New Fortress Energy Inc. Q2 FY2022 Earnings Call

Good day, and welcome to the NFE Second Quarter 2022 Earnings Call. Today’s conference is being recorded. And at this time, I’d like to turn the conference over to Brett Magill, Managing Director and Head of Investor Relations. Please go ahead, sir.

Thank you, Emma. Good morning, everyone, and welcome to New Fortress Energy’s second quarter 2022 earnings call. This call is being recorded and will be available by replay within the Investors section of our website under Events & Presentations. There, you’ll also find our Q2 2022 investor presentation, which we’ll be referencing throughout today’s call. The presentation includes 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. Joining me here today are Wes Edens, CEO and Chairman of the Board; and Chris Guinta, Chief Financial Officer. Also joining today’s call are other members of the team, including managing directors, Andrew Dete and Patrick Hughes. With that, I’ll turn the call over to Wes.

Great. Thanks, Brett, and thanks all for dialing in. Good morning. So let’s jump into it. So as usual, we will go through our presentation we posted to our website last night, and with that, let me start at the beginning. So Page 4, a very, very good quarter for the firm by all measures. Total EBITDA, $283 million. If you take the last four quarters together, our trailing four quarters EBITDA is now just a shade over $1 billion, so $1.05 billion, so a real milestone. We are affirming guidance for the remainder of the year that we expect 2022 to generate approximately $1 billion in EBITDA, and we’re actually providing guidance for 2023 of guidance of $1.5 billion, which we think has substantial upside depending on the timing and nature of the FLNG installation. So from a financial metric standpoint, a very, very productive quarter. If you flip to Page number 5, we have many significant updates to highlight for the quarter, and I apologize for the dense words on the simplifier. The reality is we had so much activity for the quarter that even trying to condense this list was a bit of a challenge. Let me just touch on the highlights, and Andrew Dete and Chris Guinta will provide a bit more detail on it later. Our commitment to our customers and our downstream terminals is stronger than ever. This is the core of the mission of the company to help address energy poverty and energy security in the world while being a key player in this transition to a cleaner energy future. In the quarter, we substantially completed our Barcarena and Santa Catarina terminals and made significant progress on permits for Ireland. We've been working on this for a long time, and we are now more optimistic than ever that we will get to a positive resolution for the Irish terminal as well. We leased one of our FSRUs into the Netherlands for our first exposure to Europe. Europe has had a tumultuous year with the February 24 invasion of Ukraine. There’s a lot of activity from different nations in Europe to build terminals and get them online, especially with winter approaching. We successfully leased one of our FSRUs into the terminal with the Christine date of September 8. We believe now that Europe is a bright part of our future. We are generating FLNG volumes and, of course, we’ll bring them to all of our customers worldwide. But we think that the European customers are going to be a big part of our future. Eventually, the energy crisis will abate, and our downstream customers and assets are critical pieces of our business model. We’ve invested nearly $9 billion in eight years building out this infrastructure. This will allow us to take the volumes we create, distribute them around the world to our customers, and be a meaningful part of the energy transition. Two other highlights for the quarter: we intended to self-finance all our activities, with a goal of generating $2 billion to $2.5 billion of internally-generated capital, so we didn’t have to go back to shareholders or do corporate financings. The financing markets have been challenging but I’m very happy to report that we have achieved our goal. We can confirm that we do not believe we need to raise incremental capital to finance our growth. Being self-financing in this market is a top achievement for me this quarter. This speaks volumes about the essential nature of our infrastructure assets and about the people who did this work on our behalf. Lastly, we made significant strides in the Hydrogen business. We issued a press release this morning by Plug Power. We’re happy to confirm that we are partners with Plug and they will be the equipment provider for our first hydrogen plant. The energy bill currently being contemplated by Congress puts the U.S. in a strong position to be a leader in hydrogen production. I think the current discourse regarding energy transition presents a false narrative. Many believe we can seamlessly transition from dispatchable fossil fuels like gas and coal directly into non-fossil fuels like wind and solar, but this transition is complex and perilous. We have seen significant shifts back to coal usage this summer, and expect coal usage will be as high this year as it was in its peak year of 2013. The energy security narrative is taking precedence over climate change in this context. If you believe in climate change, investing significantly in hydrogen is essential. We don’t intend to include nuclear in our business, but we’ve discussed hydrogen for the last 2.5 years, and this announcement this morning is a significant milestone for establishing our first hydrogen project. With that, let me turn it over to Andrew.

Thanks, Wes. Happy to be with you this morning. Great quarter for NFE. I’m on Page 9, and I want to give you a quick update on the snapshot of our assets and the portfolio. Page 9 provides an update of where we are. We’re operating and developing over 37 MTPA of downstream regasification infrastructure in seven different countries. We own and are developing over 3,000 megawatts of power at our terminals, and we have eight MTPA of FLNG production capacity under construction and development. This map is updated now from last quarter and shows our integration efforts. Flipping to Page 10, I want to echo what Wes said at the front. Our core business at NFE is really serving customers. We seek to serve downstream LNG demand over long-duration contracts that provide energy security and lower emissions for our customers while delivering long-term, stable and growing cash flows. In this quarter, we’ve made strides. If you add in the contracts we signed recently, the volumes for the Jamalco refinery, the Barcarena PPA, and the increase in extension of our volumes with CFE, that takes us up to 136 TBtus on a 2023 run rate basis across 65 contracts, increasing the volume weighted average life to 15 years, up from about 12.5 years. This speaks highly to the quality of our infrastructure and the long-term contracts at NFE. On the left side, let me highlight some of the commercial successes for the terminals. The Barcarena terminal is complete, an offshore terminal with a 3-kilometer pipeline and a gas conditioning station that will initially serve Norsk Hydro starting in 2023. We project over $100 million of EBITDA from these contracts alone with substantial growth potential in Barcarena. The Santa Catarina terminal is over 90% complete and is expected to start operations in 2023, connecting to Brazil’s interstate pipeline system. Additionally, we’ve increased volumes and extended our contract with CFE at our La Paz terminal to ten years. Moving on to power plants, we sold our 50% stake in the 1.5-gigawatts Sergipe power plant for $1.3 billion, netting NFE $550 million after paying down debt. This shows our capabilities at NFE as we stabilized operations and connected the plant to the main interstate gas pipeline. We are also starting construction on our new 605-megawatt power plant in Barcarena, with a 25-year PPA that’s indexed to JKM. We’ve signed a fixed-price EPC contract, with Mitsubishi and Toyo, and I’m excited about this project starting construction this quarter. Regarding LNG vessels, we’re delighted with our partnership with Gasunie. We’ve chartered the Golar Igloo FSRU on a five-year term, deploying it to Eemshaven, Netherlands for the first new regas terminal in Europe. This will double the capacity for regas in the Netherlands and help address supply shortages. Lastly, we signed a $2 billion enterprise value JV with Apollo, selling 11 LNG vessels into the joint portfolio, retaining control while freeing up balance sheet capital. I'll turn it to Chris now.

Good morning, everybody. Let’s turn to Page 12 and talk about Fast LNG. Since our earnings call in May, we’ve continued to make material progress on our FLNG initiatives. On the next three slides, we’ll outline advances on deployment opportunities for FLNG and construction progress due to teamwork with our partners. On Slide 13, we’ll discuss how and where we will put our FLNG assets into service. Over the last four months, we’ve expanded our deployment options from one to three sites, now permitting over 8 million tons per annum of capacity. On our Louisiana option, we submitted permits for 2.8 MTPA on March 30, 2022. Our permitting team has regular communication with the Coast Guard to ensure they receive all necessary information for our Fast LNG project. By July 15, we responded to 97 comments in our first information request within two weeks. The second location is a partnership with CFE in Altamira, Mexico, accommodating three FLNG assets. NFE signed an agreement with CFE and Mexican President López Obrador for economic partnership to source feedgas from the existing pipeline between Brownsville, Texas, and Altamira. This will yield significant LNG cargoes as we transition CFE to gas-fired power. The third exciting location is a partnership with Pemex to develop an integrated upstream and floating liquefaction project offshore at the Lakach field, discovered in 2007, with proven reserves of approximately 1 Tcf. NFE will complete wells, develop subsea infrastructure and install a processing rig, receiving about 70% of cash flows generated. This can be repeated in multiple locations globally. On Page 14, here’s an update on our FLNG asset execution efforts. I was down in Corpus two weeks ago andamazed at the progress made; engineering and material procurement for FLNG 1 is complete, and the project is about 70% finished. Despite supply chain constraints, critical long-lead items continue to arrive, which helps us maintain our aggressive timeline. Module fabrication is on schedule, and we anticipate completing the first Fast LNG asset by Q1 and commencing offshore commissioning. Quickly on Page 15, NFE is developing FLNG using common design and equipment with various types of marine infrastructure for flexibility in different environments. We have three jack-up rigs for FLNG 1 and initiated fabrication on jackets and decks for FLNG 2 and 3 in the U.S. Gulf Coast. We also purchased two semi-submersible drilling rigs currently undergoing refurbishment in Singapore for FLNG 4 and 5. Given the same design and layout for modules, we aim for down around 14 to 16 months for module fabrication completion. Once finished, installation and commissioning will be completed within approximately four to six months. On the right side of the page, you'll see FLNGs 1, 2 and 3 are mostly fabricated in Kiewit Yard in Corpus, with two units online next year and the third in 2024. FLNGs 4 and 5 will be operational in 2024. Last point regarding commissioning and operations; we are already staffed and have begun that process, ensuring that all measures are in place to minimize commissioning timelines and maximize operational uptime. Andrew?

Thanks, Chris. Amazing progress. On Page 17, we want to talk about funding Fast LNG. Six or seven months ago, we outlined a funding plan based on three things: no new corporate financing, internally generating capital through asset sales, and laying out a timeline. We have successfully raised over $2 billion through asset sales, notably the Sergipe power plant sale and the ships JV with Apollo, with no financing required to fund our Fast LNG program. Additionally, we've increased our letter of credit facility to $250 million, which is critical for us as it allows us to place letters of credit for development and construction needs, freeing up significant cash. Great liquidity and success regarding our funding plan for FLNG. On Page 18, I want to provide more detail on our asset sales, which simplify and focus our operations as we transition from owning and operating ships to chartering them. The Sergipe power plant sale is a great outcome as it allows us to recycle balance sheet capital. On the left side, our ships monetization generated over $1.1 billion in proceeds while maintaining long-term control over the shipping assets. We expect this to close the week of August 15. Wes, back to you.

I will quickly discuss financial performance. For the three months ended June 30, we had EBITDA of $283 million, exceeding $1 billion on a trailing 12-month basis. The terminal segment operating margin was $238 million, with an additional $90 million from the ship segment. We reported a one-time non-cash impairment charge of $315 million related to CELSEPAR asset transactions; however, excluding this, our net income for the quarter was $146 million, resulting in EPS of $0.69. The results solidify our adjusted EBITDA run rate over $1 billion on our way to more than $1.5 billion for 2023, excluding FLNG cash flows which could contribute an additional $1 billion. On Page 21, we compare our performance to projections made at the IPO in January 2019. We projected around $500 million of adjusted EBITDA for fiscal year 2022, but we’re set to exceed this, reflecting a tremendous evolution of our business as predicted. The goal is to reach fully built-out EBITDA numbers over $4 billion to $5 billion or over $24 a share.

To interject briefly, going back to our history is useful. We track and measure everything. At the time of our IPO, we projected around $500 million of EBITDA in 2022. We're pleased to see this doubled. We're also happy with per-share performance improvements and appreciate our current stock price at around $50, a significant increase from our original IPO price. We also acknowledged that generating LNG volumes and routing them through our terminals globally provides us tremendous upside. While we cannot offer specific guidance on the precise impact of this right now, we anticipate offering guidance of $1.5 billion next year, which could increase our forecast significantly as FLNG units are operational. Contextually, we see tremendous economic value in generating and delivering LNG, and we aim to continue capitalizing on these growth opportunities.

On Slide 22, regarding NFE's financial health: significant progress exists, and we anticipate upgrades from rating agencies. Our earnings growth and consistency establish our performance track record. Our successful asset sale transactions ensure our business is fully funded, simplifying our balance sheet and removing over $1.4 billion in asset-level debt. This deleveraging continues under 2.0 times as FLNG assets come online. Our efforts focus on establishing stable, predictable cash flow, extending average customer term to 15 years, and maintaining relationships with investment-grade counterparties like Norsk Hydro and CFE. Lastly, we’ve enhanced our working capital needs with a $250 million new letter of credit facility.

I’ll introduce the hydrogen section and turn it over to Patrick Hughes for updates on Washington activities. As I mentioned, achieving a decarbonized future necessitates hydrogen's significant role. Industrial production sectors heavily rely on fossil fuels, contributing immensely to greenhouse gas emissions. While discussions focus on electrification for climate change, two-thirds of emissions originate from industrial activities that cannot solely rely on electricity. Consequently, hydrogen will be a critical component in this transition, and with the recent bill announced by Senators Manchin and Schumer, it positions the U.S. as a leading producer of clean hydrogen through production credits. We've been in discussions about finalizing our first project in Texas on green hydrogen, and we expect to declare FID in the next 30 days. Our project will have all completed components, including permits obtained and partnerships established with Plug Power for electrolyzer technology. I’ll now turn it over to Patrick.

Thanks, Wes. Regarding Washington activities, leaders took a strong stance last week on clean hydrogen as a vital climate solution. The Inflation Reduction Act encompasses a production tax credit of $3 per kilogram of clean hydrogen produced. This crucial credit applies to both green and blue hydrogen, but life-cycle emissions must be considered. We anticipate voting shortly on the bill, which has a high likelihood of passage. This tax incentive significantly alters hydrogen production economics in the U.S., aiming to establish the country as a leader. As mentioned, we are proud of our partnership with Plug Power for our 120-megawatt facility, expected to be one of the largest of its kind in North America. We also initiated a blue hydrogen project in the Northeast, capitalizing on low-cost feedstock from stranded natural gas in the Marcellus. We anticipate further discussions in a couple of weeks regarding project details and economics.

As stated, our goal in hydrogen is to create economically viable projects with compelling stand-alone economics. The Texas project achieves this and aligns with our strategy of providing transparency on all details relevant to investors. We aim to develop a roadmap to transition this project into a company addressing the hydrogen demand on a feasible basis. As we proceed, we may consider separating this activity to enhance its investability for shareholders. In conversations with others, I emphasize our commitment to the gas and LNG sectors and our role in the energy transition to a clean energy future. The recent legislative support provides a robust platform for our growth and opportunities ahead. I look forward to future discussions.

We’ll now take it into Q&A. Emma, if you’d like to transition us there, please.

We will now take our first question from Devin McDermott, Morgan Stanley. Please go ahead. Your line is open.

Good morning. Thanks for taking my questions. First, congrats on the great progress across all initiatives here this morning. My first question is on Fast LNG, specifically regarding the Louisiana permit process. You mentioned you refiled the permit addressing some comments. Can you discuss what changes were made in the refiling and how this might impact the approval timeline?

Yes, sure. Happy to. This is Cameron. I work with Wes on these efforts. The short answer is, after a productive set of initial questions, we filed our response back on July 26, and it is under review by regulators. So it was a positive first interaction.

The initial set of questions totaled 92, which is relatively light. Our 8,000-page application was thoroughly prepared. The results suggest we expect to make significant progress. No material design changes were requested, and we aimed to avoid those types of changes since they complicate schedules and budgets.

Very helpful, thank you. My second question concerns downstream terminals. You noted progress and optimism on Ireland. Could you provide what gives you additional confidence in the Irish process? Also, any updates on South Africa would be great.

In Ireland, we have made significant progress on permitting, which has advanced beyond initial stages. We have interacted well with the agency and expect a formal decision in September. Additionally, the project entails 600 megawatts of power, directly addressing Ireland's energy security with an upcoming power shortage. As for South Africa, we've targeted it for development, focusing on a large population, growing power demand, and currently minimal gas penetration. Development is in early stages as we position in Richards Bay, an area with high industrial and power needs. More updates will follow.

Thank you very much.

Thank you. We will now take our next question from Ryan Levine from Citi. Please go ahead. The line is open.

Good morning. For your hydrogen project, can you provide background on how it came together and the practical implications of the IRA for that project?

Around 2.5 years ago, we identified hydrogen as a critical component for the clean transition. We evaluated technologies and signed with Plug Power, the electrolyzer provider for our project. This area near Beaumont is ideal due to its access to water and hydrogen pipeline, a prime consideration for downstream users and petrochemical access. The financing profile matches our infrastructure projects, making it viable.

In terms of the financial benefit of the IRA for this project, what impact do you foresee?

The $3 production credit shifts economics from modest to compelling. Should it become law as proposed, the U.S. will lead in green hydrogen production. The first project will serve as a template for many more opportunities.

Regarding the alternative minimum tax, will this have implications for your purchase synergy?

No, I don’t believe so.

Thank you. We will now take our next question from Craig Shere from Tuohy Brothers. Please go ahead.

Good morning. Exciting times. Could you expand on the long-term vertical integration benefits of your upstream merchant plans versus your downstream assets, for example, the Barcarena plants under the 25-year JKM-linked PPA? Also, has there been a change regarding the FLNG that's redirected downstream since the last quarter?

Yes, the Barcarena PPA is attractive, as it integrates seamlessly. Supply can come from a third-party contract or from our Gulf Coast FLNG. The transportation logistics favor us. I believe that vertical integration will benefit us in the long run.

An important development is our partnership with Pemex, which allows us to access molecules without ownership. This positions us to leverage LNG further. We have expanded downstream capabilities while continuing upstream acquisitions, leading us to additional future partnerships.

Currently, we’re well positioned. The global supply of gas is insufficient. Looking at unmet demand, our customers are securely matched with our supply. Once our FLNG volumes are online, we'll have additional resources to provide.

Thank you.

Thank you. There are no further questions. I will now turn the call back to Mr. Wes Edens.

Thanks, everyone. To recap: it was a strong quarter for earnings, significant progress for our terminals in Brazil, Ireland, and South Africa. FLNG construction is proceeding as expected with three deployment sites now authorized, which enhances our gas supply options. Successfully self-funding our operations is a remarkable achievement. We look forward to speaking again next quarter.

Ladies and gentlemen, we conclude today’s conference. You may now disconnect.