New Fortress: Pivoting Away From Lakach FLNG

After speaking with New Fortress NFE, we’ve made several updates to our model. Our fair value estimate is unchanged at $30 per share, as both positive and negative changes offset each other. Essentially, our near-term forecast is lowered while our expected returns have improved over the medium term. Our no-moat rating is also unchanged. While our fair value estimate is unchanged, we think the updates better position New Fortress over the long run to more efficiently utilize its terminals and ultimately obtain more lucrative power contracts with energy-insecure countries. We still estimate about two thirds of its terminal capacity is not utilized in 2026, so there’s plenty of room for further growth if New Fortress can acquire the needed liquefied natural gas, or LNG.

The biggest change is removing the Lakach floating liquefied natural gas, or FLNG, vessel from our model. We had earlier expressed concerns regarding the project’s viability due to uncertain reservoir economics and a weak production profile that would potentially require greater investment in drilling new wells than New Fortress’ expectations. Those concerns, combined with the fact that the vessels’ costs have soared to $1.3 billion each compared with initial expectations of $500 million, have forced New Fortress to work more aggressively at protecting its balance sheet. We now expect this project to go to the back of the development queue. The change has now reduced New Fortress’ plan to just two FLNG vessels from initial expectations of as many as six.

We consider this pivot a positive, as the returns profile for the project looks more value-destructive, especially assuming LNG prices are now well off their 2022 highs. The pivot should also yield benefits via acquiring greater volumes from established LNG suppliers, given a stronger leverage profile. The increased supply will let New Fortress more aggressively pursue power contracts and lock in attractive spreads where possible.