2023-09-25 16:27:49 ET
Summary
- The Energy sector has outperformed in Q3, benefiting from rising oil prices and increased demand.
- New Fortress Energy receives a buy rating despite uncertainties surrounding capex execution and its debt burden.
- NFE's earnings, valuation, and free cash flow outlooks are seen as improving, but there are some troubling valuation metrics and key risks.
- I highlight key price levels to watch ahead of earnings in November.
Stocks are wavering after a stellar first half of 2023. Small caps have recently turned negative while anything outside of the mega caps has generally been lackluster. In the third quarter, however, the Energy sector has performed well, outpacing all other areas of the S&P 500. Rising oil prices taking care of rising demand and constrained supply have been a significant tailwind to energy producers and transportation companies.
I am reiterating my buy rating on New Fortress Energy (NFE) despite uncertainties regarding its capex execution and funding needs.
Rising Oil, Rising Energy Equities in Q3
According to Bank of America Global Research, NFE is an integrated LNG-to-power infrastructure company engaged in virtually all aspects of LNG production, transport, and sales. The company operates in two segments, Terminals and Infrastructure, and Ships. The Terminals and Infrastructure segment engages in the natural gas procurement and liquefaction; and shipping, logistics, facilities, and conversion, or development of natural gas-fired power generation. The Ships segment offers floating storage and regasification units (FRSU) and liquefied natural gas ((LNG)) carriers, which are leased to customers under long-term or spot arrangements.
The New York-based $6.2 billion market cap Oil and Gas Storage and Transportation industry company within the Energy sector trades at a modest 16.1 trailing 12-month GAAP price-to-earnings ratio and pays a low 1.3% forward dividend yield. Ahead of earnings in early November, the stock has a moderate 39% implied volatility reading and an elevated 18% short interest - up three percentage points from my previous analysis .
Back in August, NFE issued a soft earnings report. The firm missed on the bottom line with just $0.58 of Q2 operating profits ($0.64 consensus) while revenue verified at $561 million, a 4% year-on-year decline (a material $25 million shortfall compared to estimates). Profits are expected to rise significantly in the coming quarters due to reduced capex and as the firm shifts to a more predictable earnings stream via the move from cargo sales to downstream volumes as terminal capacity increases.
Free cash flow should likewise inflect higher. In 2024, capex is anticipated to decrease significantly, down to $250 million, as several projects reach completion. New EBITDA guidance is $1.6 billion for this year while 2024 should bring about $2.4 billion in EBITDA. The big unknown is how the firm's growth outlook verifies compared to these projections - its need for funding is a key risk and project delays also pose potential challenges.
Increasing infrastructure capacity drives growth in volumes & earnings
Other downside risks include adverse regulatory or political developments, weather-related disruptions, fluctuations in commodity prices, difficulties in securing new contracted offtake agreements, and a worsening of the corporate credit environment, including unfavorable interest rate movements and weaker financing market liquidity. (NFE has $5.9 in debt.)
On valuation , analysts at BofA see earnings rising sharply this year with continued strength through 2024. Per-share profits are then expected to stabilize near $4.50 by 2025. The Bloomberg consensus forecast is more optimistic, though. With forward P/E ratios that are now in the single digits, the stock appears to be a strong value. Dividends, meanwhile, are expected to hold steady at $0.40 annually over the coming quarters. With a low EV/EBITDA ratio and free cash flow that should move into the black by 2025, the fundamentals are seen as improving.
New Fortress: Earnings, Valuation, Dividend Yield, Free Cash Flow Outlooks
If we align with the consensus outlook and assume next-12-month EPS of $5.50 and apply a sector median earnings multiple of 10.4, then the updated price target is near $57. Given worsening credit conditions, I am inclined to apply a 10% margin of safety, which would assert a low $50s fair value. With a sanguine growth projection, the forward PEG ratio has fallen to very low levels, too.
NFE: Some Troubling Valuation Metrics, But Solid Growth Expected
Compared to its peers , NFE has a stellar valuation rating with a top-notch growth grade. While backward-looking profitability appears weak, this area could turn more favorable should free cash flow indeed turn better. Share price momentum has been decent from the middle of the year, but a sharp drawdown off the 2022 high is the big player there. Finally, NFE has weak EPS revisions versus its peers - likely due to the weak Q2 results.
Competitor Analysis
Looking ahead, corporate event data provided by Wall Street Horizon shows an unconfirmed Q3 2023 earnings date of Tuesday, November 7 BMO. No other volatility catalysts are seen in the near term.
Corporate Event Risk Calendar
The Technical Take
NFE finally had its date with the 200-day moving average. Notice in the chart below that shares have backed away from that long-term trend indicator, and I see further resistance in the low $30s. What's encouraging here is that the stock appears to have put in a bullish rounded bottom feature, but I would really like to see it climb above that 200dma and the first-half highs to confirm the low.
With improving RSI momentum, that should portend an eventual breakout. Also, and this is very near term, but NFE did hold its 50-day moving average last week - of course, further seasonal weakness could easily take that out. Finally, take a look at the volume by price indicator on the left side of the chart - there is a high amount of shares traded in the $26 to $30 zone - so that should provide support as we head into year-end.
Overall, the chart has some green shoots here, but the bears still have a grip.
NFE: Bullish Rounded Bottom In Play, Improved RSI Momentum
The Bottom Line
I reiterate my buy rating after a 15% upside move since mid-July. I continue to like the valuation, though much uncertainty exists regarding its capex plans, business operations pivot, and the financing environment given its debt burden. Also, the bulls still have work to do in order to reverse the downtrend.
For further details see:
New Fortress: Watching Capex Trends, Shares Remain A Compelling Value