Fallen Angels Part I: New Fortress Energy $NFE

There are a handful of companies that I’ve written about which didn’t go according to plan, two have wiped out shareholders completely, Conn’s and The Container Store. I was very early on the Consumer Discretionary rebound, I didn’t expect Jerome Powell to keep his boot on the neck of the economy for such a long time. I might still be early on Consumer Discretionary, but I am accumulating several Consumer Discretionary names now; Portillo’s, Lovesac, Dine Brands, Gamestop, Newell Brands, American Eagle, Kohl’s, approximately in that order of enthusiasm. Time will tell if I’m still early.

One of my bigger mistakes was New Fortress Energy (NFE). In hindsight, the smart move would have been to sell when they first breached their debt covenants. The 12% interest rate was a burden that the company couldn’t get out from underneath. There were other unfortunate events, the battle with the Puerto Rican government, the surprisingly low price for the Jamaica sale, FEMA funds that never showed up. But I should have had the presence of mind to recognize that the debt burden was too much, and the assets would go to the bondholders. You can find some of my past NFE writeups here:

One of the components of the NFE thesis was that founder and CEO Wes Edens, the bond king of Fortress Investments, would be skilled at maneuvering the company through the capital markets. It’s small comfort that he also misjudged the interest rate environment as well, the current debt restructuring could have been avoided with a $1 billion equity raise when the stock was still $25 a share. But he did pull through with a small victory, by structuring the debt through the UK, he was able to secure a relatively favorable debt restructuring. If the bankruptcy had been in the US, it’s almost certain that shareholders would have been zeroed out. Through the UK, NFE took a 65% equity dilution, plus a $2.5 billion preferred stock which converts into commons at the end of three years. The worst case dilution for current equity investors, if the preferreds were completely converted to commons at the end of three years would be a 95.45% dilution.

After the carving out of the Brazilian assets, what remains for NFE are Puerto Rico, Nicaragua, Mexico, and the offshore FLNG1. Those assets have somewhere around a $3.5 billion book value, offset against a remaining $527 million of debt. Management is guiding toward a 2026 $400 million of adjusted EBITDA, with the potential for finding some operating costs to cut, and maybe even a bit of growth. What enterprise value should an international utility trade at with $400 million of adjusted EBITDA? It could settle anywhere between 6x to 10x Enterprise Value to EBITDA depending on how the market feels about their long term contracts and growth prospects. That would put an Enterprise Value for NFE somewhere between $2.4 billion and $4.0 billion.

The current share price is $0.668, on 284 million shares. That represents 35% of the newly restructured entity’s float, ignoring the preferred’s for now, plus $527 million in debt. Again, ignoring the preferreds which automatically convert to common and dilute in three years, the common stock and debt come out to about $1.3 billion. The interest expense of the new entity is very moderate, and so is maintenance capex. That $400 million of adjusted EBITDA should pass through to approximately $300 million of true free cash flow.

But the $2.5 billion preferred stock is a sword of Damocles that is hanging over the heads of common shareholders, it’s hard to put a stock price target without knowing just what Wes Edens will do next. There’s a big difference between owning 35% of the company and 4.55% of the company.

But the CEO is savvy in capital markets and properly incentivized. He could, for example, raise $2.5 billion of senior secured debt, which at 7.5% would take another $190 million out of that annual free cash flow. But then at least the current equity owners would still have 35%. There is also the $300 million of annual free cash flow over the next three years as the preferred stock grows slowly with a PIK structure. If all NFE did was direct $300 million of annual cash flow into buying back preferred stock, the ultimate dilution wouldn’t leave equity holders with 4.55%, they would have around 14.35%. The final solution might be a bit of both, some new debt, and a lot of cashflow and possibly even some equity issuance. If my math works out, the stock price is currently above the breakeven where an SEO would be less dilutive than the preferreds maturing. That would still be dilution, but it would be accretive to use an SEO instead.

Given a potential Enterprise Value between $2.4 billion and $4 billion, in the most dilutive outcome, there would be 6.2 billion shares outstanding. This would imply a share price of between $0.38 and $0.64, about where NFE’s stock trades today, $0.668 per share.

But if NFE is able to refinance those preferreds through issuing new bonds and directing $900 million of free cash flow toward the preferred’s retirement, the share count would only be around 811 million. With the Enterprise Value between $2.4 billion and $4.0 billion, but with perhaps $2 billion of debt, that would give a share price estimate of between $0.49 and $2.46.

To get a higher share price target, it would require Wes Edens pulling a rabbit out of his hat, which he has done before, for example factoring receivables from long term ship charters. The existing contracts also have room to grow over time. As the low cost option, natural gas can continue to take market share in NFE’s markets. A New Fortress Energy with $500 million adjusted EBITDA in 2028 could have an enterprise value between $3 billion and $5 billion. At the most optimistic, the equity today could represent 20%-35% of that enterprise. What today has a market capitalization of $190 million could be a five bagger or better, if Wes Edens manages the capital markets well. But without much debt after the restructuring, the downside risk is significantly reduced. The worst case scenario, a $2.4 billion enterprise value, three years of free cash flow, and significant additional dilution still leads to a share price that isn’t far from the current level.

With only $527 million of debt outstanding, even at a relatively high SOFR +6.145%, the major risks to NFE remain cooperating with third world governments. The exaggerated back and forth with Puerto Rico is still fresh in our memories, and it isn’t entirely clear what the problem is in Nicaragua, but on the other hand, the long term contracts provide a lot of earnings stability.

I bought a few shares of NFE at $25 when I first wrote about it. I have averaged down a bit over time. Without the growth opportunities from Brazil, it’s a much less attractive company. I’m probably holding onto those shares out of a combination of morbid curiosity and continuing education. The finance literature believes that people don’t sell losers because of some sort of psychological pain, but in this instance, I just want to see how the story comes to an end. If I didn’t own any, would I buy New Fortress Energy today at the current price? I probably would, but I wouldn’t make it a large position. I own some Legacy Housing (LEGH) after all, not every position needs to be a potential ten bagger. With the reduced debt level and long term fixed contracts, this newly restructured NFE has a relatively low risk for the potential return. The stock price could be $3 in three years, that’s a potential five bagger with a Debt to EBITDA ratio of around 1.25x.