NFE: Puerto Rico LNG Agreement Will Drive Stronger Recovery Ahead

Key Takeaways

• The FLNG asset and core market demand growth are poised to increase revenue, boosting earnings and financial health.
  
• Strategic debt reduction and new market opportunities, like power plant projects in Puerto Rico and Brazilian auctions, promise enhanced margins and stable future earnings.
  
• Expansion and dependence on key markets like Puerto Rico involve risks from geopolitical changes, execution challenges, and fluctuating global gas prices impacting margins and revenue.

Catalysts

Operates as an integrated gas-to-power energy infrastructure company that provides energy and development services to end-users worldwide.

• The FLNG asset coming online is expected to significantly contribute to future earnings as it allows optimization of the portfolio, leading to increased future returns, positively impacting revenue and earnings.
  
• The initiative to reduce debt and simplify the capital structure will decrease debt costs, improving net margins and overall financial health.
  
• Incremental demand in core markets is anticipated, which will be met with current excess gas supply, leading to higher sales volumes and increasing revenue.
  
• New power plant projects and conversions, particularly in Puerto Rico, represent a massive market opportunity with potential growth in gas demand, significantly boosting revenue.
  
• The upcoming Brazilian power auction offers a significant opportunity to secure long-term contracts, which would provide stable, predictable revenue streams and contribute to earnings growth.

New Fortress Energy Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming New Fortress Energy's revenue will grow by 23.2% annually over the next 3 years.
• Analysts are not forecasting that New Fortress Energy will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate New Fortress Energy's profit margin will increase from -50.3% to the average US Oil and Gas industry of 14.9% in 3 years.
• If New Fortress Energy's profit margin were to converge on the industry average, you could expect earnings to reach $557.9 million (and earnings per share of $1.6) by about September 2028, up from $-1.0 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 4.2x on those 2028 earnings, up from -0.4x today. This future PE is lower than the current PE for the US Oil and Gas industry at 12.6x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.04%, as per the Simply Wall St company report.

New Fortress Energy Future Earnings Per Share Growth

Risks

• The company's expansion into new markets, such as Brazil and Puerto Rico, involves substantial execution risk, which could impact expected revenue growth and margins.
  
• The business is heavily reliant on a few key markets, such as Puerto Rico and Jamaica, meaning geopolitical or regulatory changes could significantly impact earnings.
  
• High reliance on a capital-intensive business model may pressure net margins if asset sales or refinancing efforts do not materialize as planned.
  
• Fluctuations in global gas prices and geopolitical events, such as changes in the Ukraine situation, could affect their hedging strategy and ultimately impact revenue and profit margins.
  
• The decision to extend or roll over contracts, especially in Puerto Rico, poses financial risks if market conditions change unfavorably, impacting long-term revenue assurances.

Valuation

• The analysts have a consensus price target of $5.5 for New Fortress Energy based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $8.5, and the most bearish reporting a price target of just $3.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $3.8 billion, earnings will come to $557.9 million, and it would be trading on a PE ratio of 4.2x, assuming you use a discount rate of 7.0%.
• Given the current share price of $1.4, the analyst price target of $5.5 is 74.5% higher.
• 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.