New Fortress Energy Inc. (NFE) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the New Fortress Energy Investor Update Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your host today, Josh Kane with Investor Relations. Please go ahead.

Thank you, and good morning. I would like to welcome you to the New Fortress Energy Investor Update Call. Joining me here today are Wes Edens, our CEO and Chairman of the Board; and Chris Guinta, our Chief Financial Officer. Throughout the call, we're going to reference a Form 8-K, which we filed last night and can be found on the New Fortress Energy website under SEC filings. If you've not already done so, I'd suggest that you download it now. Before I turn the call over to Wes, I would like to point out that certain statements made today will be forward-looking statements, including regarding future earnings. These statements, by their nature, are uncertain and may differ materially from our actual results. We encourage you to review the disclaimers in any of our investor presentations regarding non-GAAP financial measures and forward-looking statements and review the risk factors contained in the quarterly report filed with the SEC. Now I would like to turn the call over to Wes.

Great. Thanks, Josh, and thanks, everyone, for calling in on short notice. I'm happy to have the opportunity to update you on the business. There's been a lot of activity for us and our earnings outlook has changed materially. We want to share our current thoughts with you. As all of you know, the world has been experiencing a massive energy shock and perhaps no sector has had more volatility than our core commodity in our business, which is LNG. The business that we built produces exceptional results in the base case by delivering gas and power to our customers around the world. And the business model is very simple. Essentially, we match our supply and demand to our customers. And as a result, we have minimal commodity exposure. But the underlying nature of the portfolio allows us to benefit greatly from shocks to the system. And the portfolio as large today will grow substantially over the next 18 months as we complete the terminals that we have committed to and are building right now. This provides tremendous flexibility to us and it can lead to the types of returns that we're now seeing. So you see this firsthand of the impact, as we put out in our 8-K last night, we updated our earnings goals and forecast. Q3, essentially unchanged; Q4, up just over $200 million; fiscal year 2022, up $100 million in our forecast. In '23 and beyond, which we're not making a forecast on, I believe you'll see the scale of the business increase exponentially with the additions of the terminals in Brazil, Ireland, Sri Lanka and elsewhere. And perhaps most importantly, you'll see the addition of low-cost fixed-price gas from FLNG. This is a very, very powerful business model. It's one that we've built not only to withstand volatility, but to profit from it. So that's the earnings update. And maybe I'll just spend 2 minutes on our view on what has caused this and why this is a benefit to us. And then we'll take some questions from folks on the line. We're very focused on playing our part in the transition from fossil fuels to a carbon-free future. And we're also very focused on the inequality of energy poverty that exists around the world. But simply replacing thermal power with renewable power alone is not the answer. The variability of solar and wind and other factors cannot be absorbed easily in a system that has a -- is undersupplied from a power standpoint. And on the path to a carbon-free future, there's a fairly bumpy transition period ahead for the next decade or 2. This is a result of a very, very simple notion. There's been a structural underinvestment in hydrocarbons, and this creates a precarious supply-demand imbalance. It basically makes the system very, very subject to small changes having an outsized impact on commodity prices. The wind stops blowing in Europe, rain stops falling in Brazil, China under invests in coal for their power plants. Gas becomes the swing fuel for that. And you see even though the LNG is approximately 10% of all the supply of gas in the world, so it's a relatively small portion of the overall gas picture, but it then becomes the swing commodity that has to fill in these gaps. And when you get all 3 of these things happen and others, you get a massive shock to the system. There's a significant supply-demand mismatch, and that creates the massive spikes that you have right now. It's basically a 100-year flood that seems to be happening with much more frequency. And my view is that in the next 10 or 20 years, as we go through this transition period, you're going to see it happen more and more often. Now what does that mean for us and how do we benefit from it? Well, we spent the last 7 years building a vast network of downstream terminals and assets around the world and one that is going to continue to expand with the terminals we're building in Brazil, in Sri Lanka, in Ireland and elsewhere. As I said before, we match our gas needs with the portfolio that we bought from the market and the goal is absolute commodity neutrality, which is what we have. But the underlying downstream terminal inherently has a significant amount of flexibility. Think dozens of customers growing to hundreds across many different geographies. And simply by being active, we're able to turn what for us was a modest short position in the LNG for next year into a net long of this year and early into next year. With the big changes in prices in the marketplace, we can then take advantage of that, and that's reflected in the earnings that you see in front of you right now. This, in my opinion, is the tip of the iceberg. And that as the portfolio grows across the geographies in the world, number one. And number two, as we add in FLNG, we could have -- we have a tremendous structural situation where long volatility in these marketplaces -- so our underlying businesses generate great base case returns by simply providing the gas and power to our customers. But we have all this flexibility on both sides of the equation that really benefits from us. That's what we're working hard to achieve. And so with that, that's the update. It's a simple one, just an update to the earnings goals and forecasts for us. And we'll take any questions, operator.

[Operator Instructions] Our first question comes from the line of Devin McDermott with Morgan Stanley.

So my first question is just bridging the delta between the last quarterly update you gave on your net position across the portfolio and where we are today. Could you talk a bit more specifically about what changed? Was it more hedging? Was it change in consumption patterns across your end customers? What I'm trying to get a sense of is the repeatability of this portfolio flexibility. Or is this dynamic more onetime in nature, given how extreme what's going on in the market is at the moment?

It's very repeatable. I mean basically, what you have is a situation -- I mean the way I think about it is that I spent the first 10 years or so of my life trading mortgage securities. And in that business, basically, you were short volatility. So if I made a mortgage to you, if interest rates rose, you didn't pay it off, it's my bad investment, stuck around for a long time, that's bad. If on the flip side, if interest rates went down and I was -- now had a good investment relative to the marketplace, you turned around and paid me off and so short volatility. And so in order to make returns in that business, are constantly fighting the battle of being short volatility and you had to take market bets on one way or the other in order to do so, which makes it a pretty tough business at times. In this case, we actually have absolute neutrality. So we are matched with our portfolio. As I said in our last update we gave across the whole business, we were essentially 97% or 98% matched. We had a couple of cargoes we were short next year, but over a very long period, very, very hedged up. But then what happens is that when the market really moved dramatically, there's lots of different actions you can take to try to increase your flexibility and move around volumes and deliveries and whatnot, and relatively small movements across the big portfolio results in a handful of cargo moves. That may not sound like a very big thing, but then when you get these kind of price movements, it results in a big earnings swing. And so the real question, I think -- or my answer to the question you have is, how likely is it in the future that there's going to be future shocks to the system. And this underinvestment in hydrocarbon production, which I think is actually a very systemic issue, is one that is going to be persistent. And that puts the world on kind of a nice edge in the commodity cycle. And so you're going to get these 100-year floods happening, I believe, with a much more frequency than every 100 years. And so the net of it is the business, without the shocks, is a great business. It's a matched business. We buy for -- at one price, we sell to another. We actually take -- we provide all the services. We do all the things that we've been describing for years in our business. But then the addition of this flexibility, as the system goes up and gets larger, adds a tremendous incremental benefit to it. And when you throw on top of that the work that we're doing on the FLNG, which is going extremely well, and I'm incredibly optimistic about the prospects for that in the very near term. When you throw that on top of it, you've actually only added more and more and more volatility that you're long to your system. So I think it's a very, very powerful business model. You're starting to see the benefits from it. It's not a small thing that with a very, very small adjustment in terms of a net position, right, you're able to generate a couple of hundred million dollars in incremental earnings for a quarter. That's an amazing phenomenon. But it is, as I said, I think the tip of the iceberg in terms of what the prospects for this would be once the system is fully up and operating.

Got it. That's really helpful detail. My follow-up question is just thinking a little bit more about the growth opportunities here. I was -- I wonder if you could hit on 2 things. One, just remind us of your strategy in securing supply around new deals when they're announced. I mean there were a few post the last earnings call. And then, two, can you talk a little bit about the ability to source gas outside of Fast LNG, given what's going on in the market right now and essentially asking on the attractiveness of long-term margins for additional growth, how that's set up in the current market environment?

Well, I think the market environment actually lends itself incredibly well to the business that we're doing. I would say when you look across the portfolio and you look across the world, there has been a lot of complacency on the customer side in terms of securing long-term supply. And so I think that with relatively low commodity prices over the last couple of years, people under nominated, under committed the volumes they had with the notion that, hey, there's so much available supply that I can always buy in the incremental volumes that I want. And we've seen that across our portfolio. You've seen that from many countries around the world. That's what's going on right now. And obviously, that's not a very good strategy when you go through a period like this. And I think that the result of that is you're going to see a lot more of a long-term commitment from customers, that's good for us. It gives us a lot of certainty around that. It's good for us also that we can go procure it for them. But as I've talked with many customers over the last handful of weeks, as these prices have kind of gone crazy, the same underlying theme is that if you want to have energy security, you have to actually make long-term commitments. It's that simple. And so I think the business itself, that's been -- that's always one of the challenges is to get those long-term commitments. But I think the business itself now is really benefiting from the volatility because the cost of that is very manifested to the folks that are doing it, right? They're caught in that cycle. So I feel like it's great. The one thing I'd say is that the big difference to our business is that we're heading into some markets that are very large, very scalable markets where the expression of this flexibility could be even more extreme. So for example, in Brazil, in Ireland, in a couple of the other places we're looking, they look like relatively high volume, relatively low margin businesses. So you think NBP, which is a measure of NBP plus 60, which is kind of the market price for gas in Ireland, and that's been a relatively modest $5 or $6 or $7 kind of number for a long period of time. Well, NBP is about the same as TTF, so it's $30 today. So if you had excess volumes that you can nominate into that very competitive system and do so at the market price and benefit from that, the windfall profits from that would be extraordinary, simply by being a part of a very, very liquid system. So I think when you write the word down flexibility and you start to think about what being long volatility really means in this context -- and these all sound like mathematical terms. It sounds like it's some kind of a trading strategy. It's the opposite. It's a customer strategy. We're building terminals. We're building power plants. We've invested over $7 billion in 7 years of our lives getting to this place. So this is not a small thing to achieve. There's another probably a couple of billion dollars to go to build out the rest of the terminals and then build out the FLNG. And then you have a system that has unbelievable optionality and unbelievable long volatility. And those aren't math terms, those are actual terms in terms of just the businesses that you're operating.

And our next question comes from the line of Alonso Guerra-Garcia with Scotiabank.

Appreciate the update. I guess for my first question, I was curious on Brazil, you have the new terminals coming online in the next several months. Is the fact that you're long LNG this year and next change how you approach securing supply for Brazil? I guess are you able to use any of those cargoes to potentially supply Brazil? Or is the base plan still to sign another supply agreement here before year-end?

Yes. I mean our position right now is essentially flat. I mean we're long, obviously, a handful of cargoes, right? But it's -- in the big picture for the material amounts of supply, we're essentially flat. I'd say essentially flat, a couple of cargoes goes a long way in a market like this. But we obviously are not long in the cargoes that you would need for some of the big contracts there. So the business strategy is identical to what it has always been, which is as you secure a long-term offtake, you secure long-term supply to match up with it. And even though prices are up, if the -- this is my kind of earlier point, as long as the commitment term is long enough, there is supply that's readily available that still generates adequate margins that are attractive to us in the long term from that. So that's basically the business.

Got it. Appreciate it. And then I guess as my follow-up, and just maybe stepping out a bit, but you did allude to this, just given the run-up in global prices and especially the situation in Europe. There's, of course, been an increased need for gas and LNG supply. I guess just curious if you view the current macro setup sort of helping add some urgency to the permitting process and the development process for the Ireland terminal specifically?

It certainly doesn't hurt, right? I think that Ireland, like a number of the countries around the world, is a little bit off size. I mean who would have thought that there'd be a lack of wind in Ireland this summer, right? So these are the kind of factors that when you really underinvest in kind of your core assets to dispatch, you lend -- you make yourself more vulnerable to these kind of changes. So I think Ireland definitely has a shortage of thermal power to complement its significant renewable portfolio. And they have a lack of supply and that they have essentially a sole source of supply at this point. We think we address both of those issues. So we are as optimistic as we've ever been that we're the right solution to the problem that exists there, and we're very focused on being a good long-term partner in that part of the world. We're in the middle of the planning process. We actually think -- as I said, we're optimistic before all these changes that we'd have a successful result, and there's nothing that has happened recently that changes that law, only adds to it.

And our next question comes from the line of Spiro Dounis with Credit Suisse.

I wanted to go back to 2023 and onwards. Glad to hear Fast LNGs progressing on time and budget. It sounds like you need a little bit more time to finalize the commercial deal. So in that vein, just curious if you could provide a little bit of color maybe on what some of the sticking points are with respect to lining up a commercial agreement here. And as it stands, do you still feel like the economics that you guys have laid out on Fast LNG are still in place?

Short answer is yes. I mean the economics are very much like we think that they are. There are significant stranded gas assets around the world. We're having active dialogues with many different counterparties. And I'm extremely confident we're going to end up with a good result with it. And from a timing standpoint, our gear will be ready to deploy at the end of next year. So we're far from in a time crunch about it right now. I think it is very likely that we'll end up in a positive solution and have a specific result to announce before the end of the year. And I think that the sticking point is just a process of finding the right partner and the right asset at the right point in time. But I think that eventually, that part of the business will be significant because I think that the dimensions are where those resources are and what the value of that assets are and our ability to monetize it through the kind of bringing in the gear and the expertise, that's the partnership that we're essentially looking for. And without being specific on where we think that ends up, I'm incredibly positive about it. So...

Great. Appreciate the color there, Wes. Second one, just wondering if you guys can update us so far with respect to funding growth. I think you've had some massive sales and refinancings here under your belt. So I think that covers about 2/3 of that CapEx budget. Obviously, you've got a bit of a windfall here, thanks to being long on some of these LNG cargoes. So just curious how you're thinking about funding the rest of that CapEx budget and where do asset sales fit in now.

Asset sales are still part of it. I think that the terminals are obviously core assets. The -- I'm very happy that we own a big chunk of our logistics assets or ships, FSRUs and other power assets. Over time, we will look to finance those out or sell those as our -- obviously, they're great baseload customers for the business, but we don't think we need to own over on power assets over time. So there's a handful of things that are certainly on the board. I've described the funding outlook for the company as very much ordinary course. There's nothing really exceptional about it. I believe we should be a higher rating company right now, and we're having conversations about that. I mean I think that we kind of brought forward the earnings. And I think that the right question to be asked by rating agencies and investors is like are the earnings going to show up. I think we've answered that fairly emphatically today. And you're looking at a run rate of a business that is a very, very powerful one. So -- but I think it's an ordinary course business. I'd like to get higher rated. I'd like to reduce our borrowing costs and do so in kind of a thoughtful and methodical way.

And our next question comes from the line of Sean Morgan with Evercore.

So I appreciate the analogy to trade, and you sort of talked about what the mortgage backs at the start of the call. And so I was just kind of thinking, in terms of taking advantage of the volatility and making it your friend, for the guidance for 2022 in terms of the volumes you put out in April, should we think those '22 volumes will be a little bit lower than that -- the slides from April? Or is this going to be -- you're just going to wait until we pass into kind of the shoulder season of natural gas demand post February and then, I guess, use volatility again to buy on the other side of this spike?

Yes. I think volumes, we expect are about the same, actually. So the forecasts are -- haven't really changed. Our core underlying customer base is very stable. We've had no real changes. I mean look, the business model, I feel like we've lived through 2 100-year storms ourselves. We had a pandemic that actually affected of course all of us, but it affected the emerging market countries the most. And so from a credit standpoint, we held up incredibly well, have no real credit losses at all to speak of, on the one hand. And then number two, we lived through the most volatile period in natural gas prices ever and have benefited from that, not been harmed by it. So I feel like the business model has passed with flying colors with 2 most significant tests that you could have. And the volatility point, what I would say about this is that if you were a participant that was long product, so you're an LNG producer and you were looking for a perfect counterparty to put it with, you'd want to have the portfolio that we have and we're developing. And we've had actually lots of inquiries from people that wanted to team up on that side. And I say, look, all it takes is like $7 billion or $8 billion in 7 years and a lot of hard work and good fortune, you can have exactly what we have. So we feel like the competitive position of the business is incredibly powerful. We worked very hard to get there. But we're the 7-year overnight sensation in terms of what that portfolio looks like. It's only going to grow from this standpoint, and we feel great about that. So...

Okay. So just to be clear, of the 8 cargoes, you sold a few kind of into this volatility, and you'll be expecting to cover those later when gas prices kind of normalize a little bit?

Yes. It's not even cover, we're actually net long now, so we don't need to cover them. We actually -- like I said, the portfolio, when you think of it in the aggregate terms, we were 97% long. We're now effectively 102% or 103% long. So it's very close to 100%. It's just -- the most relevant point is that the cargoes that we are net long in our position are now or effectively now. And that's much more valuable than 5 years from now, right, so -- for obvious reasons, when you're in this kind of a shortfall. So we have monetized it to an extent, and we've got more to do on that side. And we'll continue to look for opportunities that make sense for us. So...

Yes. And then just really quickly on the FLNG conversion. So you've kind of highlighted how important it is to get the contract -- the upstream contracts right. So taking your time on that. But how bespoke are these conversions? Can you essentially retrofit these things completely with trains in place that they're ready to go for virtually any site? Or do you kind of have to have specific resource play in mind?

Well, with the assets themselves, our goal of -- myself and then, of course, the technical team that does all the work, is to create essentially a factory of creating these liquefiers. And the underlying resources, so the -- and in this case, the jackup rigs, there are many shapes and sizes of those. The 2 things you're trying to solve for is, number one, just square footage of kind of deck space. And number two is capacity to handle weight. Those are the 2 -- I mean, I'm grossly oversimplifying what is a fairly complex engineering problem, but that's essentially what you're trying to do. So even though it seems like there's a thousand different flavors of jackup rigs that are out there, and of course, there are, these 2 elements in terms of just cleaning it up with deck space, one; and two, what are the loads that it can support are actually fairly straightforward. So you could actually create from existing infrastructure what is a blank palette that looks the same or very similar time and again. In terms of the resource itself, the sole issue is really what treatment, if any, does the gas need in order to go into the liquefier to be liquefied. And so that's just the one addition. So some cases, gas needs little or no treatment. In some cases, it needs significant treatment. That's just another thing. It's just another LEGO that you need to snap on to the tool to basically like allow for that. And -- but look, I think that repeatability of this is very high. I think that as you do the same thing over and over, you save engineering costs, soft costs, manufacturing, installation, all those things happen. And so version 1.0 we think is going to be terrific. Version 2.0 is going to be better. And version 3.0, 4.0 is going to get better and better. But I think the goal of all this, and you can see the benefit of it now, I mean, I don't think it's an overstatement to say we're the only people on planet Earth that are spec developing a liquefier that can be deployed around the world. And while there is definitely risk, and we put that out as our risk factors, we don't have a gas to source for right now, I think -- I feel like that is a very, very good risk. And when we do cross that box off, then you'll have done so and have gas and LNG to service this market in the short term, and that's the value of it. Because having gas in the first of '23 is very different than having gas the first of '24 or '25 or '26.

And our last question is going to come from the line of Marc Solecitto with Barclays.

So my understanding is that your supply contract with Ocean LNG offers some flexibility as it relates to like delivery of cargoes there. Was that factored into the delta in your net long position? Or how should we think about that next year just in the context of your forecast for dispatch of the Sergipe facility?

Yes. It's not factored into it at all. So I mean I don't really remark about specific contracts. I don't think that's appropriate. But the simple answer is there's no flexibility that is actually reflected in the numbers from that whatsoever.

Got it. Okay. And then just as it relates to the 4Q margin target, just wanted to clarify how many long cargoes are factored in there versus early next year?

We don't disclose that. I mean we basically -- I've given what we think is adequate disclosures that we've gone from the kind of net short in the short term to a net long. That's obviously a very positive thing. And -- but beyond that, the disclosure that we give is really in the earnings that we think that it's going to generate. So it's just not productive for us to get into the inner workings of all the aspects of the business we'd be in would be in the disclosure like a cycle that would be extraordinary. So...

Thank you. And that does conclude our question-and-answer session. And I would like to turn the conference back over to Wes Edens for any further remarks.

Now that's all. Thanks very much. Appreciate the time on short notice. Thank you.

This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.