Gas Monetization And Capacity Auctions Will Drive Strong Long Term Earnings Power

Catalysts

About Eneva

Eneva is an integrated Brazilian energy company that combines gas exploration and production, LNG infrastructure and thermal power generation to supply reliable, flexible electricity and natural gas solutions.

What are the underlying business or industry changes driving this perspective?

• Scaling of the Parnaíba off-grid LNG platform, including the third liquefaction train and expansion of the green road corridor for heavy transport, is expected to unlock high-margin, take-or-pay gas monetization and drive sustained EBITDA and cash flow growth through 2027 and beyond.
• Full commercialization of the Sergipe Hub, supported by surplus FSRU capacity, flexible LNG sourcing and growing demand for firm gas in Brazil, positions Eneva to capture structurally higher trading and supply margins, lifting revenues and improving net margins with limited incremental CapEx.
• Recurring capacity auctions in a grid increasingly dependent on intermittent renewables, combined with Eneva’s contracted thermal portfolio and robust project pipeline, create a multi-year avenue to secure long-duration, inflation-linked fixed revenues and enhance earnings visibility.
• Ongoing upstream development in the Parnaíba basin and future campaigns in the Amazonas basin are expected to expand reserves and integrated gas optionality, lowering structural fuel costs for generation and marketing activities and supporting higher profitability and return on capital.
• Disciplined liability management, declining leverage and long-duration, inflation-indexed debt enable Eneva to fund its next growth cycle at attractive costs, allowing incremental EBITDA from new plants and LNG projects to translate more efficiently into net income and free cash flow.

Assumptions

This narrative explores a more optimistic perspective on Eneva compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts. How have these above catalysts been quantified?

• The bullish analysts are assuming Eneva's revenue will decrease by 6.9% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 0.2% today to 35.4% in 3 years time.
• The bullish analysts expect earnings to reach R$4.9 billion (and earnings per share of R$3.03) by about December 2028, up from R$34.0 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as R$3.0 billion.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 17.9x on those 2028 earnings, down from 1138.1x today. This future PE is greater than the current PE for the BR Renewable Energy industry at 11.4x.
• The bullish analysts expect the number of shares outstanding to decline by 0.81% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 20.32%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The optimistic thesis relies heavily on recurring capacity auctions and ongoing demand for flexible thermal generation, but Brazil's policy drive to reduce renewable curtailment and introduce battery storage could progressively reduce the role of gas and coal plants in system balancing, lowering future recontracting volumes, dispatch hours and associated revenue and earnings.
• Eneva is committing substantial capital to long lead time projects such as Azulão 950 and the third liquefaction train in Parnaíba at a moment when global equipment costs have risen sharply due to competing demand from AI driven data centers and Middle Eastern gas build out. This raises the risk that project returns compress over time and that higher than expected CapEx erodes net margins and free cash flow.
• The growth strategy assumes sustained expansion of LNG and gas marketing, including off grid diesel substitution in heavy transport and opportunistic LNG trading. Structural shifts toward electrification of transport, alternative fuels and more volatile global LNG pricing could limit long term demand or compress spreads, negatively affecting trading EBITDA, gas marketing revenues and overall earnings quality.
• The business model depends on continuous reserve replacement and expansion in the Parnaíba and Amazonas basins. Rising exploration costs, potential dry wells and slower than expected reserve certifications could leave thermal and LNG infrastructure underutilized over time, forcing Eneva to source higher cost gas and pressuring fuel costs, operating margins and long run return on invested capital.
• Leverage has been reduced but the company still carries a large, predominantly inflation indexed debt load and is entering another investment cycle. A prolonged period of higher Brazilian real interest rates, stickier inflation or weaker operating cash generation would increase debt servicing costs, constrain balance sheet flexibility and dilute the expected uplift in net income from current EBITDA growth.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for Eneva is R$27.1, which represents up to two standard deviations above the consensus price target of R$20.35. This valuation is based on what can be assumed as the expectations of Eneva's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of R$27.1, and the most bearish reporting a price target of just R$13.9.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2028, revenues will be R$13.9 billion, earnings will come to R$4.9 billion, and it would be trading on a PE ratio of 17.9x, assuming you use a discount rate of 20.3%.
  
• Given the current share price of R$20.22, the analyst price target of R$27.1 is 25.4% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.