New Fortress Energy Inc. Q1 FY2021 Earnings Call

Ladies and gentlemen, thank you for standing by, and welcome to the New Fortress Energy First Quarter 2021 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Josh Kane with Investor Relations. Please go ahead.

Thank you. I would like to welcome you to the New Fortress Energy first quarter 2021 earnings call. Joining me here today are Wes Edens, our CEO and Chairman of the Board; Chris Guinta, our Chief Financial Officer; and Ken Nicholson, Managing Director of Fortress Investment Group and CEO of our new hydrogen venture. Throughout the call, we’re going to reference the earnings supplement that was posted to the New Fortress Energy website. If you’ve not already done so, I’d suggest that you download it now. In addition, we will be discussing some non-GAAP financial measures during the call today. The reconciliations of those measures to the most directly comparable GAAP measures can be found in the earnings supplement. Before I turn the call over to Wes, I would like to point out that certain statements made today will be forward-looking statements including regarding future earnings. These statements, by their nature, are uncertain and may differ materially from our actual results. We encourage you to review the disclaimers in our press release and investor presentation regarding non-GAAP financial measures and forward-looking statements and review the risk factors contained in our quarterly report filed with the SEC. Now, I would like to turn the call over to Wes.

Great. Thanks, Josh, and everyone. As Josh said, we posted the supplement to the webpage, that’s why I refer to as we go through it. So let’s jump right into it and go to Page 4. The quarter that just ended has been a historic one for us. It’s been an incredibly busy quarter and a productive one. We completed the acquisition of the Hygo company from Golar, as well as the MLP that we bought at the same time $5.1 billion we did not issue additional equity. It grows our base of operations dramatically. And I’ll talk about that a lot down the road. Very importantly is that the growth of the company that we now envision, we believe can be internally generated, the equity that we need to grow the company we can generate from asset sales and I’ll talk about that. We expect to close our first asset sale here this quarter. And with this total summation of all this activity, this does firmly establish us as the leading LNG to power company in the world and put us on our path to kind of our growth targets we’ve talked to you about before. Meaning in very simple terms, the way I think of it is the combination of number one, the terminals that we’re acquiring in Brazil, which we think are extraordinary footprint in one of the fastest growing countries in the world. Number two, the impending turn on of our terminals that we’re building in La Paz and Nicaragua both of which we expect to be operational in the next 60 days or less. Number three, the addition of all the logistical infrastructure that we need to make this all happen. So the ships and the FSRUs and all the equipment basically that we bought from the MLP that really slides into our operational footprint. Number four, the developments we’ve made on the Fast LNG. So we’ll talk about this at some length later, but in simple terms, just simply closing the loop and basically becoming fully integrated to provide our own feedstock we then use in our midstream and downstream businesses around the world, changes the aspirations of our business dramatically, lowers our costs and may actually increase our operating revenues substantially. So Fast LNG is a big thing. And lastly, the Hydrogen Initiative. So as Josh said on his – Ken Nicholson has been a longtime partner of mine at Fortress who is going to step in and be the CEO of our new Hydrogen Initiative. We got a very, very actionable first real commercial activity in that sector. And so all this together is – the net of it is we think we have put in place all the pieces we need to create the company that we have and now it’s just simply a matter of the work to kind of do that. We’ll have a company that generates in excess of $1 billion in free cash flow. With the FLNG, we’ve got the ability to grow that substantially. And we now have the commercial – actionable hydrogen initiatives that we’ve been looking for since we first announced this at the beginning of last year. So it’s a lot to talk about. So let’s flip to Page number 5. First of all, the terminals that we are under construction in La Paz and in Puerto Sandino, Nicaragua, are both moving along extremely well. These are renderings – these renderings will be replaced with the actual photographs in the next one. We probably will host an Investor Day in early August in La Paz. I think that’s the first one that we’ll get down to. So obviously as we move forward with that, if you’re interested in seeing up close the terminal logistics footprint of the ISO Flex operations in – a trip down to La Paz might be well in order now that the COVID situation seems to be under control a little bit, but Josh will help us coordinate that, but that’s something we think is in the very near term for us. Puerto Sandino, the turbines are in place. The same things were happening there. What this does in terms of the volumes in the bottom of the page is that our committed volumes go from approximately 2 million gallons per day to 3.3 million gallons. So it’s a big step up on the committed volumes, and discussion volumes, another 800,000. So it takes our total volumes from the existing five terminals, up to just about 4 million gallons. So it’s a big step that roughly doubles what our production is right now. Page number 6, Brazil. So the punch line is the Brazil terminals we expect to be online by the first quarter of next year. We had the Brazilian development team up here this week, I’ll be in Brazil, actually on Sunday. So there’s a lot of activity there. But there’s been years of work that went into these terminals, prior to us acquiring from Hygo. Now that’s turning into these actual terminals on a timeline that are going to culminate and turning on in the first part of next year. And – we have just started the process of commercializing these assets. You can see in the bottom, even with a very, very short period of time in the commercialization side, the volumes that we expect out of these portfolios are dramatic. So Santa Catarina in the South, there’s a tender outstanding for a number of the distribution companies in that. Suape will be in the middle part of the country, the easternmost part of Brazil will be really anchored by our own power plant, which is scheduled to be turned on by the end of next year. Barcarena in the North, we signed an LOI with Norsk Hydro, that is a terminal we think we’ll serve the Amazon basin. It’s got tremendous potential to be a very, very productive terminal for us. But bottom line, the Brazilian terminals plus our existing terminals give us a huge footprint and add up to over 16 million gallons of expected volumes. Page 7, we detail what that looks like from us. So first quarter of this year, 1.4 million gallons a day where was a scheduled maintenance event in Puerto Rico that took those volumes down that will be ending here literally any day that takes us to roughly 2 million gallons per day of normalized volumes. Those then step up substantially with Mexico and Nicaragua, and the Sergipe Terminal that produces 2.6 million gallons. And then the big step up is as these Brazilian volumes come on next year 16.2 million gallons. And frankly, there’s a lot of upside there. So this is as I said at the beginning, it’s hard to overstate how significant the addition of the Brazilian volumes on top of our existing assets step to, but you can see that this generates a substantial amount of volumes and margins. Some of that FLNG is a Fast LNG for a moment. The cartoon on Page number 9, we’ve shown you before, but basically the contrast is if you look at the box on the left hand side, this is what the floating LNG business looked at like when we started this. So there’s a handful of these assets that exist around the world. We own 50% of one of them. And the Hygo transaction we bought half of the Hilli, which is deployed off the coast of Cameroon. So the basic notion is put a liquefier onto a ship, put it over a stranded or offshore gas field, generate low cost LNG. It’s actually an incredibly simple concept. That’s the good news. The bad news is it costs billions of dollars to build ships like this, and it takes many years to develop it. So those two things were simply not attractive to us in the timeline for what we’re trying to achieve. The challenge that I put to the technical team back in January is can we rather than use a ship, can we put this gear onto existing marine infrastructure, that we can do it a, much faster and b, much cheaper. And the answer is simply yes, we can. And if you look at the following page, there’s the two rigs that we bought that are just about ready to move, they actually move later this week. The move to that keyword shipyard in the bottom there, and that’s where they’ll be stripped down and the things that we don’t need, where you can then add and the things that we do need. And then the rendering in the right hand side is what these things will look like when you put them all together. So these are on jack up rigs, there’s other types of marine infrastructure we think this works on as well. Rigs are really suitable for water depths of several hundred feet. Obviously, things like the semi-submersible ships, et cetera, are appropriate for the thousands of feet kind of deployments. But the key for us is flip one more page is to hit the timeline that we’re showing here. So we declared FID on our first project in March of 2021, we bought these two jack-up rigs, we are very much now hot and heavy on working to supply gas for them. I’ll talk about that in just a second. But there’s a lot of promise on that side. So I feel good about that. We expect to be complete with our construction of these in July of 2022. It then will take us roughly 90 days to put the gear in place and do commission it, and to put it in place on the gas source into producing LNG by the end of next year. We talk about this literally every day. I have an 8 o’clock call that basically goes through the technical and gas aspects of this. The team is incredibly engaged and competent. And when you look at Page number 12, the places where we are looking at all the major offshore assets around the world. So there’s lots and lots of gas in stranded former other. So Gulf of Mexico, West Coast of Mexico, Brazil, West Coast of Africa, obviously, Southeast Asia, so there’s many, many places in the world where there’s gas that is a target for us. And so simply, we’re trying to find the most suitable and most straightforward one for the first one. And I think once we get proof-of-concept for the first one, there’s lots of different places we can go. So there’ll be more updates of this to come, but the bottom line is that the impact that can have on our earnings is substantial. So Page 13 is a busy page. So this shows all the different terminals with the volumes that are committed in discussion in total volumes, and what the margins for those generated the $1.6 billion. In very, very simple terms, if you simply take our model right now, which is to assume $5.5 as a cost of LNG. With the FLNG, we believe we can lower that cost by $2 or more and maybe substantially more in certain of these cases. But $2 on 1.4 million tons is about $150 million. So just for illustration, we say, look, if we basically provided gas to all of our terminals through an FLNG solution, it would add roughly $1 billion in earnings to us. So it’s a huge, huge incremental benefit to us. It also diffuses a lot of risk of supplies. There are many different elements of it, that are positive for us, but more to come with this. This gives you a pretty clear demonstration of what it is that we’re actually playing for. So let’s – and update and I’ll turn this over to Ken and introduce him in just a second. But page 15, just by way of review. So in the first quarter of last year, we announced that we had a goal and our goal was to basically decarbonize our activities and be a zero emissions company by 2030. So a very, very aggressive goal, a suitably aggressive one, in my view, given the kind of sustainability issues that we’ve got around the world. We said, we’re going to now open our phone lines, talk to people, look at technologies, and see what is out there with a goal towards creating a commercially viable activity that we can then kind of go ahead with. I believe strongly that sustainability comes from profitability. And if we can actually create commercially viable options to this that can really advance the ball far more than just simply investing in VC technologies that may or may not have a commercial application. So we did make an investment in green hydrogen, and then we made an investment in an electrolyzer company based in Israel that we think has got promising. But the green hydrogen businesses, in my opinion today are not commercially viable. I think that that will change. And I think that there’s reason to be optimistic about that, because the governments are going to be very supportive of green hydrogen initiatives. And that’s great. But we now believe that the actionable opportunity today lies in clean and renewable fuels. And we’ve got two different initiatives for that. And with this today, we’re actually announcing we have formed a company Zero Parks, Ken Nicholson has been a partner of mine at Fortress for many years, the infrastructure business. He is going to be the CEO of that business. And you look on Page 16, our focus is initially going to be fuels, so big picture 51 billion tons of greenhouse gases are released into the atmosphere every year, 37 billion tons of CO2. So roughly 75% of all greenhouse gas are from CO2. Of the CO2, the vast majority of that comes from fuels. The market itself is there’s 36 billion barrels of fuels annually around the world, less than 1% is renewable or clean. So the market opportunity for renewable and clean fuels to take a big chunk of that is gigantic. The opportunity, as we see it is to replace a big chunk of this with two different pathways. One, is renewable fuels, which the way – simply the do no harm business, you’re not decarbonizing absolutely, but you are keeping more carbonization from happening, basically. Because you’re simply taking what exists right now repurposed and recycling and turning it into a clean fuel. That’s sort of renewable fuel is. Clean fuel is a different tack at all. So clean is really hydrogen-based. Hydrogen-based means, producing it in a clean way. So again, for definition, green hydrogen is one which is created by using renewable power, so there’s no emissions. Blue hydrogen is one where you’re creating hydrogen. There is absolutely CO2 that is created as part of that process, but you essentially are capturing it. So it’s clean, but from an emission standpoint, just like green. So if you flip to Page 17, these are our two paths. And with that, let me turn it over to Ken. And Ken, maybe just introduce yourself and give a bit of background and then talk about our initiative here.

Great. Yes, happy to do that. Thank you very much, Wes. It’s Ken Nicholson here by way of a quick background. I’ve been working with Wes here at Fortress for just over 15 years. We’ve invested over $30 billion in infrastructure, transportation, and energy companies. And I’m thrilled to be helping to lead this new venture at NFE. I think we have an enormous opportunity in front of us to make some highly compelling investments and at the same time, do a very good thing for the environment along the way, and I’m excited to join the team. I’m going to go to Page 18. Our goal is to make these two investments that Wes mentioned immediately. To do that, we’re forming a new joint venture with FTAI that will combine NFE’s development and technology know-how with FTAI’s transportation experience and infrastructure assets. FTAI provides three critical needs. One, efficient logistics for feedstock supply. Two, access to land in key markets. And three, immediate access to low-cost tax-exempt financing that enables us to find our investments quickly and efficiently. The picture on the right side of the page is an image of FTAI’s terminal in Beaumont, Texas, which is the site we’re planning for our first two investments. I personally have been deeply involved in the development of Jefferson. It’s an incredible terminal with connectivity to all modes of transportation, plenty of space for additional development, and the track record of obtaining extremely low-cost financing in the tax-exempt markets. Flipping to Page 19. As Wes said, we plan to be in a position to reach FID on our first two projects by the end of this summer. One project that produces renewable diesel and jet fuel, the other that produces carbon-free hydrogen and ammonia. For both of the projects, the technology is well known and readily available. As is the feedstock, we’re now focused on securing the offtake for the projects, which we expect to do in the coming months. The box on the right illustrates the attractive economics around these investments, each project represents capital costs in the range of $200 million to $300 million, and after a roughly 24 month development timeframe should generate annual cash flows of $50 million to $75 million. As I said, we expect to finance both projects largely with tax-exempt debt requiring minimal equity investment, which should in turn result in extremely attractive equity returns. Finally, to realize that value creation, our goal will be to separate Zero Parks ultimately into a standalone public company through an IPO of the business.

Great. Back on Page number 18, we look at the – the Jefferson terminal. Ken is actually being quite modest here, when we first got involved in this terminal. It basically was a muddy piece of ground, a 100% of what you see represented in that picture. He oversaw the development of and when we looked at getting into the fuels business, of course, the most obvious place to start with a fuels terminal because number one, you need all the logistics on either side of it. Because you need to bring things in, so you can actually create what you’re going to create and then bring things back out fuels terminal actually accomplishes that. Number two, you need the access to the land, you have enough space to build what it is that you intend to build. And we have a substantial amount of land, both after development and adjacent to development, which is great. And number three, it’s a bit of a superpower is that the ability to finance yourself on a tax-exempt basis. So we have done a number of tax-exempt financings on this development. It’s a tried-and-true methodology for us, it allows us to in a fairly capital-light manner, be able to turn these projects into a reality. And as Ken said, our goal then is if you’re an NFE shareholder on the phone here right now, our goal would be that you – for every NFE share that you get, you essentially get a share of this company as well. And I think that the impact of this the economic impact to shareholders could be material. When you look at the sustainable projects and companies that are public right now, the vast majority of them are not economically based. So they’re more a bet on an aspiration or a dream of what could happen as opposed to what actually is happening. We think that both of these projects are very attractive on a standalone basis. And they also represent a small fraction of the size of what this company could actually represent, ultimately. So the renewable fuels is just simply a repurposing, you make money from taking what has been discarded and reuse it. That’s obviously a big, big benefit. The 2005, California started with the renewable fuel credits was basically the first step in this direction. We think that there’s going to be renewable fuel credits adopted in all probability by virtually every one of the states. And as a result, we’ll have a lot of places to distribute these fuels and actually make a good margin on them and do a good thing in terms of their carbon footprint. The blue hydrogen allows you then to create blue hydrogen at an attractive cost roughly $1 a kilogram net of this. The technology that our technical team has identified as one, where they can capture in excess of 90% of the emissions in total. So it truly is a very green way to create hydrogen. Once you have that green hydrogen, there are many, many different options that you got in terms of creating offtake. The simplest may just simply be to turn it into blue ammonia that can be used for fuel or industrial purposes, but there’s a number of other things. So these are meaningful steps for this is a very substantial company, I think it’ll be a very exciting venture to have on a standalone basis. At NFE, we’ll still retain our green hydrogen initiatives. But this is a big step for us. And Ken is an incredibly capable person on top of the technical folks that we’ve got that are working on this. So we think it’s a big moment for us. So next, Chris.

Yes. Thanks, Wes. Good morning, everyone. I’m eager to provide an update on our business and financial results for the first quarter of 2021. Our operating statistics summary shows our strong track record of execution. The key takeaway is that we continue to perform at a high level and serve our customers effectively while focusing on safety and reliability. As we remain a global leader in LNG truck and ship transfers, we are looking forward to increasing our activities later this quarter as our terminals in Mexico and Nicaragua go live. I will discuss our financial performance shortly, but one important metric we are monitoring is our maintenance outages, which are expected to be within 5% of our anticipated downtime. This outstanding operational performance results from our team's hard work and determination. We are expanding quickly and have over 600 employees, approaching 1000 by year-end. Our skilled team operates globally and is helping to accelerate the energy transition on five continents. Moving to the next slide, I believe it effectively illustrates Wes's earlier points. Once our infrastructure is established, cash flow will follow. By the second half of 2021, we anticipate having all six terminals fully operational, collectively selling around 3 million gallons per day. These terminals are projected to generate approximately $600 million in operating margin, and when combined with our shipping fleet, NFE expects to produce over $900 million in operating margin. As we ramp up to over 5 million gallons per day of committed volumes along with our first Fast LNG unit, we foresee reaching $1.2 billion in committed operating margin. A crucial aspect to highlight is the significant operating leverage within these terminals. As we sell additional volumes, our fixed costs are spread across a larger number of units, increasing our margins. Additionally, by pairing new high-volume terminals in Brazil and Ireland with extra FLNG assets, we enhance cash flows and transform them into high-margin terminals as well. If we move forward with our ongoing discussions, we anticipate sales exceeding 200 million gallons per day, potentially generating close to $3 billion in operating margin. On the next slide, we have a summary of our financial information for Q1. The quarter’s performance aligned closely with Q4. We saw robust volume performance that met our expectations; while the Jamalco power plant was down for planned maintenance, sales to the Old Harbour power plant compensated for this downtime. In San Juan, volumes decreased as one turbine was out of operation for 53 days during maintenance on their unit number five, but gas supply to unit six remained steady. Furthermore, during Q2, PREPA successfully completed the installation of their selective catalytic reducer, and the asset is expected to return to full capacity soon. For the quarter, revenue reached $146 million, with a cost of goods sold of $113 million, leading to an operating margin of $33 million. Our LNG cost for the quarter was $6.17, in line with our previous projections. Looking at the income statement, SG&A expenses were around $23 million after normalizing for non-cash compensation and one-time expenses. This increase is partly due to ramping up headcount in Mexico and Nicaragua ahead of the commercial operations date. As these projects become operational, expenses will shift from SG&A to operating costs. On the balance sheet, we have $380 million in cash, supplemented by operational cash flows, which fully support our remaining development commitments. Quickly on the capital markets side, in April, we secured financing for $1.5 billion of 6.5% notes due September 2026, which we will use to finalize the Hygo and GMLP transactions. Additionally, we have established a new $200 million revolver to enhance our operational flexibility as our new terminals become operational. Lastly, regarding growth capital, we have a solid portfolio of baseload power plants and long-term vessel charters that function like fixed-income assets, making them suitable for lower return investment profiles. As Wes mentioned, we believe we can monetize over $900 million in assets, specifically the net FSRU in Brazil and the Jamalco power plant in Jamaica, with a goal to complete those transactions in the coming months. With that, I’ll hand the call back to Wes.

Great, that’s the end of the prepared marks. So operator, let’s open up for questions, please.

And your first question comes from the line of Alonso Guerra-Garcia with Scotiabank.

Hey guys, good morning. Congrats on the on the Zero Parks JV. Understand this opportunity is much more near-term in regards to what your zero division was looking to accomplish previously. I wonder if you can elaborate on your first two projects there? Well, both of those projects leverage that infrastructure at the Jefferson Terminal in Beaumont. And I guess, what sort of line of sight do you have to additional opportunities beyond these two projects?

I’ll let Ken answer specifically in a second, but the answer specifically is that they both leverage greatly the existing terminal. So we think the renewables project, the focus for us right now is on feedstock. So finalizing feedstock arrangements and figuring out how to get them into the port, obviously, what you have at this terminal are rail lines, pipelines, so there are truck lines, there are a lot of different modalities that come into the terminal that bring stuff in. And then once you create your fuels, they need you to ship it out like any other fuel, whether it goes out in a pipeline or it goes out in a barge, it goes on a truck. So it absolutely uses the infrastructures in place. And that’s why such a critical part of it. In terms of the timing of it, Ken.

Yes, I think we’re confident by the end of the summer. We’ll be ready to go and be FID on both of these projects. You also asked I think, what the pipeline was for additional projects. I mean, I would say right now, we are evaluating in the double digits north of 10 individual projects. The first two are very near-term, but we do expect to do several of these things over the next six to 12 months.

Yes. Clean and renewable fuels less than 1% of the entire fuel spectrum, so there’s a very, very long ways to go. So there’s a very, very long list. The power of proof-of-concept is very, very strong. And so actually getting to FID, getting our construction, getting fully financed is a huge milestone, a huge step for any company, but especially a company in a new sector like this. So we think that actual will catalyze all kinds of incremental opportunities.

Got it. Great. And then maybe one on the terminal side, notice the Southeast Asia is marked with first gas for September this year. Is that project under construction at this point, I guess, what’s left to do there and any update on progress with Shannon.

On the Southeast Asia, we’re making great progress on the agreements in place, we haven’t officially announced, that actually continues to move very well. The initial gas that will come existing power plants. So that’s why the timing is – in between final commitments and actually the first gas is a relatively short period, because there’s a very straight pole just to bring in gas for the first terminal. Then down the road, there’s expected to be additional power built and more permanent put in place. That’s that. On the Shannon, Ireland, we continue to make great progress. I think that, our goal is to file for permits here in the very near-term. We think that the characteristics of that terminal will look quite similar to the terminals in Brazil, and it’ll be hooked directly into a very, very well-developed pipeline system. And so it’ll have the profile of higher volumes, such as we have expected to get in Brazil, lower margins, but a very, very attractive proposition. So we don’t have a final date of FID on that project in Ireland. And we won’t have that until we actually file officially the permits, but expected that’s coming in the coming months.

Great. Thanks, guys. That’s all I had.

And your next question comes from the line of Sean Morgan with Evercore.

Hey, Wes. Just a quick question on Brazil, when we look at the volume opportunity in Sergipe, which my understanding was Golar kind of had that up and running. It’s obviously smaller than some of the opportunities seeing in places like Suape. And so for those of us that aren’t that familiar with the Brazilian market and kind of the coastal cities and regions there. Why is that there’s like a smaller footprint opportunity in the existing terminal? And then what else can be done to sort of grow that, because from my understanding, it’s already somewhat established?

Yes. So it’s a really good question. So big picture, Brazil’s roughly two-thirds of the population in the United States uses about 5% as much natural gas. So the biggest of the big picture, as we think the opportunity in the country is gigantic. It is serviced by two pipelines that run up and down the East Coast. They stopped short of Barcarena. So the Suape, Sergipe and Santa Catarina are all on pipelines that are significant pipelines. And so to a large extent, it’s just a geography question of like, what user is closest to which of the terminals, because there’s somewhat ubiquitous with respect to where you connect on that. The volumes that we expect that are significant out of the pipelines are really anchored on either end by Suape and by Santa Catarina, but they could also be serviced from Sergipe as well. Assuming the Sergipe Terminal has been connected to the pipeline. It’s about a 30-kilometer pipeline pole that's a fairly short and straightforward pole from Sergipe into that pipeline. And then you can send gas either north and south depending on what you want to do. With Sergipe itself, specifically, right now, the volumes are relatively low, because the nature of the contract is one that does not really allow readily for merchant business. So what is – we get a significant capacity payment, and then there’s a 60-day window, they have to provide notice for you, in order to be dispatched. So it’s really intended to be a backup power generation source, which I think really underutilizes the assets significantly. In a country that actually has significant needs of power production on a daily basis. We have 1.5 gigawatts of power, that’s expected to run a fairly small amount of the time. That’s what the volumes are small there. So one of the very first things that we are doing with the technical teams there is evaluating what we would need to do to bring that into a merchant power production as well and thus generate a lot more volumes and a lot more revenue as a result. So there’s a lot more on that to follow. But I think the Sergipe Terminal is really two things. It’s one is that 1.5 gigawatts shiny new beautiful power plant. And it’s also a possible pipeline connection that would connect into the pipeline. It’s the same pipeline that is hooked in Suape.

Yes. That’s helpful. And then on the last quarter, I think everyone’s kind of aware that gas prices saw pretty aggressive spikes there at the end of really the start of the last of the first quarter. So I get the gas costs kind of going up, but what the cost-plus contracts in places like Puerto Rico and Jamaica. Why don’t we see that? The volumes are somewhat consistent quarter-over-quarter. So why don’t we see a bigger bump in revenue as that gas pass through commensurate with what you saw in COGS?

Hey, Sean. I mean, the short answer is that we’ve already purchased for LNG prices. So we knew how much we needed and we bought it in over the course of the end of 2020. And so in the market seeing new LNG supply at all during Q1. We aren’t really in Q2, we have maybe two cargoes in that. So we would need the rest of the year. So we have a pretty known cost of LNG for the remainder of 2021. And as we talked about before, we’re largely purchasing the Caribbean Basin for 2022 plus, and have a little bit of exposure still in the Pacific Basin for 2022, which we intend to use FLNG to supply.

But you’re protected as a company in that about 75%, about three quarters of our contracts on the offtake side are also indexed to Henry Hub. So where we are indexed on the supply side, we’re indexed on the other side of it. It does, I mean that it’s interesting. It’s a good question though, and that gas prices definitely went higher both on LNG as well as on Henry Hub over the course of the – especially in the last month or so. And it does really underscore this point of the FLNG. So to the extent, we can really successfully deploy those assets on largely fixed price gas. We have changed our operational risk perspective dramatically. And also we then have the potential of offering more certain prices to our customers, which I think can have a huge impact in terms of some of our downstream uptake. So it’s more to follow, but it’s all good.

Okay. But just to clarify some of those contracts on the revenue side are more Henry Hub based, which we did see was kind of stable versus your COGS, which are bought somewhat in advance, but in the spot market on a deliberate LNG basis, there’s going to be more variants there. And that’s why we saw that kind of margin decrease a little bit in the quarter.

But as we’ve said, Henry Hub is a direct pass-through. So Henry Hub – we buy Henry Hub plus we sell at Henry Hub plus in the contracts in the Caribbean. Going forward, we would expect to be able – what we want to provide is clarity and visibility into our cost of LNG, which then gives you confidence in the margins that we’re projecting.

But in any change in margin, really, it was just – that’s just the timing perspective, there’s not really a material risk factor for that law. And it should really work itself out quarter-over-quarter.

That’s right. And we forecasted the increase in LNG costs for Q1 versus what we experienced in Q4. And that is the biggest component of the margin change.

And your next question comes from the line of Devin Ryan with JMP Securities.

Okay, great. Good morning, everyone. Maybe I want to start coming back to the JV with FTAI. I’m sure I’ll get some questions from investors since I covered that also. Just love to maybe get anything more you can provide around just the structure and split and how capital investments and economics will work in terms of what you will provide versus FTAI. And then it sounds like there are a number of projects, potentially behind the two that are about to going to FID. So I’m just kind of curious around the development timeline more broadly. And kind of thought of what it would take for this business to be ready to be split off or taken public.

Yes, well, the relationship with FTAI is one that will be formalized during this period when we go FID in the first two projects. So the specific answer is that we’ll have great clarity on that when it’s finalized over the next 90 to 120 days. We started LOI with them, that is conceptual. And the concept would basically be they provide land, and they provide access to their terminals and operational support. And we provide all the technical and commercial activities. And our estimate today is that the appropriate split of the company would be 75% for NFE, 25% for FTAI. That’s rough justice for what we think is being contributed on either side. Once that number is established, and we have agreed on it, then the capital provided would basically flow commensurate with that. So if it was 75% with us and 25% for them, and there was $100 of capital needed, you would split along those lines. So that’s something that is yet to be determined. But I think that I expect that the final numbers to be along those lines. And we think it’s a – we get great benefit by being associated with these terminals, because we think that it’s actually meaningful logistics and land and access to capital, they get great benefit from our operational and technical teams and commercial teams. And so the two of those, that’s a fair transaction. We think that has the makings then of a public company. That is a very, very exciting one. And we’re talking earlier and looking at the different estimates of what we think this could be worth. Again, when you look at the clean tech universe, there are very few examples of companies that are actually commercially viable produce significant amounts of cash flow, have material growth prospects that are meaningful. I think that the valuations of this company could be extraordinary, and could have a significant impact in terms of the overall valuation or as we’ll have to see. But I mean this is not something that we are anticipating doing years from now, something we’re anticipating doing months from now. So we’ll have some clearer view of this by the end of the summer. That’s the timeframe that actually ends up holding up. So with respect to the other projects, as Ken said, there are literally tens, dozens actually of different projects we have looked at. I think that the fuel sector is the most obvious commercial activity. It’s one where we can make money immediately, and we could have a big impact on the environment immediately. And so we’ve looked at a lot of different technologies. We’ve actually talked to hundreds and hundreds of different forms of adventures that looked at this, and included that fuels fit us very well, as an organization, again, through the Fortress had Ken and others, they’ve made over $30 billion equity investments in transportation. So we have truly one of the best track records in the world and understanding the transportation market. So pretty much everything that uses fuel that moves, whether its ships, trucks, trains, planes, chassis, ports, you name it, we’ve made material investments. We understand intimately what that is. And Ken is one of the senior partners of that, that business has been a very successful one. So transportation is something we know a lot about. Fuel is something we know a lot about. We have great assets to start with. And that plus all the technology and the sustainability stuff from NFE, we think is a very potent combination. So that’s the strategy for. And I think these first two are meant to be representative of what we think the overall our opportunities are. But they’re not just science projects. They’re actually meaningful projects that produce actual meaningful cash flow and profitability. And we think really put this company on a great track to being a very, very material green tech company.

Yes, that’s great color, Wes, and definitely interesting. Maybe just for the follow-up kind of a high level question, so I think the vertical integration with the Fast LNG is incredibly disruptive. And now that it’s been out there for a couple of months, in terms of when you guys started talking about this. I’m just curious kind of what the market reaction has been and how that maybe is impacting potential additional deal flow coming to NFE. And if there are other markets that are kind of interesting, where kind of the arbitrage opportunities are most compelling, I’m just kind of curious that I’m sure this created some reaction in the market, just given the kind of disruptive nature of it and love to just maybe get a little color on maybe additional opportunities that are coming about as a result of it.

Yes. We have a very active dialogue with a number of upstream providers, right. I’d say that, especially the deep-water solutions, which are going to be more technically challenging – are definitely the most lucrative or the ones that long-term payoff are the most valuable, because when you are far offshore, and you’re producing oil, and there’s associated gas with it. There’s not really much to do with the gas. You have to build material amounts of infrastructure and a pipeline to take it to shore, it takes a lot of capital to do, it takes a lot of time to do that. So that’s the place where gas is re-injected, or it's flared or it’s really viewed as a liability not an asset, that’s clearly going to be where we’re going to find the cheapest resource and have the biggest impact. But even in the onshore basins and from that map, you can see there are many of those around the world. And there are similar situations that occur there as well for gas as either being flared, or it is being re-injected or it’s not commercialized. And that’s where we really want to play apart. I think in the short-term, I’m very focused, we’re very focused on getting proof of concept of the infrastructure deployed. So we’re looking at what we think are some kind of shorter cuts and easier transactions that we think will be good representations of what the production might be. But there are many, many offshore upstream opportunities for us to be a partner of and we’re talking to a number of firms. It’s also very good timing, and that many of the oil majors, independent oil companies are looking to divest assets are looking to commercialize them in some way, shape, or form. And so there’s a lot more to come on that. But this is without a doubt, my single biggest focus on a daily basis. And we’re only showing a $2 margin expansion for one of these projects that we think the upside could be materially higher than that. But that’s a good representation as the 350 versus 550 kind of numbers that’s in our financial projection on just the first of these. As I said, if you look at that, that one page, if you took the – all of our production, you replace it all with FLNG at $2 generates $1 billion incrementally, at $3 or $4 it’s obviously even higher than that. So the impact to us on an earnings perspective is potentially very dramatic.

Yes, appreciate it. Okay. Thanks, Wes. I’ll leave it there.

And your next question comes from the line of Spiro Dounis with Credit Suisse.

Hey, good morning, everybody. First question is a two-part question on zero parts. First of all, can you talk a little bit about what your target customer base looks like and what your unique offering? Is it seems like either FTAI or NFE, those kind of found an edge or way to develop a better mousetrap curious what that is here. And then on contract structure, you anticipate this being a fee-based business with long-term contracts similar to NFE or something else.

Yes. Hey, Spiro, I mean target customer base in the renewable fuel space is just about everything. I mean the products are immediately interchangeable and immediately replace any fuel. The technologies that where we’re likely going to be announcing take multiple feedstocks and produce anything from renewable diesel, automotive gasoline, jet fuel. So it’s a broad, broad customer base. I think for the blue ammonia, the broad – the biggest customer base is the shipping market. Ships today consume practically no renewable fuel over the next 20, 30 years, that’s going to transition to over half of their fuel needs being from renewable sources, at least according to the IMO standards that are being implemented.

Got it. And on contract structures is something that – if you be based in long-term or...

Yes. No, no, absolutely. I mean fixed feedstock supply, with guaranteed pricing and offtake. And to the degree, we’re selling some of the supply out to the fuels markets in the event, so some of that you are a price risk taker. But at the same time, you can enter into a variety of arrangements to kind of effectively, synthetically fix that price. So, yes, largely a fixed cash flow business with upside as you grow volumes.

Yes, we’re actually quite close to finalize in the first of these and the second one is in progress. I think that in our base case numbers, we think it’s between $600 million and $900 million in asset sales. So there’s substantial numbers. And one of the things that we are going to work on is a way to represent or financial statements that are actually accurate, because the accounting standards for sale leaseback have changed dramatically in the last year or so. So and we want to conform this and show I mean, I have a very simple financial metric that I think of as the money. And we’re – when you get cash flow from these, and you don’t pay tax on them, because they’re a financing, it generates a certain amount of capital, how best to represent that. I mean in the past, the real estate businesses and whatnot have used measures like FFO or like cash available for distribution or whatever. And so we need to come up with something I’m not a big fan of non-standard accounting measures. And so that is one limiting factor. But by the same token, you’re going to get a substantial amount of liquidity and cash flow from these asset sales. And they’re going to be sold, I think on balance at prices higher than what we paid or created them. And so representing that fairly is something that we need to do some real work on. But you’ll see some gain, that we think that the end of the day are kind of base proceeds number up the middle for us is around $900 million. The basis of those assets that we are potentially selling is about $350 million less than that. They won’t show up as an operating gain, nor will we pay tax on it, but it will show up as in the register. So we just have to figure out what the right way is with our finance – with our accounting people and then work with you also to make sure that we represented your models correctly.

Got it. That’s helpful. One last quick clarifying question, I think in a previous question, you’re asked with respect to zero parts becoming a standalone company. Are there any specific major milestones you need to see before, I guess starting that process? I don’t know if it’s a specific EBITDA amount you need to get to or maybe it’s something well absorbed before that?

No, no, I expect that we will actually create a separate public company for us really the minute that we’re FID on these two projects. So when we can say we’ve got 90 to 120 days is what – its an aggressive, we think achievable goal, given where we are today on both of these projects. And then we would look to have that be a capitalized and on – and suffered loud immediately. And there’s a number of different forms and ways that we could achieve that. But we actually are working on that now. So that’s not something we will wait to do until then, but actually take that down the path. We end up with something. I think getting that as a standalone company giving us an identity, getting the shares directly into the hands of the shareholders. Those are all the right objectives. And I’m very focused on doing that in the near-term, because I think that’s the right thing to do.

Got it. Very helpful. Thanks for the time today, guys.

Your next question comes from the line of Ben Nolan with Stifel.

Thanks. Hey guys, I wanted to shift the bucket to Brazil, you guys about FID on the three incremental projects there and appreciate that sort of your internal investment decision. But are there any hurdles or anything that needs to take place with respect to regulatory or commercial before you actually break ground and start spending money in that kind of thing.

No, it’s actually the – we’re very fortunate the team that we inherited, we bought the company that Golar assembled is incredibly capable. So we had the whole squad up here Monday and Tuesday, Ben and basically what we’re looking to do is marry up kind of our expertise and our operating experiences with what they have been doing. And I think on balance, I’m very, very pleased with what that group has accomplished thus far, kind of where we are. So Barcarena where EPC designed in the next handful of days, that is actually very much in production. Suape like finalizing agreements with the port moving the PPAs into Suape and converting them from diesel to natural gas that’s something that obviously the governments very, very supportive of. Santa Catarina, we are deep in conversations there. That is something that is a very straightforward development. And we expect to sign EPC on that in a very, very – as well. So there are always permits and processes to go through. I’d say on balance, given our experiences, I would rate these very low, where they are right now. And the timing to accomplish may appear to be aggressive when you look at Q1 of next year. But really, you have to backtrack several years to get to where we came to honest. So these were years in the making, productively moved along, great technical teams at each one place. So I feel very confident that we’re going to hit these timelines. And really the commercial side of that Ben we have just scratched the surface of. I mean we just really have barely started to really go after and aggressively commercialize that. I’ll be in the north of Brazil on Sunday. And we’ve got – we think some really, really interesting things there. We signed up the LOI on that first terminal with Norsk Hydro, but that is a – that’s the mouth of the Amazon River, the Amazon River has gigawatts of power. It’s the highest power prices in Brazil. They are all heavy fuel oil and diesel base. So I think it’s got potential economically to be tremendous. And you’re also de-carbonizing power in the Amazon. I mean that’s winning, right. That’s the best thing you can imagine. I think that the commercial activity will follow, I think you’ll get a lot of updates, in terms of announcements on things that are going on there. There’s big commercial groups that are down there. But we know that as projects get closer to completion, that’s when the commercial activity really ramps up, that - effectively that’s what happened to us in Mexico, right. So we’re very, very close to it now being completed in La Paz. And it’s not a really surprise that’s actually what was – the CFE showing up and signing the contract with us and looking at other opportunities there. So commercially, this stuff is going to be I think extremely, extremely productive.

Okay, great. And then shifting to the other side of the equation a little bit on the FLNG side here sort of getting closer to commercial agreements, are those – I’m curious, are those on a fixed gas price basis? And the reason I asked there is a lot of places don’t like to give up upside economics, especially developing markets. So I’d like to give up upside economics are rethinking really fixed price, or there’s drove an excellent part of that equation.

Yes, you’re 100% right. I think they don’t but of course, for the most part, they’re very focused on the oil right, a lot of these cases associated gas is a byproduct of it. And I think that in the end, there will be a number of different structures there. My goal is to end up with as much certainty as possible on the gas price that’s good for our core business and is good ultimately for our downstream customers. And so that’s obviously the goal, but there can be many patients of what that looks like. And probably at the end, it’s – there’ll be some combination where you’ll have some fixed pricing, you’ll have some indexation. And but unbalanced, I think it’ll tend more towards the fixed price side, just given the nature of the resource that we are extracting. Look I think the other material factor for a lot of the resource extraction is we are not just a resource extracting company. We are a problem solver from the power side, because really all these countries in some shape or form want incremental gas, want incremental power onshore. And that’s something we can also accommodate and do in a very, very competitive and expeditious way. So I think there’s a lot more to come on this. I think the reality of having the first of these is something that we’re now kind of really like seeing the benefit is with our conversations, but we’ll get the first one deployed, and hopefully, there’ll be a lot more to follow.

All right, sounds good. Appreciate that. Thanks, guys.

And your final question comes from the line of Craig Shere with Tuohy Brothers.

In question, Wes, can you talk more about the – or Ken, can you talk more about the technology used for carbon sequestration? And are you working with Chart on that as well?

No, not specifically working with anyone. Yes, in particular, there are multiple technologies, some that sequester the carbon in terms of carbon capture, and some that actually capture the carbon and convert it into usable products. It’s the ladder that I think is actually more relevant for our first project. Pretty interesting technology is continuing to emerge, but actually pretty straightforward process. But I think it’s more likely on the carbon capture side to be a technology where we both capture the carbon and actually convert it into something that has market value.

Yes. I mean there’s obviously a huge focus on carbon capture in Houston, Texas, right. So type of big oil companies down there, there’s a lot of interest in trying to be a part of it. I think the most straightforward use of it is to use it underground. But I think that that really undersells what the benefit of it. The CO2 itself is a very, very useful product in pure form. You can create lots of products for it. There are lots of things that you can do with it. And so we’re much more focused on that. Because that we think that’s another incremental part of the value chain that you can capture. But there are many, many different folks that are looking to participate in that, that have a lot of expertise in the upstream businesses that we think are good folks to talk to. So that that’s part of the process of going in finalizing that on the technology for our first plant here over the next few 90 to 120 days.

Great, thanks. And one last one, on Fast LNG, where are you in terms of procuring additional oil-filled infrastructure with the use of semi-submersibles involve any greater complexity than the liquefaction at top jack-ups. And now that the market knows what you’re using it for is the pricing starting to change?

Well, the first two rigs we bought paid a total of $31 million to rigs, the new cost just over $0.5 billion. So we say penny is in the dollar is literally penny is the dollar, what they are, and there’s – with all that has happened in the world, there is an abundance of offshore infrastructure, which is available, and basically scrapped values. And so that’s a good thing. We focused on the jack-up rigs, because we think that that’s just an easier installation the first time around. As I said earlier, it probably is not the highest value when you compare it to some of the offshore opportunities, but it’s still substantial value. And so it’s a good place to start. Then the semi-submersibles are the deepwater stuff, that’s where I do believe that the greatest benefits will be, because that’s the so many times if you want to make a great fortune, find a big problem and solve it. And the offshore gas is a big problem. I mean offshore development focuses on the oil, the gas, and the infrastructure that is needed to deal with that is takes a lot of capital, which is not that available and a lot of time. And so this is a big solution for it. And but our technical team, which is a very, very capable one. They think that the offshore installation is very much will follow the same pattern. So the modularization, if that’s a word I might have made that up, but I mean modularizing the liquefaction gas treatment, all those things and making them fit into smaller spaces. That’s my – description for what these guys actually do in a very, very – that works the same on the deck of a semi-submersible on the deck of a jack-up rig. So a lot of those things we think obviously morning systems how it all connects and whatnot there are different things you have to account for. But we very much feel like the application will work in both shallower as well as deeper water eventually.

Thank you.

I would now like to turn the call over to Wes Edens for closing remarks.

Great. Well, thanks everyone for dialing in this morning. There’s a lot going on. And it’s fun to have a chance to update you. And as I mentioned earlier, I think we’re going to have a road trip sometime this summer. And I think it’ll be fun to get people give them a chance to see some of our operations in business. I mean we’re a busy operating company today that is transitioning from this development company to an operating company. The pace of that is going to intensify as we now open these new terminals in Nicaragua and in Mexico. And I think it’d be a great opportunity to get people in front of it and have a chance to interact with our operational folks and see what’s going on. We’re very, very happy with kind of what is going on down there and be great to share it. And I think there’s a lot more to follow on, on all these different fronts, but thanks very much for your support.

This does conclude today’s call. You may now disconnect your lines.