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

Good day, and welcome to the New Fortress Energy Dividend Policy Update Conference Call. Today's conference is being recorded. [Operator Instructions] And at this time, I would now like to turn the conference over to Mr. Patrick Hughes, Head of Investor Relations. Please go ahead, sir.

Thank you, Jess, and good morning, everyone. Thanks for joining today's conference call, during which we're going to discuss our updated dividend policy. As Jess said, the call is being recorded and will be available by replay on the Investors section of our website under the subheading Events and Presentations. At the same location, you'll find a press release and a corresponding presentation related to our updated dividend policy. Both of these were released to the public yesterday evening. The presentation to which we'll refer during today's call contains a series of important disclosures related to forward-looking statements and non-GAAP financial measures. We encourage participants to review these important disclosures and in addition to the description of risk factors contained within our SEC filings. Now let's turn to today's call. This is Patrick Hughes. I look after Investor Relations here at New Fortress. Joining me today are Wes Edens, our Chairman and Chief Executive Officer and Chris Guinta, our Chief Financial Officer. Wes, over to you.

Great. Thanks, Patrick, and welcome, everyone. So a little announcement here. We sent the -- our press release that as well as the foot book that Patrick was referring to. And what I would like to do is just briefly kind of go through the pages along with Chris, and then we're happy to answer any questions. Let's just start with Page 4. So first, the news is that we are updating our dividend policy. When we initiated a dividend a year or more, I guess, at this point ago, it was more of a placeholder of a modest dividend, $0.10 a quarter that was designed to reflect what we thought would be ultimately the business that we would grow into and then we would adjust our dividend, but we actually had the cash flow and the maturity of the business to support something that's more meaningful. The top of the list is really a quick question about what the right way is to allocate capital. In a business like ours that has substantial cash flow and substantial investment needs, our view is that the right approach is a balanced approach. And so as the business has grown and matured and cash flow has grown substantially. We want to then take the next step of employ a disciplined way to allocate that capital to benefit both shareholders and also grow the company. So doing this, we think actually will provide significant and meaningful returns to shareholders. And a big component of that is providing the framework by which we intend to update our dividend in the future. So flip to Page #5. The guiding principles that I referred to are really the various options that we have to use incremental capital. We can use it, number one, to invest in CapEx, to invest and build the assets that we're building around the world. Number two, to return capital to shareholders in the form of issuing dividends or alternatively to buy back shares or alternatively to pay down debt. Now our debt is at very modest levels relative to the performance of the company. So that's not a high priority for us at this point. When we look at the various scenarios that we have, we're headed into a period where our cash flows are going to grow materially. So in fact, if you look at Page #6, this gives a very kind of vivid depiction of this. 2019, our adjusted EBITDA, negative $115 million, that was in the growth stage of the company. 2020, we basically broke even, made $33 million. Last year, $605 million. This year, approximately $1.1 billion. And then next year in years forward, it goes up materially now, so $2.5 billion plus next year and beyond that in 2024. The CapEx on the bottom line is impressive. We actually invested $377 million in 2019, $157 million in 2020. And then last year and this year, those numbers have increased substantially. $669 million last year, $800 million to $900 million this year, $2 billion plus. The way I think of the business is that it really is 2 really quite different businesses. One is the production of cash flow and the other is the investment of the cash flow. When you think of the business that used to be in the fund business, you had a fund that was investing $1 billion to $2 billion a year. That was actually a pretty big fund. And what we are simply trying to relate is what's the appropriate amount of capital that we're going to retain and what's the appropriate amount of capital that we're going to give back to shareholders. And after a lot of analysis and looking at all the various scenarios, we have concluded that retaining approximately 60% of the capital for growth purposes, and paying out approximately 40% for shareholders was the right balance. This is not a precise science. There's -- it's not like 39% and 61% was the wrong number or 60-40 is absolutely the correct one. But what it does is when we look at the planned expenditures that we've got for CapEx, we can see that we can fund ourselves very readily with the liquidity and the cash on hand and the earnings that we have and still allow for a meaningful dividend. And so that's the judgment that we're making at the end of the day. It is not, by my measure, an aggressive policy whatsoever. I think that with the business environment that we're in, with the position that we're in, which is a very, very fortunate one, we have more than adequate capital to fund our business, and this is the right step to take. Page #7, it's good, I think, to reiterate what we expect to happen after this kind of windfall period of 2023, 2024. So obviously, the world is very, very short gassed, broadly speaking, for the short term and we're going to be the beneficiary of that. We already have done. But our goal for our business remains exactly the same as it was when we started the business, which is to match the long-term supply that we are generating with the long-term demand around the world. And you can see the value of all these downstream assets and terminals that we have out here. I mean our goal long term with our FLNG volumes that are coming into the portfolio, is the matches up with long-term supply. And to do so, really the focus for that is on these long-term customers that either buy gas from us or buy power from us. Today, the portfolio is 65 contracts with weighted average contract life of about 15 years. So very, very long-term demand match now against our long-term supply on the FLNG side. And we simply want to grow that side of the business to actually match this. So that the calculation of our earnings is just a net spread and the production of that is something which is very certain, given the longevity of the cash flows. So Page #8, just to try and convert that into a relatable form. A good rule of thumb, it's not precise, but it's close enough to be a good measure is that every 100 megawatts of thermal power that you actually service uses about 10 TBtus of gas. So we're -- to put that in the context of our portfolio, we're building 5 fast LNG units that each produce about 70 TBtus, so 5x70 is 350 TBtus, converting that into power is 3,500 megawatts. 3,500 megawatts -- by the way, we have either built or purchased to date more than 4,000 megawatts. So again, to relate this to kind of like what the actual scale of the business is today, it's not something which is offside. And in fact, in addition to what we have done historically, if you look at the box on the right-hand side, we already have about 1,700 megawatts in discussion or under construction between Brazil and Ireland and South Africa and Jamaica as well as actually a number of other assets and projects that are in earlier stages. So total 1,700 megawatts and need of 3500 megawatts, the timing to get there is over the next several years, you have lots of time and lots of opportunity match up these 2. And I think long before we get to 2025, we're going to be well matched on this and these long-term and this demand will meet the long-term supply, and we'll be fully utilized the gas that we're creating. Now to look at this in the context of how other companies view themselves and what their performance is, we did a very simple analysis and looked at the S&P 500. Of the 500 companies in the S&P 500, 397 of them pay a dividend. And in the past year, but in fact, over many, many years, companies have paid dividends, have outperformed the S&P by a substantial amount. The balance that all these companies are trying to achieve is the same balance that we're trying to achieve is how do you match up excess cash flow with investment needs in the business and find that right balance in terms of returning capital to shareholders. But historically, companies have done this very well. In Page #10, the real -- the punch line of all this is that you want to be the company in the upper right-hand corner. So when you look at these 2 axes of growth and dividends, what you're really looking to be is the company that is in the upper right-hand corner, which is basically when we went back and looked at the 397 companies that were actually in the S&P 500, we can't find any that are really in the upper right-hand corner. And so what we're really -- that's not an exhaustive analysis, but it's just an anecdotal one. And so what we are trying to achieve is this very simple goal of being the company in the right-hand corner, which is a company that has very high levels of growth coupled with very significant amounts of capital that's returned to shareholders in the form of dividends, that's the company we want to be. And so what we did is we just simply plotted this against a series of comparable companies. And I would put an asterisk next to that, and we don't feel that any of these are actually really great comparables to us. That's both blessing and curse of our business is we don't feel like there's a great comparable per se. But we looked at the E&P companies, the midstream companies, the majors themselves as well as ourselves. And these are a bunch of fine companies and they've got various elements of one or the other. They tend to be either higher paying and slower growth or higher growth and lower paying. There's nobody that's in the upper right-hand corner. This is the graph that we think is actually important for us. So that's all. And Chris here as well, to answer any questions on the financial side. And of course, I'm here to answer questions, but our dividend is, we're going to pay $3 in this first dividend. The goal is basically to pay a dividend twice a year. So we think the right period to kind of measure this is the first half of the year and the second half of the year. The dividend is -- the record date to be a recipient of the dividend is January 4th. The payment date is January 13th. So for those shareholders that are actually owners on the 4th and they'll receive it on the 13th. Our goal then would be roughly in the second half of the year. So the figure after the first half is done, so July or early August, will actually have a similar conversation to this. And our goal is to obviously be consistent with this. We feel very good about our forecast for next year. We feel like the environment is a good one, and we're well underway. Obviously, what this does reflect is a significant amount of confidence in both the market for our products as well as the timing for the supply that we're bringing online. So there's no real update to that. We had an earnings call here and the Investor Day and kind of demonstrated that the bottom line is kind of on time and on budget is what our expectations are. And there's nothing we see that actually gets in between now and then. Obviously, March, April, May are not very far away. We sit here in the middle of December. So there's a lot of work to be done, but we feel obviously good about it and the confidence in our ability to deliver on that is in part reflected on this, but it's not irrational exuberance by any means, it's something that reflects kind of the day-to-day activities of our business. So with that, let me turn it back over to the operator, and we're happy to answer any questions.

[Operator Instructions] Our first question comes from Sam Margolin with Wolfe Research.

First one is just -- sorry, a clarification on Slide 6, the cash and working capital facilities. Is that -- do I understand correctly that's sort of pro forma the sale leaseback that was announced a couple of months ago for the vessels. Is that right?

Sam, it's Chris. No, that's really just the revolver and the letter of credit facility. So revolver today is 460. We're going to upsize that. We've got an LC facility for another 300. We expect to have about $1 billion between those 2 facilities accessible sometime in the first quarter.

Okay. Got it. And then -- yes, just on the reinvestment side and the build-out of downstream and incorporating a full gas to power value chain. Are you going to keep most of the generation capacity that you participate in sort of off balance sheet and operate it through joint ventures? Or does that -- is that incorporated into the CapEx number here?

What we've done historically is what we expect to do in the future, which is basically where necessary, we've invested in the generation to get it built then online. And then once it's up and running, we look at them either finance or sell it. That's what we did in Jamaica, that's what we did in Brazil. Those are recent examples of it. The announced transaction in Mexico, another one. So I mean, long term, our real goal is supplying fuel to these products or power. But we don't think that there's going to be a significant balance sheet of generation assets for us in the future. That's not the goal. But we're obviously happy to invest in them. We're happy to partner in them. And there's lots and lots of different situations that are out in the world that are interesting. But I think that we don't think that running a balance sheet of generation assets is really where we want to be or need to be. .

[Operator Instructions] We will go next to Craig Shere with Tuohy Brothers.

So first, I want to make sure I understand this correctly. First part, getting the obvious [ streets ] a little below guidance. And the second point that at a 40% payout ratio, the announced dividend run rate implies beating guidance. Am I saying that wrong?

I'm not -- I'm sorry, Craig, I couldn't hear kind of clearly. I think that the 40% payout rate with $3, annualized $6 does give you guidance with respect to what we think the EBITDA is for sure. And obviously, we think it's going to be substantially greater next year than it is this year. And that's -- and we have actually tremendous visibility into that. So that's obviously what is driving it. And trying to -- I feel like effective dividend policy is one or not -- there's not only a dividend declared, but there's also a paradigm that's used to actually show how it is constructed. So people can then base their expectations on both current and future dividends based on what the actual performance of the business is. And so we obviously feel very confident about the performance of the business next year, and we're making a dividend announcement as a reflection of that. And we think that that's the right path to take.

Sure. I guess just to clarify, when you say $2.5-plus billion next year, EBITDA, this dividend suggests an emphasis on the plus.

I missed just the very last part. The $2.5 billion EBITDA. Sorry, I just missed the last sentence. I couldn't actually understand clearly.

I apologize this. I'm just saying that the dividend announcement would suggest the plus and the $2.5-plus billion is being emphasized as we expect to be able to exceed that number.

That's correct. No, your math is right. So...

Okay. And last question. You mentioned $11 billion liquidity through 2025 being added. In terms of annual allocation, is it fair to say that it's going to be a little lumpy, some years a lot more towards CapEx but roughly over the entire time frame, you might be targeting 40% dividend, 40% to 45% for CapEx and then the rest for share buybacks, taxes, other things?

Yes. It's not precisely that, but that's certainly directionally correct. I mean I guess the 2025 numbers and forward. So if you take our current book of business, which is about 120 TBtus right? You add in the 350 TBtus, right? So that obviously takes up to 470 TBtus. If you used a $10 margin as your long-term supply, long-term demand number, you can multiply 10x470 to get kind of a rough approximation of what we think the long-term prospects of the business are. That's what we -- when I say match long-term supply with long-term demand, that's what I'm talking about. Obviously, over the next couple of years, there's a build-up to that. So it's not going to be precisely a matter of moving this amount by quarter by quarter. But within the approximations to come to the 60-40, there's more than ample room to pay this dividend and also to increase it if we're fortunate enough to do what we expect to in the coming years. So -- but the $11 billion, I think that, that's our estimate of what the production of the business is going to be over the next couple of years. And I think it adds some context, that's meaningful context to help for shareholders to understand what we think the dimensions are of the business and one of the ways to kind of evidence the confidence in that is what we're doing right now, which is returning some capital and setting up a paradigm that allows us to revisit this every 6 months. And you can obviously revisit the earnings updates every quarter. And those 2 things will like to vector in on what the performance is and what the payout of capital is versus the investment of that.

We will go next to Jason Mandel with RBC Capital Markets.

On -- in previous comments, you guys have had some focus on migrating towards investment grade with the change in the dividend policy. Any change towards either that progression or the speed or the importance and value of being investment grade?

No, not at all. In fact, we think that this reinforces that path. I mean we're in active dialogue with agencies all the time. I mean, at the end of the day, my experience with rating agencies, which is pretty significant over time, is that consistency and performance are what actually carry the day. And our overall leverage is actually very modest given the cash flows of the business. The -- we've moved from being a development company to an operating company in a very material way as reflected by the cash flows we generated this year and the ones that prospectively, we expect next year. And we think that, that puts us in great standing on this. I think that getting to investment grade is a big step, and it's a meaningful one for the company on a number of different levels. And I think that getting our FLNG units up and running, getting more and more of the supply termed out on long-term contracts on the power side. Those 2 things are what we think are the ingredients to getting to the right place from the agencies. I mean we've demonstrated very clearly in my view that long-term supply and long-term demand can be easily matched in this business. That's the current book of business we have that is very, very well matched. And we just now need to execute on the second half of that, and I think we'll be in a phenomenal place in terms of the rating of it.

Okay. Great. It's very helpful. And then just one other question on the '23 illustrative goal of $2.5 billion plus Obviously, there's still a pretty decent sized disconnect versus what the street is -- appears to be looking for, which has increased pretty significantly over the last several quarters, several months. Any necessarily your job to do so, but any sense what you think the street is getting wrong in terms of '23?

I think that it's not unusual for people to wait for performance to kind of reflect it. We -- we've done everything that we can do, both in terms of making the money and trying -- and being as transparent as possible. We hosted folks down in Corpus Christi to show them the progress down there. I think that -- I think it's just a matter of time. And hopefully, this is another brick in the wall in terms of trying to solidify what the performance of the company is. But it's not an event, it's a process. And I feel like we are very, very undervalued. And as a result, I think that we've got a lot of potential. And so I think that as we continue to make strides, I think that you're going to get this reflected proper. I think it's just hard for people in certain cases to get their mind around going from $33 million in EBITDA to $2 billion or $3 billion or $4 billion in EBITDA over a couple of year period, but that's the world that we're in. And then the first job is to make that money, the second job is to increase the duration of all those cash flows. That's something we have done a number of times. So we feel very confident we can do it again. I mean the need for power long term in the world has not lessened in the last couple of years. It's gone the other way, actually. And so while people are very excited about short-term demand for the product, the long-term demand is greater than ever. And we feel like that the gas to power fully integrated model is the most amazing business model I've ever been associated with. And so now it's just a matter of doing the work to kind of put those pieces together. So...

Our next question comes from Gregg Brody of Bank of America.

Just as your -- it appears that this is a forward-looking number, which you've -- how do you -- how are you thinking about -- how should we think about how much of that is locked in? And how much margin of safety you've built into that forecast or that forecasted dividend that you're going to pay out?

Yes, there's -- it's -- from my standpoint, it is not really forward-looking based on kind of the business flows and the transactions that we have in hand. So we feel like it is reflecting the reality of the business more so than projecting kind of some forward results. And we've been very clear about what we think the future holds. We have, obviously, a lot of tools at our disposal to make these numbers. And feel really good about it. I think that we do mitigate a substantial amount of our risk through a variety of different measures. There's the easiest way to lock in provinces to sell supply. We've done a lot of that. The second easiest way to do it is to hedge it. And obviously, there's a lot of factors you can take into consideration there, but we've done that as well. So there's variability. I'd say the most significant variability from my standpoint is in the second half of the year, not the first half of the year, and that just simply relates to when the FLNG turns on. And I think that for those of you that went down to our site visit in Corpus, I think that everyone is there hopefully understands it's merely a question of when, not if. And obviously, a month or 2 or 3 can make a difference. We believe strongly in the timelines that we have communicated with people. So we're going to have mechanical completion in the spring. We're going to get this thing off of the dock and into the water in April, May and turned on in June. I mean that's what the plan is, and we feel great about that plan. And so -- but I think that when you look at the -- from our standpoint, when we look at the numbers, there's more variability in the second half of the year than the first half of the year as a result of that. But even with that, there's a very substantial amount of earnings and cash flows that are generated in the ordinary course of the business. So it's not -- that's why I say this -- we don't feel like this is a speculative position we're taking at all. So it really just reflects the business.

And just one follow-up. Does that the dividend change your strategy on contracting or anything in terms of locking in cash flows? Or is it still -- you're still approaching things the same way?

No. I really think that the business plan, as I would say, is we have our current core business, which is matched supply with match demand. We then have a significant amount of additional supply that we're bringing in the portfolio and we want to match that up with long-term demand. In the ordinary course to build or buy or develop those assets, it takes a couple of years. So you have this incredibly fortuitous situation where you've got excess volumes in a period where merchant prices are very, very high and you have long-term supply going to feed long-term demand when those factors start to abate a bit. So I'd say that there's more volatility and variability in 2023 and 2024, I think probably in a positive way, just given kind of the dynamics of the business. And then I feel very good about our ability to lock in that with real duration on gaps and power customers long term, '25 and beyond. And that's really the -- that's really what I think is simply the business model, and I think you're going to see it play out vividly over the next number of quarters as we go from here to there. So it's no -- it's really -- what has changed is really the market has changed. And it has made the time, while we're waiting for a long-term supply to get developed, be a very positive addition to our cash flows. And so there's no penalty for doing that. We don't have to worry about being uncommitted during this period because obviously, the market is such a productive one, if that makes sense. Well, great. Well, we are up at the end of the time, and I want to thank everyone for getting on the phone in short order, and I look forward to chatting with the number of you personally, I'm sure. But thanks so much.

Ladies and gentlemen, that will conclude today's call. We thank you for your participation. You may disconnect at this time. Have a great day.