FLNG Deployment And Strategic Shifts Set To Surge Cash Flow And Investor Confidence

Key Takeaways

• Introduction of FLNG assets and operational improvements set to increase free cash flow, positively impacting future revenue and earnings.
  
• Diversification into power generation and strategic refinancing activities aimed at enhancing financial health and stability, potentially improving stock value.
  
• New Fortress Energy faces operational risks, concentration risk in cash flow, stagnant EBITDA projections, limitations from past high CapEx, and financial structuring risks impacting liquidity.

Catalysts

Operates as an integrated gas-to-power energy infrastructure company that provides energy and development services to end-users worldwide.

• Deployment of the first FLNG asset and the improvement in operational performance after its delayed start increases the company's capacity to generate significant free cash flow, positively impacting future revenue and earnings.
  
• The expected growth in EBITDA to $1.4 billion to $1.5 billion for the year, fueled by contracted projects in Nicaragua and Brazil, reinforces confidence in the company's ability to enhance revenue and net margins moving forward.
  
• The diversification into the power generation sector, particularly through innovative projects like modular power systems for data centers, opens new revenue streams and could significantly contribute to the company's profitability.
  
• Refinancing of existing debt and efforts to achieve a senior secured corporate leverage to EBITDA ratio of less than 4x by 2026 aims to improve the company's financial health and stability, which in turn, could reflect positively on stock value through improved investor confidence.
  
• Significant reductions in CapEx for 2025, alongside a strategy focused on organic growth with little or no additional CapEx, are expected to increase free cash flow, enhance the company's ability to service debt, and potentially allow for shareholder returns, all of which could contribute to a revaluation of the stock.

Assumptions

• Analysts are assuming New Fortress Energy's revenue will grow by 24.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 10.3% today to 18.1% in 3 years time.
• Analysts expect earnings to reach $814.9 million (and earnings per share of $3.89) by about September 2027, up from $242.3 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 8.6x on those 2027 earnings, which is the same as it is today today. This future PE is lower than the current PE for the US Oil and Gas industry at 9.7x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 7.84%, as per the Simply Wall St company report.

Risks

• The delay in the deployment of the FLNG 1 asset led to a significant miss in quarterly earnings (a miss of $155 million) and could signal operational risks that impact future revenue and net margins.
  
• Heavy reliance on the FLNG 1 project for future cash flow generation ($500 million a year in free cash flow as stated) introduces concentration risk, potentially affecting the stability of future earnings.
  
• Projected EBITDA guidance for the upcoming years shows no significant growth (flat EBITDA forecast from $1.4 billion-$1.5 billion for the current year to $1.3 billion for next year), indicating potential challenges in expanding profit margins or earnings.
  
• High capital expenditure (CapEx) in previous years ($8 billion invested to create the current portfolio) and the transition to focusing on organic growth without additional CapEx may limit the ability to quickly adapt to market changes or new opportunities, potentially affecting long-term growth prospects and revenue.
  
• The strategy of migrating corporate-level debt to asset-level debt, aiming for less than 4x debt to EBITDA by 2026, introduces financial structuring risks that could impact the company’s liquidity and net margins if not managed properly.

Valuation

• The analysts have a consensus price target of $27.11 for New Fortress Energy based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $35.0, and the most bearish reporting a price target of just $17.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $4.5 billion, earnings will come to $814.9 million, and it would be trading on a PE ratio of 8.6x, assuming you use a discount rate of 7.8%.
  
• Given the current share price of $10.19, the analyst's price target of $27.11 is 62.4% 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.