New Fortress set to reverse Q2 loss as LAC projects go full swing

US-based New Fortress Energy's (NFE) CEO, Wes Edens, told investors the company had made a key transition toward strong operations and profitability in 2Q20, despite a net loss of nearly US$167mn. 

During the quarterly results call Monday, Edens emphasized a strong return on sales, with the company reporting an operating profit of US$15.2mn, up from a US$2.2mn operating loss in Q1.

The firm reported record volumes of LNG sold with the average daily volume rising to 978,000 gallons per day, an increase of nearly 30%.

Revenue was US$95 million, up from US$74.5mn, with increased volumes driven by a full quarter of operations at the Jamalco CHP facility and revenue on gas supplied from the San Juan facility.

NFE also expects volumes rise to between 1.7Mg/d (millions gallons per day) and 2Mg/d on average for the rest of 2020.

To illustrate the outlook on sales volumes based on projected output, the company said the plants in Jamaica and Puerto Rico look to increase operating income by US$400mn/year.

The company also expects an additional US$150mn in annual operating income, taking into account the Mexico and Nicaragua projects set to start by end-2020.

PROFIT IN PERSPECTIVE

In the results release, NFE said COVID-19 had not materially impacted company financials though there were impacts on customers and energy demand in the markets it serves. 

“[The] last four and a half months since the COVID situation developed has been challenging in ways that we never expected, but also rewarding [in] ways that we couldn't possibly hope for,” Edens said. 

“The pipeline for our business and future customers is more robust than it ever has been.”

Edens also said the quarterly net loss was in large part the result of a one-time US$105mn premium NFE paid for the cancellation of eight LNG cargoes.

That transaction, he said, took place before the pandemic-related hydrocarbons price disruption, and though it affected the company’s bottom line, it was ultimately a positive.

“[The cancellation] allowed us to … basically replace those cargoes and buy them on a spot basis,” Edens said, adding that this meant the company would gain on spot purchases anywhere below US$2.94/MMBTU (million British thermal units)  – the price negotiated with the canceled cargoes.

The company has since bought two of the eight LNG cargoes that needed to be replaced, the first at US$1.92/MMBTU and the second at US$1.85/MMBTU.

“In very simple terms, if we did nothing other than pay the US$105mn to cancel the contracts and replace them at exactly that level, it still would have been a very, very beneficial transaction,” the CEO said.

“The net of it is that we expect it to be positive to us to the tune of US$15-25mn, so we do make a little bit of money as a result, but it also does really present an operating profile that is terrific,” he added.

TARGETING INVESTMENT GRADE 

Edens said Moody’s and S&P on Friday responded to the company’s request to be rated. The agencies rated the company 'Ba1' and 'B+', below investment grade. NFE plans to use the ratings as bases for refinancing debt with targeted savings of US$25mn per year. 

The CEO added the company's overall debt stands at “about US$1bn,” where the overall cost of debt is around 8.3-8.4%. 

“In both cases, we believe our rating as a company should be better than that,” he said, adding a key aspect in the rationale provided by both agencies considered the relatively new status of all facilities.

The ratings, according to Edens, were part of the process typical a young company like NFE, on the path to becoming an investment grade company. 

“If the operating metrics hold the same or improve, both of which we believe are likely, and our operating history is consistent, we think that this will be the beginning of a long-term upgrade for the company,” he said.

LOGISTICS INNOVATION

NFE executives outlined a new infrastructure/logistics solution that could cut project timelines and costs by 50% or more.

The proprietary scheme, dubbed the “ISO Flex System” (see graphic), involves offloading product from giant LNG tankers directly into modular ISO storage containers and onto specialized small offshore support vessels (OSVs), which are inexpensive, abundant and able to run in low draft ports.

Source: New Fortress Energy

Chief development officer Brannon McElmurray said, “what we've done basically is just simply cut out a ship.” To illustrate, he mentioned an LNG barge arriving with 160,000m3 of cargo or 40Mg of gas and loading the product onto 10,000-gallon containers in OSVs.

“It simply takes a very, very efficient manifold that allows you to take the gas from the very big ship and put [it] directly into the ISO containers themselves,” McElmurray said. He added there are over half a million ISO containers in the world today. “It's a very, very prevalent form of transportation to move this around by both truck and by rail.” 

Using the model, the company believes it can cut the timeline on a new project from 24 months to three to six months, cut estimated construction costs from US$100mn to US$50mn and lower operation costs from US$40mn to US$15mn. 

MEXICO AND NICARAGUA 

Sam Abdalla, NFE vice president for projects development in Mexico and Nicaragua, said the ISO Flex model is already being applied in both countries “as the proof of concept to turn on this year.”

Abdalla detailed progress at the Pichilingue LNG import terminal (pictured as artist rendering) and merchant 105MW gas-to-power plant in Baja California Sur with projected run-rate volumes of 500-750,000 gallons per day. 

Dredging works on the site, also described as the La Paz Terminal, have been completed, and construction for the terminal has started.

The company expects to ship three gas turbines to La Paz on October 1, and adding first gas is now scheduled to begin in the fourth quarter, rather than the original Q3 target date set last year. 

NFE’s project in Nicaragua at Puerto Sandino involves a 300MW natural gas-fired plant underpinned by a 25-year PPA to supply Nicaragua’s electricity distribution companies. An offshore LNG receiving, storage and re-gasification terminal, also being developed by NFE, will supply the gas. 

Abdalla said, “we have filed for all the critical permits, and expect to be fully permitted by end of September this year. We also completed the concept design and planning to award the construction package by end of August and target completion date end of this year.”

CARRIBBEAN UPDATES 

Edens said the new plant in San Juan, Puerto Rico, reached its target run rate July 10 on the two turbines at the facility, which is designed to provide natural gas to the San Juan combined-cycle power plant.

McElmurray added, “with our San Juan Facility ramping up in Puerto Rico, we have completed our transition from a start-up to an operating company.”

With this, said the CFO, the company’s four major operating assets in the Caribbean – Montego Bay, Old Harbour, the Jamalco CHP in Jamaica, and San Juan – “have now hit their run-rate volumes, totaling in excess of 1.7Mg/d.” 

“Importantly”, added McElmurray, “each of these facilities has built-in capacities to serve additional customers. As an example, we started loading LNG tankers in Puerto Rico last week to serve on-island industrials looking for behind-the-fence power generation solutions.”

Company executives did not address recent criticism of the San Juan project, with local opponents alleging irregularities in contracts with Puerto Rico's electric power authority (PREPA) and citing the delayed timeline on the project with construction concluding in May, nearly a year year behind schedule, as the country struggles to rebuild its grid after 2017’s Hurricane Maria.

MEANINGFUL EXPANSION

Edens hailed the ISO Flex model’s potential to unlock territories that are largely out of reach for other LNG developers, citing the Puerto Sandino project as an example.

The system will allow NFE to provide solutions to territories without the needed physical and financial criteria to support deep port developments typical of LNG terminals.

Edens said, “the reason why the timeline in Nicaragua has been advanced is specifically because of this solution. That’s a real life manifestation of why we think it makes so much sense.”

He added, “it’s the first new infrastructure that’s been on the power side in a long time, it’s being done with gas, which is much cleaner and much cheaper than the alternative at the moment.”

Also, “there will certainly be competition. There is competition for us in the world, but the world is so under-electrified and so in need of these projects, and they don’t need a project that turns on five years from now, they need a project that turns on now.” 

This is why he believes “that the solution is such a meaningful one,” adding that the 1GW and 2GW MOUs "I've seen signed ... at all these different countries around the world, that says it's going to deliver in five years.” 

For Edens “the project in Nicaragua is a very good example of something that's meaningful to the country.”