The first IPO to brave the volatile 2019 market and the US government shutdown is New Fortress Energy (NASDAQ: NFE $17.00 – $19.00). New Fortress is another energy company focused on liquified natural gas (LNG) like market leader Cheniere Energy (NYSE: LNG $63.33).

Natural gas has been growing rapidly as a fuel of choice for generating electricity and also for powering vehicles and industrial projects. It’s cleaner and has become plentiful, especially in the US. However, as a gas, it is difficult to store and move outside of dedicated pipelines. By cooling natural gas down to minus 162 degrees C it changes it into a liquid and shrinks the volume to just 1/600th of its original volume. Then it can be stored and transported easily in special purpose trucks, railroad cars, and ships.

LNG has been on a tear the last few years and is poised to continue to grow into the future along with renewable energy sources. Some have posited that natural gas is just a “bridge” to renewable energy sources and is growing as we shift from coal but will be eclipsed once renewable sources are more cost-effective. The real question is how long is the bridge? According to a two-year study by MIT published in 2011 the natural gas market will continue to grow through 2050. [Here is a link to the 300+ page MIT report (PDF).]

There are others though that believe the “reckoning” for natural gas could come much sooner. A more recent analysis by VOX suggested that renewable energy costs are dropping more quickly than expected which diminishes the need for natural gas. When combined with improving battery economics the combinations of solar/wind plus battery storage can mean “that it may be cheaper to build renewable plants than to continue to operate natural gas plants by 2035.” [Here is a link to VOX article.]

On balance we see natural gas taking more share from oil and coal than renewables will be taking share away from natural gas – at least for the next decade or two. Some uncertainty around the timing might favor a more granular expansion model like the one New Fortress is implementing. There’s a cool analysis by Lazard concerning the “levelized cost of energy” and if you are into that kind of thing you can get the full PDF of that here. It looks at all the energy sources both with and without subsidies.

The “Mini” Model

There are quite a few very large LNG development projects out there. Some are by giants like Shell and ExxonMobil and others are by “upstarts” like Tellurian (NASDAQ: TELL $8.19) which plans to spend $30B on one in Southwest Louisiana. Some may remember the Nucor (NYSE: NUE $57.69) story in the steel industry. For decades “big steel” was a dying industry. Nucor pioneered the idea of building “mini-mills” which cheaper, more flexible and able to go after new markets in small, measured steps. Nucor could adapt by changing inputs and evolving demands for different types of steel products.

New Fortress is doing something similar. Firstly they are building smaller liquefaction facilities near large natural gas sources where long-term contracts can be secured. Then they build downstream terminals near customers and the necessary infrastructure between the liquefaction facilities and the terminals. By locking in long-term supply agreements and long-term customers they can deliver a near-fixed-price natural gas experience to their customers and generate positive investment returns and free cash flow for the company.

Another way to think about it is that the use of our vast amounts of natural gas is constrained by the need for big pipelines and large tankers. New Fortress is building small networks that link pockets of demand with existing sources using LNG processing. Instead of using the “if we build it, they will come” model of development, NFE works to line up customers for new operational terminals and LNG plants to serve those terminals and the logistics in between. There are clearly markets where this is a good fit. For example locations like Jamaica, Puerto Rico and the Dominican Republic can’t be served with a pipeline or enormous tankers.

Deal View & Valuation

The company is offering up to 25.5M Class A shares which makes the deal size $460M at the mid-point. There will also be 147M Class B shares which results in a total market capitalization of $3.1B. At 5.6x projected free cash flow (base case) it’s not an expensive stock if you believe they can achieve their base case and attractive if they can come close to their growth scenario. For reference, the market leader, Cheniere (LNG) is trading at an EV/EBITDA ratio of 17x.

There are plenty of risks for NFE investors to consider outside of the standard boilerplate. It’s a sobering list so we’ll just put it out there:

  1. Completion risk – There are lots of things still to build and delays are endemic to the industry.
  2. Funding risk – their growth plans will require additional capital on favorable terms.
  3. Contract counterparty risk – Long-term contracts at $10+ per MMBtu are fine as long as they are honored.
  4. Intense competition – From both other LNG companies and ever-improving renewable fuel options.

An Echo of Bloom Energy

Last July Bloom Energy (NYSE: BE $12.01) had a very successful IPO – reaching $32/share in October only to fade from there to a now-below-the-IPO price of $12. The company has continued to grow but at a slower pace than expected. Management cites delays from hurricanes and wildfires.

So far the Bloom Energy “story” has not unfolded the way investors expected. We’ll have another look at their execution when they report Q4 results on February 5th. The Bloom stock performance shown below is another reminder that “selling the story” is much easier than executing on it so investors should be price-sensitive when evaluating New Fortress Energy. We note that Bloom performed out of the gate consistent with our analysis and FPV estimates for a fair price. You can review their story here: Can Bloom Energy Fix the Grid? 


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