level debt and support earnings.
• The plan to keep a portion of Trains 4 and 5 volumes uncontracted to capture higher spot margins, with additional contracting as a fallback, increases exposure to LNG price cycles. This could result in lower distributable cash flow if margins trend closer to the US$3 per MMBtu sensitivity rather than the US$5 case.

Assumptions

How have these above catalysts been quantified?

• This narrative explores a more pessimistic perspective on NextDecade compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• NextDecade currently has no revenue. The bearish analysts are forecasting revenue to reach $194.1 million by March 2029.
• The bearish analysts are not forecasting that NextDecade will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate NextDecade's profit margin will increase from 0.0% to the average US Oil and Gas industry of 15.1% in 3 years.
• If NextDecade's profit margin were to converge on the industry average, you could expect earnings to reach $29.3 million (and earnings per share of $0.11) by about March 2029, up from -$306.4 million today.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 69.5x on those 2029 earnings, up from -6.3x today. This future PE is greater than the current PE for the US Oil and Gas industry at 15.7x.
• The bearish analysts expect the number of shares outstanding to grow by 1.55% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.98%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Long term LNG demand for the 2030s and beyond is described as strong, with customers showing interest in new supply from Train 6 and potential later trains. If this interest translates into additional long dated SPAs, it could support higher contracted revenue and reduce exposure to weaker spot prices, improving visibility on future distributable cash flow.
• Trains 1 through 5 are already approximately 85% contracted on long term agreements with a weighted average life of 19.5 years and around US$3b of annual fixed fee cash flow before escalation. Management is open to lifting that to about 90% through extra contracting, which could stabilize net margins and earnings even if short term market conditions soften.
• Construction of Phase 1 is tracking safely, within budget and ahead of guaranteed completion dates, with Trains 1 and 2 around 65% complete and Train 3 close to 40% complete as of early 2026. Trains 4 and 5 are already progressing after FID, so any continued on time or early delivery and successful ramp up would support earlier cash generation and help service debt, which could underpin earnings.
• The company has already pre sold part of the early LNG cargoes at margins above US$3 per MMBtu and sees strong appetite for remaining early volumes. Management has outlined sensitivities where early margins of US$3 to US$5 per MMBtu still support projected distributable cash flow of US$1.2b to US$2b, so sustained healthy margins on these volumes could strengthen cash flow and help move leverage toward the 3 to 3.5x debt to adjusted EBITDA target.
• The financing structure for Trains 4 and 5, including delayed draw project finance facilities and the flexible FinCo loan that can be prepaid or partially undrawn, together with options to shift more funding to project level debt if needed, provides several routes to adjust the capital structure. This could help manage interest costs and support net income and earnings if executed as planned.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for NextDecade is $6.0, which represents up to two standard deviations below the consensus price target of $8.0. This valuation is based on what can be assumed as the expectations of NextDecade's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $12.0, and the most bearish reporting a price target of just $6.0.
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2029, revenues will be $194.1 million, earnings will come to $29.3 million, and it would be trading on a PE ratio of 69.5x, assuming you use a discount rate of 7.0%.
• Given the current share price of $7.28, the analyst price target of $6.0 is 21.3% lower. Despite analysts expecting the underlying business to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.