Yahoo Finance New Fortress Energy Inc. (NASDAQ:NFE) Q3 2023 Earnings Call Transcript
New Fortress Energy Inc. (NASDAQ:NFE) Q3 2023 Earnings Call Transcript November 8, 2023
New Fortress Energy Inc. beats earnings expectations. Reported EPS is $0.58, expectations were $0.35.
Operator: Good morning, everyone, and welcome to the NFE Third Quarter 2023 Earnings Conference Call. Today's conference is being recorded and all phone participants are in a listen-only mode. [Operator Instructions] To get us started today with opening remarks and introductions, I am pleased to turn the floor over to Managing Director of Strategy and Investor Relations, Mr. Chance Pipitone. Please go ahead, sir.
Chance Pipitone: Perfect. Thank you, Melinda, and good morning, everyone. Thank you for joining today's conference call, where we will discuss our third quarter 2023 results, recent developments, operational highlights and future here at NFE. As Melinda said, the call is being recorded and will be available by replay on the Investors section of our website under the subheading Events and Presentations. In the same location, you will find a press release regarding our third quarter 2023 results and the corresponding presentation that we will walk through on today's call. As we proceed through the discussion, we will be referring to that presentation. And in that same presentation, you will also find a series of important disclosures related to forward-looking statements and non-GAAP financial measures.
We encourage participants to review these important disclosures in addition to the description of risk factors contained within our SEC filings. Now let's dive into the call. My name is again Chance Pipitone, and joining me today at New Fortress Energy are Wes Edens, our Chairman and Chief Executive Officer; Chris Guinta, our CFO; Andrew Dete, our Managing Director of New Business and other managers of our senior leadership team. Wes, over to you.
Wesley Edens: Great. Thanks, Chance. Welcome, everybody. As Chance mentioned, we have a presentation that we put together for our Term Loan B that's on our website. There's a ton of great information there. And I'm not going to go back and belabor that. But there's a lot of great reference materials there. So the earnings deck is a skinny one this quarter because of all the material that is out there. So let's just dive in. Actually, by far, the best operational quarter that we had hit in the history of the company. Many, many highlights to talk about in terms of what we've done on the operating side, but a few things to point out. Number one, first and foremost, in our view and many others out there. Our first FLNG unit is now firmly in place.
It's been mechanically completed. It's in the field. It is connected to the pipeline. It's in the final stages of being commissioned, really a remarkable accomplishment by the entire team, 5.4 million man hours, 2.5 years. So a record of a liquefier in the world by every single measure and something we're quite proud of. And obviously, a real cornerstone of the supply side of our business. Number two, in Puerto Rico, we completed our two power plants down there, the second of which was done and completed COD at the end of September. Brannen will talk to that. But obviously, again, built in record time, actually at a great impact on the energy system in Puerto Rico, something we're actually very proud of and also a real cornerstone investment for us in the island and something to really build on in terms of our future activities there.
Lastly, I'll have Andrew Dete talk about Brazil. We were down Brazil together last week, two massive accomplishments. The two terminals we have done there are now mechanically complete. They both have FSRUs that are headed to be in place in the next 30 to 45 days or so. Brazil is a massive, massive opportunity for us, huge market. There will be a lot of commercial activity that will follow out of this. But getting all of this completed and it really is the culmination of many years of hard work for us across the FLNG, Puerto Rican and the Brazilian markets. In many respects, we now have perhaps the two best markets in the world for our business that are fully operational and generating cash flow. Second highlight of the quarter as we fully financed our balance sheet, the term loan B that closed a few weeks ago.
This allows us now to focus on the business and hand of operating our business. We expect now to have a very direct line to deleveraging the balance sheet and with operating cash flows and asset sales as we march towards investment-grade rating, which is our plan over the next 12 to 24 months. Lastly, and of course, the purpose for this call is the earnings call, we had record core operating earnings. Chris will detail them in particular. But basically, the transformation of our business, where we are now generating cash flows virtually entirely from our customers is significant for us. Q1, we had $15 million of core operating earnings. Q2, we had $49 million in operating earnings, Q3, $195 million in operating earnings. I would expect Q4 to be double or more of that of Q3 and Q1 to be better than Q4.
So we really marched a significant distance towards producing better high-quality cash flows, 100% downstream and really a great way for us to go into the second half of the year. Look at Page 4 briefly, so the quarterly financial results. The three pillars kind of our earnings are quality, duration and growth. As I said before, 100% of our earnings are coming from downstream customers, $208 million of adjusted EBITDA for the quarter. We are now in the last stage of the year. Our expectation is still the same, $1.6 billion in adjusted EBITDA for this year, $2.4 billion for next year, $1.6 billion, about $200 million of that we expect to come from gains on asset sales in the fourth quarter. So there could be some volatility there in terms of just the timing of those, but those are straightforward.
Notably, of the $2.4 billion that we are forecasting for next year, virtually all of it is already contracted. Of our $2.4 billion estimate for next year, all of it about $250 million is already contracted. So quality of cash flow is coming 100% from downstream customers, duration of our portfolio in excess of 12 years. And the growth, we currently only use about 25% of the capacity of our terminals. So there's a massive potential for organic growth going forward. Page 5, in spite of the operational performance, we are significantly undervalued as a company. by every metric that we look at, we are the lowest value across the business. This is something we think will be addressed just simply through producing results and operating the company.
But from an earnings per share basis, our estimate for this year is $2.50 to $3 for the year for next year, $6.50 to $7. So if you apply that to an earnings per share multiple, there is no cheaper company than us in the infrastructure place on earth. If you look at the enterprise value to EBITDA, which is a good measure of the leverage of the business, not only are we the lowest value in terms of the earnings multiple, we are by far the least leveraged across these different sectors. And lastly, in terms of the growth of the company, our compounded growth rate earnings per share in 2022 through 2024, 55% annual growth rate, so extraordinary growth rate. Not only has it been extraordinary growth rate, but we think that the prospects for future growth are absolutely there with the capacity that we have in our terminals and the relatively low utilization.
So with that, let's flip quickly to the construction update. I talked about this a little bit at the beginning. What I'll do is I'll turn this over to various members of the team to talk about it. But we have a handful of very, very significant updates. The punchline is that the vast majority of our construction is completed at this point. And so -- but let's just go through, I'll have Chris start with the FLNG down in Mexico.
Christopher Guinta: Yes. Thanks, Wes. Good morning, everybody. The progress in FLNG1 is nothing sort of remarkable. We started the process of FLNG from a standing start on March 9, 2021. And in 31 months, we're proud to announce that we have gas into the system and expect to conclude commissioning by the end of the year. While a typical LNG project takes on average five to seven years, but thanks to our incredible employees, contractors, equipment providers and regulators were nearing the completion of one of the world's most advanced offshore LNG facilities. So quickly, just a brief recap of what has occurred and an outline of what happens from here. Over the last 60 days, the remaining two rigs have moved from their construction site in Corpus Christi to their permanent home in Altamira.
All three rigs have been jacked up into position, connected to one another and hooked up to the Subsea pipeline. On Monday, we opened the valve of the subsea pipeline and moved the First Gas molecules into our system. The nat gas then flows from the hot tap assembly through the riser to our rig and into our high-pressure let-down valve. From now through COD, the process will be to move gas into the turbines and complete commissioning of the power generation system and then move natural gas into our pretreatment module. Gas flows through the mixed refrigerant compressor and into the cold box where LNG will then be produced. Once LNG is produced, the LNG then flows into our floating storage unit, the NFE Penguin, which will arrive on site in about 10 days.
Our team has done a phenomenal job completing the various construction work streams, methodically and safely commissioning critical equipment, and we expect to see the first drops of LNG in the next few weeks. Andrew?
Andrew Dete: Thanks, Chris. So turning to Brazil and to our downstream business. We've been talking about Brazil for a while. We're very excited that -- on the next call, we have, we're going to be able to talk about both terminals in Brazil being in operations. So on Page 9, we start with Barcarena. Barcarena has been mechanically complete for a few months. And we also have our FSRU that's been undergoing conversion works in the Seatrium yard in Singapore, the Energos Celsius that will finish the chemical completion under contract at the end of November, and we'll move to Brazil. And so the terminal will be in operations at the very end of 2023. A reminder that in Barcarena, we already have some long-term contracts. So Norsk Hydro, we have a 30 TBtu 15-year contract that will start when the vessel arrives and starts sending gas in early January 2024.
And then we also have a 25-year PPA for a 630-megawatt power plant. We were excited to announce yesterday that we've closed financing with the Brazilian Development Bank to fully fund CapEx on that power plant, so 100% financed. And then that power plant will start operations in Q3 2025. Currently, it's about 37% complete under a fixed price fixed date EPC contract with Mitsubishi and Toyo Setal. We have another over 1,000 megawatts of permits for new power plants adjacent to the terminal, and we are excited to bring this terminal online to change a region at the mouth of the Amazon, which has no gas today and is totally reliant on oil-based fuels and to continue to announce new commercial activity at the terminal. On Page 10, we're talking about Santa Catarina.
So all the way in the south of Brazil. We've been able to make great progress here. And on Monday, we announced the charter of the Energos winter, which will allow us to bring the terminal online in January of 2024. So we'll subcharter that vessel from Petrobras for 2024. And then we'll start our long-term charter with -- directly with Energos for the same vessel at the end of the year. So that vessel will stay in Santa Catarina for the long-term. On the right, we're able to show our progress physically here. So we have the offshore terminal going clockwise. We've got the connection to the pipeline. Then we have our 32-kilometer pipeline route and then our city gate and gas conditioning station where our pipeline connects to the pipeline system in the region.
This is an extremely exciting terminal for us because it's the first time that we're really connected into a full transport pipeline system, and that gives us a really diverse set of opportunities. In this region, we have baseload supply to existing gas customers, both industrial and local distribution companies. We can provide firm gas supply to power plants that don't have firm gas supply today. There's about 2,000 megawatts of existing power plants without firm gas supply. We can work with greenfield tower developers, of which there are about 1,000 megawatts of permitted plants in the region. We can also own power plants. There's a very well-regulated and well-run capacity market in Brazil that can award long-term contracts for power capacity and also for energy.
And then we can also provide balancing and other services to the pipeline system. So we have a hugely diverse set of opportunities. We have a terminal which in both cases, for Barcarena, and Santa Catarina. It's really a five or six year project with beginning permitting through construction into where we are today. So we're very excited to own two of the LNG terminals in Brazil to bring these online at the end of the year and look forward to sharing more about our commercial activity on our next call. Brannen, over to you.
Brannen McElmurray: Thank you, Andrew. Brazil is truly a remarkable market for NFE. Moving to Slide 11 for an update on the Puerto Rico mission. Just for a bit of context, Puerto Rico is placed with about 3.2 million people, but also shouldn't lose focus. There are about 5 million people in Puerto Rican descent living in the Mainland U.S. So an incredible culture, highly relevant to the history of the U.S. and extreme focus for us and federal government and others. Puerto Rico actually has, unfortunately, the dubious honor of having the highest electricity prices in the U.S. and the least reliable power. The average Puerto Rican customer is 500x more likely to be without power than someone in the Mainland U.S. After two devastating hurricanes and earthquake and other issues that they've dealt with over the past five years, federal government has decided to make a $22 billion investment to rebuild the energy infrastructure system in Puerto Rico.
After Hurricane Fiona in October 2022, Puerto Rico launched a power system task force to stabilize the grid that included agencies such as DOE, FEMA, EPA and others. NFE responded to a call by FEMA in the Army for earlier this year to install 150 megawatts of power in Palaceco and 200 megawatts in San Juan. We are extremely proud to report that we have completed both projects, both operating base loads each running over 97% of the time, 2x more reliable than PREPA's existing system and 25% more reliable than private operators who operate in the market. It is the fastest large-scale power project that the Army Corps has ever accomplished, which is actually saying something given their history. Our power, which is 350 megawatts operating, but about 425 megawatts installed represents over 10% of the installed power in Puerto Rico today.
And after looking at the stats this morning, we're providing about 15% of the power that's hitting the grid as we're talking now. So what does this mean for the average Puerto Rican citizen? This power that we're talking about, the 350 megawatts is the cheapest power in the island. It's the most reliable. It serves about 550 households and most importantly, has avoided about $600 million of economic loss due to load shed events that occur frequently in this market. We expect this tower to be a lasting part of the Puerto Rican infrastructure. We think about it as megawatts today and then it will support renewable energy integration in the future. Because of our performance, we were recently selected to be part of two groups who are going to participate in a $5 billion program launched by the U.S. Army Corps to respond to future events on the island.
As Wes stated at the beginning of the call, this is an amazing example of the NFE mission, which is to provide capital expertise and vision to those markets to provide reliable power to folks to improve their quality of life and improve their economic outcome. This mission complements the Genera mission, which is our recently launched platform that runs as a private operator, the PREPA generation fleet. On the Genera side, we're currently developing 500 megawatts of battery projects and over one gigawatt of dispatchable generation improvements on behalf of PREPA to continue the mission of grid modernization. So with that, I'll turn it over to Chris to update on La Paz.
Christopher Guinta: Yes. Great. Thanks, Brannen. Just a quick refresher on the La Paz power plant. This is located at our terminal in Baja California Sur or BCS, which utilizes our proprietary ISO Flex logistics solution to move LNG in cylinders from the large offshore storage vessel to the terminal where they are then unloaded and sent to power plants owned by the CFE as we've done for the past year. More recently, we started executing regas operations and power generation at our owned plant, which we constructed beginning in 2021. In Q3, we conducted the 240-hour reliability tests on each of the three turbines and successfully completed grid compatibility assurance measures that were required to place the asset into service during Q3.
The photograph on the right side of the page shows our power plant, which is comprised of three LM6000 turbines capable of supplying up to a maximum of 135 megawatts into the Baja power market. As we have mentioned before, we have an agreement to sell the power plant to the CFE in 2024, but NFE will continue to own the terminal and to supply gas to the power plant until the sale closes. In the meantime, NFE retains the cash flows associated with generating power and selling it into the local market. As a side note, NFE retains the cash flows associated with generating power and selling it into the local market. Flip to Slide 13, and this is the Nicaragua power plant. The beauty of the Nicaragua development is that every piece of this project has been done by NFE in some shape or form.
So the power plant is constructed, it's on-site. It's waiting gas. We are currently doing permitting and initial construction works for an offshore FSRU terminal. This will be similar to the terminal design that we used in Santa Catarina. Then we will move the gas from offshore through a directional drill to onshore, and then we have existing rights of way to move the pipe from the shore to the power plant. The freeze is currently in the shipyard and arriving on site in Q2 of 2024, and the pipeline will be completed over the course of the next four months. This contract is -- this terminal is underpinned by a 25-year PPA with a local utility and expected to turn on late Q2 2024. Go ahead and turn to Slide 15. What you're seeing on Slide 15 is the numerical representation of what Wes has been saying for months.
This is that the company is nearing the completion of our approximately $7 billion of capital spend over the last eight years. We have invested in essential infrastructure in key markets that are poised for increased power development and fuel switching over the near term. Additionally, we were proactive in our investment in critical equipment and construction of liquefaction facilities that will allow us to increase terminal volumes in spite of the current market, which has no prompt availability for long-term offtake. This page shows the remaining spend on FLNG1 and 2, which is approximately $400 million through the end of 2024. Then we have another $150 million in CapEx associated with the completion of the terminals and ship conversions.
When you offset that with the proceeds from the recently closed Term Loan B and the contractual vessel conversion reimbursement from Energos, this leaves us with a fully funded capital plan and excess cash. When you add to that, the over $2.5 billion in free cash flow from operations and asset sales over the next four, excuse me, five quarters. You can see the deleveraging inflection point that we foreshadowed. With these funds, we will be able to fully pay down our revolver and retire the 2025 bonds, putting it at a leverage ratio of below 2x. Now please turn to Slide 17, and I'll run through the financial performance for the third quarter of 2023. I must admit this is as excited as I've been to report our financial results because as we've been telling you this quarter was true pure cash flow from our core business.
No cargo sales, no cancellations, no noise from asset sales or impairments. Total segment revenue was $514 million, and total operating margin was $250 million. Downstream operating margin, meaning volumes that we sold through our terminals to our customers was $195 million. As Wes alluded to, this is an astounding 4x what it was in Q2 and 13x what it was in Q1. And yes, we do expect it to nearly double in Q4 of this year. The Ship segment produced another $50 million in operating margin for each of the past two quarters, and that's about what you can expect from here to the end of 2024. Net income for the quarter was $62 million or $0.30 per share on a diluted basis. And as Wes said, we're forecasting between $250 million and $350 million for the full-year.
Please turn to Slide 18. We continue to have a good dialog with the rating agencies, which have been super constructive as we pursue our goal of further upgrades and eventually an investment-grade rating. As Wes has mentioned previously, there are a great number of benefits to achieving this call, including, one, access to LNG offtake and trading markets that are currently reserved for investment-grade participants, two, decreased costs of borrowing; and three, greater financial flexibility in the form of covenants and market access. Our current corporate ratings are BB-, BB-, B1 from S&P, Fitch and Moody's, respectively. And in the recent report, Moody's has issued a positive outlook on the corporate family trading. On our recent term loan B issuance, we were notched above the corporate to BB flat from S&P and Ba3 from Moody's, and in the reports, the agencies cite near-term upgrade possibilities as we continue to execute on our business strategy.
They emphasize four critical themes, stabilization of the CapEx profile, earnings visibility and consistency, operational performance and conversion to free cash flow generation, leading to continued deleveraging. When you look at the five boxes on this page, you'll note our key highlights include net debt of under $3 billion and target leverage of less than two at the end of 2024, increased asset diversity along with duration of our downstream contracts, stable earnings growth, in the fourth box, high free cash flow conversion of our business, which is expected to be in excess of 60% next year, which we'll touch on in the next page. In the last box, the commissioning of critical infrastructure like FLNG, the power assets in Puerto Rico and the terminals in Brazil.
Finally, move to Slide 19, and we have a walk here of adjusted EBITDA down to net income for 2022 through 2024, let's stay on the adjusted EBITDA line for just a second. When you look at 2024, it's important to note that over 85% of these cash flows are expected to come from volumes sold to our downstream customers through our terminals. On 2024, close to 90% of these volumes are already contracted, meaning we have over $2.1 billion of EBITDA essentially backlog. Now move down the page and net income for 2022 was $185 million for 2023 is expected to be around $600 million and around $1.4 billion for 2024. Then we added back noncash depreciation and amortization to get to the amounts you see highlighted in the black row, which we refer to as free cash flow before CapEx, $328 million in 2022, $775 million estimated for this year and $1.65 billion estimated for next year.
What's most compelling about this slide is the precipitous decrease in CapEx from 2023 to 2024. Next year, with only $400 million of growth CapEx and approximately $40 million of maintenance CapEx, we're forecasting over $1.2 billion of cash flow that can be used to delever. The conversion of income to free cash flow is extraordinarily high as we look into 2024 and beyond, which will allow us to pay down debt, reinvest in the new projects or return capital to shareholders. With that, I'll turn the call back over to Chance for Q&A.
Wesley Edens: I'm sorry. What I'd like to do is actually just take a moment and have Ken Nicholson, give us an update on our hydrogen business. We've got the hydrogen folks here in the room of this, but there's a lot that is going on there. So there's a couple of slides we've put in the appendix, but Ken, if you could just give us brief, that would be great.
Kenneth Nicholson: Yes. Great. Thank you, Wes. It's Ken here, folks. Slides 21 and 22 in the supplement provide a little bit of an update on the latest with ZeroPark's. I would say in the third quarter, we continue to establish a lot of momentum with the business. We are well on our way to building and establishing a company that we expect to be the biggest in North America in what we do and by far and away, is the most profitable. This is a business that will produce green hydrogen and hydrogen logistics terminals to customers in the energy, industrial and transportation sectors helping decarbonize all of their businesses, the terminals we're setting up are set up primarily focused on regional demand here in North America, but are also all on waterfront.
And so they have expandability for exports, and there's a tremendous amount of demand in the international markets. And so we've sort of set out the business plan to establish things for a lot of growth going forward. On Slide 21, just to give you an update on our first site in Beaumont, Texas, ZeroPark 1. This is a site that we had originally planned and designed for 100 megawatts of capacity or up to 50 tons per day of hydrogen production. We are now increasing the scope of the site twofold to 200 megawatts or 100 tons per day of hydrogen. During the quarter, we signed a 100% offtake deal with OCI. We're big fans of OCI and what they're doing. They operate today, a large petrochemical ammonia and methanol production facility in Beaumont, and we will be supplying them with green hydrogen as they start producing blue and green methanol and ammonia products.
That's a long-term deal, represents all of our available capacity for now. We still have the ability to expand what we're doing in Beaumont, and so we look forward to looking to continue to do that. We're all set with technology, working with folks at electric hydrogen. So the PEM technology is all set and construction is underway. We'll be in a position to turn on the facility late next year and be fully operational as we enter 2025. On Slide 22, the bigger picture is doing more of what we're doing in Beaumont. We have two other sites, and actually very recently, we're adding a fourth that's not on this slide. One in the Pacific Northwest that we are advancing rapidly. We've effectively secured the site. It's a great site. Similarly, in the Northeast.
We have secured the site in the Northeast. We have a fourth facility also on the Gulf Coast that we think is very interesting and we're in advanced negotiations to secure that site. As I said, ZeroPark 1 is fully at FID and construction is underway. The other two or three situations will be all set and starting construction we expect in the next six months or so. If all we do is build the three parks in the Pacific Northwest, Northeast and down in Beaumont, this is a business that will generate $150 million of annual EBITDA. The cost to build these facilities are largely debt financed, our debt facility today at ZeroPark's is very, very low cost, very long-term. Actually, our borrowing rate is sub 5%, that only makes an already profitable project, even more profitable and more accretive on a cash flow basis.
So we look forward to continuing to update investors as we make our way in developing this company. I think I think we're going to see a lot of growth in the future.
Wesley Edens: Thank you, Ken. If I can, I'm going to turn it back to the operator, I'd like to open up the lines for any questions.
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