GLNG - Excelerate Energy: Pegging Performance On FSRU Deployment

Summary

• Excelerate Energy's FSRU began a 10-year charter in Finland by the beginning of 2023, a move seen to widen the company's revenue basket in the Baltic region.
• EE's EBITDA for Q3 2022 rallied 14.7% (YoY) from $75 million in Q3 2021 to $86 million realized in Q3 2022.
• The company is still reeling from high operating costs that have reduced net income to $8.8 million from a revenue of $803.3 million in Q3 2022.
• EE hopes to acquire a state-of-the-art FSRU by June 2026 to speed up delivery and lower operating costs.

Liquefied natural gas ((LNG)) infrastructure company Excelerate Energy ( EE ) has shed off 5.55% (YTD) trading 25.15% below its 52-week high of $31.13. In Q3 2022, EE announced EPS of $0.34 on revenues of $803 million. This revenue topped the $360 million+ IPO capital raised by the company in April 2022 by more than 123%.

Thesis

Excelerate Energy continues to see increased demand for LNG infrastructure globally as countries seek flexible cleaner energy sources. Natural gas storage in Europe has surged with more countries going for alternative sources apart from Russia. The war in Ukraine has made EE sign new and renew contracts with countries such as Finland, Germany, the Southern Gas Corridor, and Bangladesh among others. EE is also set to reap from the clamor for floating storage and regasification units (FSRUs) especially in Europe meant to secure local energy in the wake of the loss of Russian pipeline gas.

FSRU Deliveries

EE announced at the end of December 2022 that its FSRU Exemplar had touched down in Inkoo, Finland to commence a 10-year charter. The vessel is expected to provide Finland and other Baltic countries with regasified LNG under the Time Charter with Gasgrid Excelerate. This FSRU is Finland’s first floating LNG terminal and will replace Russian gas imports that were cut off as a result of the ongoing war in Ukraine.

Finland’s natural gas imports from Russia reached an average of 9624.64 Terajoule from 2008 to 2022. The imports reached a record high of 22061 TJ in 2010 and an all-time low of 405 TJ in July 2022.

Finland is strategically located considering that it borders the Gulf of Bothnia to the right as well as the Baltic Sea. The FSRU Exemplar is also undergoing winterization upgrades in Ferrol, Spain, a move is seen to spur strong customer acquisition into Europe. These leads are a result of a robust gas-marketing strategy in Finland that has helped to open up Europe to EE.

More Opportunities in Store

Q1 2023 will also see EE commence charter hire in Germany after signing the 5-year charter in October 2022 for the FSRU Excelsior. This charter agreement is the second FSRU deployment in Europe after Finland. Towards the end of 2022, Germany spent €17 billion ($18 billion) filling up the country’s gas caverns. Approximately €4 billion was spent on purchasing LNG while €9 billion was used to buy gas outside Russia. Still, Germany’s gas imports declined 12% (YoY) in 2022 despite the emergence of Norway as its main gas supplier replacing Russia. Of special attention is the fact that Germany is advancing on FSRU having set aside 4 locations with at least 6 facilities in place. Another important aspect to consider is that the country will take a few more years before it starts using its land-based terminals. This will give room for LNG cargoes to dominate the market, and here is where EE will come in.

Overall, EE from its headquarters in Houston, U.S. operates 10 FSRUs. In 2021 (pre-IPO), EE realized more of its revenues from customers located in Asia-Pacific, the Middle East, and Africa. Inevitably, EE's revenue prospects have continued to rise with Russia's invasion of Ukraine as more countries have detached from Russia’s natural gas supply. The company boasts of over 2,400 ship-to-ship transfers and regasified LNG deliveries running above 5,900 Bcf. Projects in waiting include the long-term LNG sale in Bangladesh and a state-of-the-art FSRU delivery by June 2026 in conjunction with Hyundai Heavy Industries (HHI).

This state-of-the-art FSRU will have among other features, a proprietary LNG regasification system (that can be customized), dual-fuel engines, and a catalytic reduction system. After this innovative new build is in place (that is in 2026), Excelerate will now have 11 FSRUs in operation.

In my view, EE is outdoing itself in terms of performance and LNG delivery. A similar company, Golar LNG Limited ( GLNG ) had 22 vessels in operation (as of 2020) including 15 LNG Carriers and 6 FSRUs. The global fleet of FSRUs (at the end of 2021) consisted of 48 vessels compared to 588 LNG carriers. With EE having 10 FSRUs which will soon translate to 11 after the successful building in 2026, it means that the company is the dominant FSRU Company in the world. It owns more than 20% of the global FSRU fleet.

It has been estimated that building a new FSRU unit can take close to 3 years at a cost of up to $300 million. Companies can also choose to convert existing LNG tankers into FSRUs, a process that takes 18 months to 24 months (that is 2 years). Conversion costs way less than building a new unit with the average cost ranging from $100 million to $150 million. It is also estimated that at least 10 FSRUs out of the global number 48 are conversions and not new builds. The high cost explains why there are fewer FSRUs around the globe and the dominance of EE in this sea-carrier infrastructural play.

The top question is if the company will be able to fund its ongoing operations, including dividend payments and CapEx in the long term.

Financial Position

Excelerate had $345.7 million in cash as of September 30, 2022. While EE had no outstanding borrowings (as of Q3 2022) under its $350 million senior secured revolving credit facility, it still had $40 million worth of credit issued. Cash used in operations as of Q3 2022 ((TTM)) stood at $4.7 million together with $69.1 million as CapEx. Cash from financing was higher at $345.8 million. This liquidity position is stable in that it left the net change in cash at $271.9 million heading into Q4 2022 likely to support a dividend yield of 0.21%.

Ahead of its next earnings date on March 1, 2023, EE will be targeting an adjusted EBITDA guidance of $264 million to $274 million for FY 2022. This will be higher than the previous target of $249 million to $269 million. This target is achievable considering EBITDA for Q3 2022 rallied 14.7% (YoY) from $75 million in Q3 2021 to $86 million realized in Q3 2022. We should also take into consideration that the Bahia Blanca seasonal charter in Argentina recorded higher margins in the quarter. EE’s FSRU Exemplar regasified 12 LNG cargos at the Bahia Blanca in the quarter with lower repair costs as well as reduced maintenance expenses. With the inclusion of low rental costs, EE's EBITDAR guidance for FY 2022 is likely to range from $300 million to $310 million up from $285 million to $305 million.

Risks to Consider

Excelerate has not disclosed the amount of money it will invest in the construction of a new state-of-the-art FSRU after it contracted Hyundai Heavy Industries (HHI). It is also not clear if the company will use debt since the net capital expenditure stood at $69.1 million.

Further, EE has a negative levered free cash flow of $35.4 million. This situation meant that it was short of $35.4 million after meeting its financial obligations in the quarter. Additionally, EE has faced a robust increase in total operating expenses that have eaten largely into the company's revenue. These expenses have risen +367% (YoY) from $160.9 million as of September 2021 to $752 million in September 2022. From $803.3 million in revenue, EE reported $8.8 million as net income. These high costs can be attributed to among other things, high infrastructural maintenance costs including repair, congestion at the port, and others.

The price of US LNG exports has declined 29.9% since it hit highs of $16.72 per Btu in September 2022.

The price of spot LNG also appears to be falling from its August highs of $69.96 mmBtu despite rising demand from Europe. However, the price may increase owing to an improvement in Chinese LNG imports later in 2023.

Bottom Line

US-based Excelerate Energy is a solid LNG infrastructural play with a full range of regasification services. The company has increased its revenue post-IPO by more than 300% (YoY) but is still suffering from an influx of operating expenses. However, the company has contracted HHI to deliver state-of-the-art FSRU, a move that will decrease vessel maintenance costs while increasing delivery timelines. I have raised my rating of the stock to hold from sell in the near term as I put the stock on my watch list.

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