New Fortress Energy: An Ambitious Business Model Faces Some Growing Pains

We are initiating coverage on New Fortress Energy NFE with a $30 per share fair value estimate and a no-moat rating. Shares are about fairly valued currently; however, they tend to be volatile alongside global LNG prices, so we would suggest investors wait for a better entry point.

New Fortress is in the process of building out a fleet of five sea-borne liquefaction terminals (it calls this Fast LNG) that can produce LNG to feed its network of eight import terminals and power generation facilities in five countries, primarily in the Caribbean and Brazil. Ultimately, power generated by its gas plants is sold to local utilities at a contracted rate. This integrated model is what New Fortress describes as LNG-to-power. In addition, New Fortress has entered into a joint venture with Pemex to develop the Lakach gas field using a Fast LNG vessel in order to gain below-market cost gas in order to widen its power contract margins. This allows the company to generate significant adjusted ROIC in excess of its cost of capital, averaging 16.2% versus 10.3% over 10 years.

Despite the healthy ROIC/WACC spread on average, we do not think that New Fortress has a moat. This stance is primarily because we have little confidence that it has a durable source of low-cost gas supply, that it has locked in high enough power prices via contract to secure a viable spread throughout the commodity cycle, and that it has enough protection built into its contracts in the form of a large fixed fee or make-whole fees to protect its business during a weak market. ROICs also decline below WACC in the latter stages of our model, when we assume the business model reaches more of steady-state status.