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Does New Fortress Energy Deserve a Place in Your Portfolio?

Global energy infrastructure company New Fortress Energy (NAK) recently lifted its supply and earnings goals for the coming quarter due to its expanding portfolio of facilities and increased demand. However, given that production constraints have stymied global LNG supplies, the supply-demand mismatch could limit the company’s growth in the near term. So, is it worth betting on the stock now? Let’s discuss.

Integrated gas-to-power infrastructure company New Fortress Energy Inc. (NFE), which is headquartered in New York City, offers affordable energy and development services to end-users internationally. NFE’s share price has soared 23.6% over the past five days after the company raised its economic outlook for the fourth quarter of 2021 and fiscal year 2022 from those previously discussed in a recently released SEC filing. 

However, the company’s shares have declined 39.5% in price year-to-date and 30.4% over the past year. In addition, the stock is trading 50.8% below its 52-week price high of $65.90, indicating short-term bearishness.

Although the company’s debt financing efforts could help it finance several projects worldwide, given its already high long-term debt, the debt financing could make investors nervous. In addition, the abnormal volatility in the liquid natural gas markets and the ongoing supply constraints could mar its growth.

Here’s what could influence NFE’s performance in the near term:

Unprecedented Volatility in LNG Market

Amid electricity shortages in  China, the world's top LNG buyer, and low inventory in Europe fueling significant competition for LNG, Asia liquefied natural gas (LNG) prices skyrocketed this week. As global gas demand continues to surge with nations recovering after a dip in 2020, supply issues due to a decline in production have been causing a supply crunch. In addition, prices are expected to hit new highs in winter when the demand for heating peaks. With coal prices surging as the industry faces supply constraints, natural gas demand is expected to grow further. The increasing demand-supply gap could exacerbate problems in the LNG market. This could negatively impact NFE’s projects and mar the company’s growth.

Debt Financing

In September, NFE executed a term loan facility secured by its shipping facility. It made an initial borrowing of $430 million. Also, the company could borrow up to $725 million under the shipping facility. The loans will bear an annual interest rate equal to LIBOR plus 3% and have a three-year term. NFE plans to use the shipping facility's net proceeds to fund the development and construction of the company’s energy infrastructure projects. However, it could be a risk to its business given its high long-term debt and inconsistent cash flow.

Lackluster Financials

NFE’s operating expenses rose 4.9% sequentially to $101.43 million for the second quarter, ended June 30, 2021. Also, its loss from operating activities came in at $12.24 million, while its net loss stood at $1.73 million. Moreover, NAK’s loss per share amounted to $0.03 for the quarter. And its net decrease in cash and cash equivalents totaled $399.02 million for the six months ended June 30, 2021. The company’s long-term debt stood at $3.33 billion as of June 30, 2021.

Its trailing-12-month ROE, ROA, and levered free cash flow margin are negative 8.4%, 1.3%, and 38.6%, respectively. Also, its trailing-12-month cash from operations stood at negative $156.60 million. The stock’s 14.2% EBITDA margin is 41.2% lower than the 24.1% industry average.

Premium Valuation

In terms of trailing-12-months EV/EBIT, NFE is currently trading at 299.04x, which is 1,310.9% higher than the 21.19x industry average. In addition, its 8.98x trailing-12-months Price/Sales is 450% higher than the 1.63x industry average.  Furthermore, the stock’s 62.61x forward Price/Cash Flow ratio is 954.8% higher than the 5.94 industry average.

Unfavorable POWR Ratings

NFE has an overall D rating, which translates to Sell in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree. 

Our proprietary rating system also evaluates each stock based on eight different categories. NFE has an F grade for Quality. The stock’s negative profit margin is reflected in this grade.

Also, it has an F grade for Value, which is consistent with the stock’s stretched valuation.

In terms of Stability grade, NFE has a C. This justifies the stock’s relatively high beta value of 1.61.

Beyond the grades I’ve highlighted, one can check out additional NFE ratings for Sentiment, Growth, and Momentum here.

Of the 42 stocks in the D-rated Energy – Services industry, NFE is ranked #38.

Bottom Line

While NFE’s commercial headway into new markets and rise in new direct sales customer agreements have helped it advance in the LNG market, skyrocketing demand for the fuel ahead of winter amid a supply crunch could threaten its growth. Meanwhile, its weak balance sheet and stretched valuation could pose a risk to the stock. So, we think the stock is best avoided now.

How Does New Fortress Energy Inc. (NFE) Stack Up Against its Peers?

While NFE has an overall POWR Rating of D, one  might want to consider taking a look at its industry peers, Oceaneering International, Inc. (OII) and Archrock, Inc. (ARDOC), having a B (Buy) rating.

NFE shares were trading at $34.47 per share on Monday afternoon, up $2.07 (+6.39%). Year-to-date, NFE has declined -35.18%, versus a 18.43% rise in the benchmark S&P 500 index during the same period.

About the Author: Imon Ghosh

Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization.


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