Q1 2021 New Fortress Energy Inc Earnings Call
[music].
Ladies and gentlemen, thank you for standing by.
And welcome to the new fortress energy first quarter 2021 earnings call.
At this time all participants are in a listen only mode.
Later, we will conduct a neat trick question and answer session and.
Instructions will follow at that time.
If anyone should require assistance during the conference. Please press Star then zero on your Touchtone telephone.
As a reminder, this conference is being recorded.
I would now like to turn the conference over to your host Josh Kane with Investor Relations.
A head.
Thank you.
We'd like to welcome you to a new fortress energy first quarter, 2020 one earnings call. Joining me here to your West East, our CEO and chairman and the Board, Chris Jensen, Our Chief Financial Officer, and Ken Nicholson, and managing director, a fortress investment group and CEO of our new a hydrogen venture.
Throughout the call we're going to reference the earnings supplement that was posted to the new fortress energy website, if you've not already done so I'd suggest that you download it now.
In addition, we will be discussing some non-GAAP financial measures during the call today, the reconciliations of those measures to the most directly comparable GAAP measures can be found on the earnings supplement.
Before I turn the call over to Wes I would like to point out that certain statements made today will be forward looking statements, including regarding future earnings.
These statements by their nature are uncertain and may differ materially from actual results and we encourage you to review the disclaimers in our press release and Investor presentation regarding non-GAAP financial measures and forward looking statements and a review the risk factors contained in a quarterly report filed with the SEC now I would like to turn the call over to Wes great. Thanks, Josh and fun.
And as Josh said, a we posted the a a supplement to the webpage and that's what I'm gonna referred to as we go through it.
So that's a let's jump right into it and go to page four.
On the quarter that just and it has been a historic one for us and spending and incredibly busy quarter and a productive on we completed the acquisition of the hydro a company from Golar as well as the MLP that we bought them at the same time, a $5 $1 billion, we did not issue additional equity.
Cody.
And it grows or a base of operations, a dramatically and I'll talk about that a lot a down the road.
Very importantly is that the growth of the company that we know and vision.
We believe can be a internally generated a.
On the equity that we need to grow the company, we can generate from asset sales and we'll talk about that I would expect a close our first as a sell here this quarter.
And with this and the total a summation of all of this activity. This does firmly established us as a leading LNG to power company and the world and puts us well on our path to kind of our growth targets and we've talked to you about before I mean, and very simple terms. The way I think of it is a combination of number one a the terminals that we're acquiring and Brazil.
Which we think are extraordinary a a footprint and and one of the fastest growing countries and the world number two and <unk>.
<unk> a turn on of our terminals that were building and a pause in Nicaragua, and both of which we expect to be operational and the next 60 days or less.
A number three and the addition of all the the logistical and infrastructure that we need to make this all happened so the ships and the Fsrus and all of the all the equipment basically that we bought a from the MLP that really slides and into our our operational footprint.
For you know the developments we've made on a fast LNG. So we will talk about this and some some length later, but in simple terms, just simply closing the loop and basically becoming a fully integrated to provide our own feedstock. We then use and our midstream and downstream businesses around the world changes a the the a.
Yeah, the aspirations of our business a dramatically lowers our cost may actually increase our our operating revenue substantially so fast LNG is a big thing and.
Lastly, a the hydrogen and initiatives so a as Josh said I'll introduce a Ken Nicholson, who has been a longtime partner of mine.
At a fortress, who is going to step in and be the CEO of our new hydrogen initiative. We've got a very very actionable our first real commercial activity in that sector and so all of this together is a net of it is we think we have put in and place all the pieces, we need to create the company that we have and now it's just simply a matter of the work to kind of do that we'll have a.
And it generates in excess of a $1 billion and free cash flow.
And with your Epsilon Gee, we've got the ability to grow that substantially and we now have the commercial actionable hydrogen and initiatives that we've been looking for since we first announced this at the beginning of last year. So it's a it's a lot to talk about so let's flip to page number five.
First of all the terminals that are that we are under construction and a pause and and put us and Dino Nicaragua are both moving along extremely well. These are a rendering these renderings will be replaced with the actual photographs and the next one we probably will host a and.
On Investor Day.
In early August a in the pause I think that's the first one the debt.
And that will get down to so obviously as we move forward with that if you're interested in and are seeing up close the terminals and logistics footprint on the.
And so flex operations and a.
A a.
A trip down to a a pause might be well on order now that the COVID-19 stuff seems to be under control a little bit, but Joshua I'll help us coordinate that but that's something we think is in a very near term force Puerto Sandino. The turbines are in place a the same things are happening there. What this does in terms of the volumes and the bottom a pages that are committed volumes go from approximately two nine GAAP.
And today to $3 3 million gallons and so it's a big step up on the committed volumes and discussion volumes and other 800000 and so it takes our total volumes from the existing five terminals up to just about 4 million gallons and so it's a big big step and roughly double what a production is right now.
Page number six a Brazil. So the the punch line is the Brazil terminals, we expect to be on line, but the first quarter of next year, we had the Brasilia and development team up here. This week I'll be in Brazil actually on Sunday, So theres a lot of activity there, but you know theres been years of work that went into these terminals as a prior to us acquiring.
And from Hydro now that's turning into these actual terminals on a timeline that are going to culminate and turning on and the first part of next year and we have just started the process of commercializing these assets, but you can see on the bottom even with a very very short a period of time on the commercialization side on the volumes that we expect out of new.
Portfolios are dramatic so center kind of arena and the South a.
And there's a tender this outstanding for a number of the a distribution companies and that swap a will be a and in the middle part of the country. The eastern most part of Brazil will be really anchored by our own power plant, which is a a scheduled to be turned on by the end of next year Baccarat and on the North you know, we signed an LOI with Norsk hydro that it was a terminal that we think will serve.
<unk>, the Amazon Basin, and it's got tremendous potential to be a a a very very productive terminal force, but bottom line and Brazilian terminals, plus our existing terminals gives us a huge footprint and add up to over 16 million gallons a expected volumes.
Page seven we detail what that looks like from us. So first quarter of this year $1 4 million gallons a day, where it was a scheduled a maintenance event in Puerto Rico. They took those volumes down that will be ending here literally any day that takes us to roughly 2 million gallons per day, a normalized volumes those and then step up substantially with a.
Mexico, and Nicaragua and Mr. G. P. A terminal that produces a $3 6 million gallons and then the big step up is as these Brazilian volumes come on next year $16 2 million gallons and frankly, there is there's a lot of upside there. So this is as I said at the beginning and it's hard to overstate a.
And how significant the addition of the Brazilian volumes on top of our existing assets a step two but you can see that this a this generates a substantial amount of volumes and and.
And margin so about half a F. LNG is a fast and LNG for a moment a the cartoon on page number nine.
We've shown you before but basically the contrast is if you look at the box on the left hand side. This is what the floating LNG business looked at like when we started this so there's a handful of these assets that interest around the world, we own 50% of one of them and the hydro transaction, we bought half of the helium, which is deployed off the coast of Cameroon. So.
And that the basic notion is put a liquefied and onto a ship put it over a stranded or offshore gas field generate low cost LNG and it's actually a incredibly simple concept.
That's the good news the bad news is a cost you know a billions of dollars a build ships like this and it takes many years to develop it. So those two things were simply not attractive to us and the timeline for what we're trying to achieve the challenge that I put to the technical team back in January is can we rather than use a ship can we put this gear onto existing and marine.
And infrastructure.
And we can do at a much faster and be much cheaper and the answer is simply yes, we can and if you look at the following page there's the two a rigs that we bought a.
And that are just about ready to move though I should move later this week they'll move to that keyword shipyard and the bottom there and that's where there'll be stripped down from the things we don't need where you can then add and and things that we do need and then the rendering and a right hand side is what these things will look like when you put them altogether. So these are on a jackup rigs. There's other types of marine infrastructure. We think this works on as well.
Well.
Rigs are a really suitable for a water depths of several hundred feet, obviously things like the semi submersible ships et cetera.
A appropriate for the thousands of feet, you know kind of deployments, but the key for us as a as we slip one more page is to hit the timeline and we're showing here. So we declared a <unk> on our first project in March of 2021, we bought these two jackup rigs, we're very much now a hot and heavy on <unk>.
Working to supply gas a for them and I'll talk about that and just a second but theres a lot of a there's a lot a promise on that side. So I feel good about that we expect to be complete with a construction of these in July of 2022, and then will take US roughly 90 days to put the gear and place and do commission and that had put in place a on on the gas source.
And be producing LNG by the end of next year.
We talk about this literally every day I have and eight o'clock call that a basically goes through the technical oil and gas aspects of this are the team is incredibly engaged and competence and when you look at a page number 12. The places where we are we are looking at are all the major offshore assets around the world. So there's there's lots and lots of.
Gas in Australia, and a former other so a Gulf of Mexico, a west coast of Mexico, Brazil, and West Coast of Africa, Obviously, a south East Asia. So there's there's many many places and the world, where there's gas and as a target for us and so it's simply we're trying to find the most suitable and most straightforward one for the first one and I think once we get proof of concept for the first one.
Lots of different places we can go so there'll be more updates of this to come but.
And the Bottomline is that a the.
And the impact that it can have on our earnings as a substantial so page 13 is a as a as a busy page.
So this shows all of the different terminals with the volumes that are committed and discussion and total volumes and what the margins for those wood generates a $1.6 billion.
And very very simple terms, if you simply take our model right now, which is two to assume five and a half dollars as a cost of LNG with the LNG. We believe we can we can a lower that cost by $2 or more and maybe substantially more and certainly these cases, but a $2 on a $1 4 million.
<unk> is about a $150 million. So just for illustration, we say look if we if we basically a provided gas to all of our terminals true and F. LNG solution. It would add roughly a $1 billion and earnings to us. So it's a huge huge incremental benefit to us. It also defuses a lot a risk of supplies. There's many.
Different elements of it that are that are on a positive for us but more to come with this but this just.
It gives you a pretty clear demonstration of what it is and we're actually playing for.
And.
Update and I'll turn this over to Ken and introducing on just a second but page 15, just by way of review so and the first quarter of last year, we announced that we had a goal and our goal was to basically decarbonize our activities and be a zero emissions company by 2030, So a very very aggressive goal a suitably aggressive one and my view given the kind of sustainability.
Issues that we've got around the World. We said, we're going to now open you know on.
Our phone lines and talk to people look at technologies and see what a what is out there with a goal towards creating a commercially viable activity that we can then kind a go ahead with I believe strongly that a sustainability comes from profitability and if we can actually create a commercially viable options to this that can.
Really advance the ball far more than just simply investing and and D. C technologies that may or may not have a commercial application. So you know, we did make a and investment and green hydrogen and and we made investment and a and Electrolyze a company based in Israel, and we think has got a promising but the green hydrogen businesses in my opinion today or.
Not commercially viable.
That will change and I think that there's a reason to be optimistic about that because I think the governments are going to be very supportive of green hydrogen initiatives and that's great. But we now believe that the the actionable opportunity today lies and clean and renewable fuels and we've got two different initiatives for that and with this today, we are actually announced and we have formed a company.
A.
Zero parks can Nicholson, who has been a partner a mono a fortress for many years and the infrastructure business a is going to be the CEO of that business and if you look on page 16, our focus is initially going to be fuels.
So big picture, a 51 billion tons of greenhouse gases are released and the atmosphere every year 37 billion tonnes of Cotwo, so roughly a 75% of all the greenhouse gas or from C. O. Two other C. O. Two the vast majority of that comes from fuels.
The market itself is Theres 36 billion barrels a fuels used annually annual around the world less and 1% is renewable or clean so the market opportunity for that the the renewable and clean fuels to take a big chunk of that is gigantic.
The opportunity as we see it is to replace a big chunk of this with two different pathways, one is renewable fuels, which the way it's.
It's simply the do no harm a business youre not youre not decarbonising, absolutely, but you are keeping more a carbonization from happening and basically because you are simply taking what exists right now.
Repurpose and that recycling it and turn it into a clean fuel that's the that's sort of a renewable fuel is clean fuel is a different tack at all so clean is really a hydrogen based.
And base means a producing it and a and a clean way. So again for a definition green hydrogen is one which is created by using renewable power. So theres no emissions blue hydrogen is one where you're creating hydrogen there is a there is absolutely C O two to discretely, but as part of that process.
But you essentially are capturing and so it's it's clean but and emission standpoint, just like green. So if you flip to page 17, and these are our two paths.
And with that let me turn it over to Ken and and they've just introduce yourself and gives a bit a background and then talk about our initiatives here.
Happy to do that thank you very much worse, it's Ken Nicholson here by way of a quick background, a I've been working with a west here at fortress for just over 15 years, we've a we've invested over $30 billion and infrastructure transportation and energy companies and I am a I'm thrilled to be helping to lead this new venture at NSP I think we have and enormous opportunity in front of us.
To make some highly compelling investment on investments and at the same time do a very good thing for the environment, along the way and I am a I'm excited to join the team I'm Gonna have a go to page 18.
Our goal is to make a these two investments that Wes mentioned immediately.
To do that we're forming a new joint venture with appetite that will combine <unk> development and technology and Knowhow with <unk> transportation experience and infrastructure assets. After I provides a three critical needs one efficient logistics and feedstock supply to access to land and key markets and three immediate acts.
First a low cost tax exempt financing that enables us to fund our investments quickly and efficiently.
And the picture on the right side of the pages and image of a F ties terminal in Beaumont, Texas, which is a site we're planning for a first two investments a.
And I personally have been deeply involved and the development of Jefferson, It's an incredible terminal with connectivity to all modes of transportation plenty of space for additional development and a track record of obtaining extremely low cost financing and the tax exempt markets.
Let me on page 19.
And I said, we plan to be in a position to reach FID.
And on our first two projects by the end of this summer.
One one project that produces a renewable diesel and jet fuel and the other that produces carbon free hydrogen and ammonia for both on the projects are the technology is well known and readily available.
As as a feedstock we're now focused on securing the offtake for the projects, which we expect to do and the coming months.
The box on the right illustrates the attractive economics around these investments each project represents capital costs and a range of 200 to 300 million and after a roughly 24 month development timeframe a should.
Should generate annual cash flows a $50 million to $75 million.
And I said, we expect a finance both projects largely with tax exempt debt requiring minimal equity investment, which should in turn result, and extremely attractive equity returns.
And finally to realize that value creation, our goal will be a separate zero parks ultimately into a standalone public company through an IPO and the business.
Great.
Back on page number 18, when you look at the the a.
And.
And Jefferson Terminal, Canada has actually been quite modest here, but when we first got involved in this a and this terminal it basically was a a muddy piece of ground.
Hundred percent of what you see represented and that picture. He oversaw the development of and when we looked at getting into the fuels business and of course.
The most obvious place to start they start with a fuels terminal because number one you need all the logistics on either side of it because you need to both bring things and so you can actually create what are you going to create and then bring things back outs fuels a.
Terminal actually a accomplishes that a.
Number two you need the access to land and so you have enough space to build what it is that you intend to build and we have a substantial amount of a land both at the development and adjacent to development, which is great and number three it's a bit of a a superpowers that and the ability to finance yourself on a tax exempt basis. So we've done a number of taxes and financing.
And this and this a on this development, it's a tried and true methodology for us and allows us to and a fairly capital light manner be able to a.
And these projects into a reality and as Ken said. Our goal then is if you're a a NFU shareholder on the phone here right now our goal would be that you for every and a few share that you get you essentially get a share of this company as well and I think that the impact of this the economic impact to shareholders could be material when you look.
The.
The sustainable projects and companies that are public right now the vast majority of them are not economically a base. So they are there more of a bet on an aspiration or a dream of what could happen as opposed to what they actually is happening. We think that both of these projects are very attractive on a standalone basis and they also represent a small frac.
And of the size of what this company can actually represent ultimately so the renewable fuels is just simply a repurposing you make money from taking what has been discarded and reuse. It that's a that's obviously a big big benefit.
2005, you know California's started with a renewable fuel credits was basically the first step in this direction, we think that there's going to be renewable fuel credits adopted in all probability by virtually every one of those states and as a result, we'll have a lot a lot of places to distribute these fuels and actually make a good margin on them and do a good thing in terms of their carbon footprint.
The.
The Blue hydrogen allows you then to create blue hydrogen at an attractive cost roughly a dollar a kilogram net of this the technology that our technical team has a has identified as one where we think we can capture and excess and 90% of the emissions and total so it truly is a very greenway to create hydrogen once you have that green hydrogen and theres. Many many <unk>.
And options that you've got in terms of creating off take the simplest may just simply to be turned into blue ammonia that can be used for fuel or industrial purposes, but theres a number of other things. So these are these are these are a meaningful steps forward. This is a a very substantial company I think it'll be a very exciting adventure to have on a standalone basis, and NFC will still retain.
And in our a green hydrogen and initiatives, but this is a this is a big step for us and Canada is a incredibly capable person on top of the technical folks who've got that are working on this so we think it's a big mall and for US So and express yes. Thanks, Wes Good morning, everybody I'm excited to provide and update on our business and financial results for the first quarter a 2021.
If you turn to page 21, and taking a quick look this is our familiar operating statistics summary, which demonstrates the business a strong track record of execution a.
A key takeaway from this page is that we continue to execute best in class operational performance and service to our customers, while maintaining a focus on safety and reliability.
Also as we continue to be a global leader in LNG truck and ship transfers and we're eager to step up our activities later this quarter as our terminals in Mexico, and Nicaragua come on line.
And a moment I will talk more about the financial performance during the quarter, but one key data point that we were tracking as a maintenance outages, which are estimated to be within 5% of our expected downtime.
And this exceptional operating performance is a direct result of a continued hard work and tenacity exhibited by our team.
As a company we are expanding rapidly with over 600 employees now and quickly approaching a thousand by the end of the year our world class team of professionals now spans the globe and it's helping to accelerate energy transition on five continents.
If you turn to slide 22, I find this a very helpful page that demonstrates what west was talking about earlier that once our infrastructure is in place the ensuing cash flow was right around the corner.
Sometime in the second half of 2021, we will have all six terminals fully ramped which sell around 3 million gallons per day. These terminals will produce approximately $600 million a operating margin and combined with a margin from the shipping fleet and a fee generates over $900 million and operating margin.
Moving to the right you can see as we fully ramped to the over 5 million gallons per day, a committed volumes and combine that with our first fast LNG unit and this takes us to $1 2 billion and committed operating margin.
One crucial point that we need to call out as a tremendous operating leverage that we have in these terminals first as we sell incremental volumes the fixed cost gets spread over a greater number of units sold and our margins expand.
Second as repair new high volume terminals, and Brazil, and Ireland with additional F. O N G assets, we increased cash flows and make them high margin terminals as well.
If we can burn on a convert on our in discussion pipeline, we see a path to sales of over 200 million gallons per day, producing close to 3 billion and operating margin.
Yeah.
On slide 23.
On refinance all information for Q1, and as you can see here the performance for the quarter was very consistent with Q4.
During the quarter, we had strong volume performance that was in line with expectations. The gym Alco power plant was down due to some planned maintenance, but volume sold to the old harbour power plant more than made up for the debt downtime.
And Sir and San Juan volumes reduced as one turbine was taken offline for 53 days, while PREPA performed maintenance on their unit number five, but importantly gas supply and a unit number six remain uninterrupted.
Further during Q2 PREPA has successfully completed the installation of their selective catalytic reducer and the asset is expected to return to full volume and the next few days.
Revenue for the quarter was $146 million and cost of goods sold was $113 million, resulting and a $33 million of operating margin.
Our cost of LNG for the quarter was $6 17, which was exactly what we were projecting on the prior quarter's earnings call.
Continuing down the income statement SG&A expense was around $23 million after normalizing for non cash compensation development and one time expenses a driver of this and as we mentioned on a previous call as we've ramped head count in Mexico, and Nicaragua in advance of C. O D and as these projects become operational costs will migrate to operating expense from SG&A and.
As you look at the balance sheet, we had $380 million and cash which combined with cash flows from operations fully funds our remaining development commitments.
And quickly on the capital market side in April we closed our financing for $1 5 billion, a six 5% notes due September 2026, which we used to complete the HEICO and G. M. L. P. Transactions. Additionally, we have put in place a new $200 million revolver price at L. Plus $2 50 that will give us more operational flexibility as a new terminals come on.
On line.
And last a quick comment on growth capital, we have a good portfolio, a baseload power plants and long term charter agreements on vessels that really act like fixed income assets, which could be better suited for and investment profile with a lower return thresholds and.
As we've said, we believe that we can monetize over $900 million and assets between just in a nook, fsrus and Brazil, and the Jamaica, Powerplay, and Jamaica and aimed to complete those transactions in the coming months with that I'll turn the call back over to us.
Great. That's the end of the prepared remarks, so operator, working let's open up for questions. Please.
Ladies and gentlemen, if you would like to ask a question. Please press star one on your telephone keypad.
A pause for just a moment to compile the Q&A roster.
And your first question comes from the line of Alonso Guerra Garcia with Scotia Bank.
Hey, guys good morning.
Congrats on the on the Euro parks JV understand this opportunity is much more near term and regards to and what your Euro Division was looking at accomplish previously.
Wonder if you can elaborate on your first few projects there will both of those projects and leverage that infrastructure at the Jefferson terminal and Belmont and.
And what would sort of line of sight do you have two additional opportunities beyond these two projects.
I'll, let Ken answer specifically on in a second but the answer specifically is that.
And they both leverage greatly the existing terminal. So when you think of the renewables.
Project debt.
Focus for US right now is on feedstock, so finalizing feedstock arrangements and figure out how to get them into the port obviously, what you have at this terminal are rail lines pipelines. So there is a truck lines. There is there's a lot a different.
Modality forms that come into the terminal that bring stuff in and then once you create your fuels. They need you to ship it out like any other fuel and whether it goes out on a pipeline or goes out on a barge or a goes on on a truck. So it absolutely uses the infrastructure is in place and that's why it's such a critical part of it and in terms of the timing of it Ken.
And we're confident.
And of the summer, we'll we'll be ready to go and <unk> on both of these projects. You also asked I think what the pipeline was for additional products I mean, I would say right now we are evaluating.
And a double digits north of 10 individual projects. The first two are very near term, but we do expect to do several of these things.
Over the next six months to 12 months.
You know clean and renewable fuels less and 1% of the entire fuel spectrum 90, Nine's a long ways to go. So there's there's a very very long list. The power a proof of concept is very very strong and so actually getting to a <unk> you're getting on a construction getting fully financed is a huge milestone and a huge step for any company but.
Especially a company and a new sector like this so we think that that actual catalyze all kinds of incremental opportunities.
Got it.
And.
And then maybe one on the terminal side noticed in South East Asia is mark the first gas for September and this year.
Is that project under construction at this point I guess, what's left to do there and any.
Any update on progress a Shannon.
On the South East Asia, we're making great progress on on the agreements in place. So it's just we haven't officially announced but that actually continues to move very well the initial gas there will come and exist.
Existing power plant and so that's why the timing is well and between final commitments and actually the first gas and a relatively short period, because it's a very straight Paul just to bring and gas for the first a terminal and then then down the road there is expected to be additional power built and a more permanent and put in place.
And that's that on a Shannon Ireland, and we continue to make a great progress I think that a.
And our goal is to file for permits here and a very near term, we think that the characteristics of that terminal a will look quite similar to the terminals and Brazil, and then it'll be hooked directly into a very very well developed pipeline system and so.
And it'll have the profile of higher volumes and such as we have and expect to get in Brazil, and lower margins, but on balance a very very attractive proposition. So we don't have a final.
Date of a F D on that project.
And in Ireland, and we won't have that until we actually file a officially the permits but I expect that that's coming and the.
Great. Thanks, guys until a head.
And your next question comes from the line of Sean Morgan with Evercore.
Hey, Wes.
Just a quick question on on Brazil, and we look at the volume opportunity in Sergipe, which my understanding was golar kind, a head that up and running and it's obviously a smaller than some of the opportunities you're seeing and posts like swap a and so for those of us that aren't that familiar with the Brazilian market and the coastal cities and regions. There why why is it that.
And.
And there's like a smaller footprint opportunity and the existing terminal and then what else can be done to sort of grow that because from my understanding it's already a somewhat established.
So it's a really good question so a big.
A big picture, you and Brazil is roughly two thirds of the population a United States uses about 5% as much natural gas so.
The biggest of the Big picture is we think the opportunity in the country is gigantic.
It is serviced by two pipelines that.
And that run up and down the east coast. They stopped short a buck arena, so the swap base or a GP and set a kind of arena are all on pipelines that are significant pipelines and so to a large extent, it's just a geography question of like what a.
User is closest to which is a terminals because theres somewhat ubiquitous with respect to where you can connect on that.
The volumes that we expect that a significant out of the pipelines, a really anchored it either and by swap a and buy by a central catarina, but they could also be serviced.
From a GP as well assuming this a GP terminal has been connected to the pipeline. It's about a 30 kilometer pipeline pulse is a very fairly a short and straightforward Paul from Sergipe and of that pipeline and then you can send gas either north or south depending on what you want a deal with Sergipe itself, specifically right now the volumes are relative.
A is low because the nature of the contract is one that does not really allow a readily for a merchant business. So what is a we get a significant capacity payment and then there's a 60 day window. They have to provide notice for you in order to be dispatched so it's really intended to be a backup power generation source, which I think really.
Under utilizes the asset significantly and a country that actually has significant needs of power production.
On a on a daily basis, we are a one five gigawatts of power a that is expected to run a fairly small amount at a time. That's why the volumes are a small there. So one of the very first things that we are doing with a technical teams. There is evaluating what we would need to do to bring that into a merchant power production as well and thus generate a lot more volumes and a lot more revenue as a result.
And so theres a lot more on that as a follow up but I think the <unk> terminal is really two things. It's one is that one five gigawatt shiny new beautiful power plant and it's also a possible pipeline connection connecting the pipeline it's a.
St pipeline, and this hooked and and swap and so.
Cash.
Yeah, No that's helpful and then on.
On the last quarter.
I think everyone's kind of aware that gas prices saw a pretty aggressive spiked there at the end of a really at the start of a less of the first quarter. So I get you know the gas costs kind of going up but with a cost plus contracts and places like a Puerto.
Puerto Rico and and Jamaica.
I don't really see the volume so somewhat consistent quarter over quarter. So why didn't we see a bigger bump and revenue is that gas pass through.
Commensurate with what you saw and in Cogs.
Hey, Sean I mean, the short answer is that we were already purchased for LNG prices. So we we knew how much we needed and we bought it in a.
Over the course of the end of 2020, and so we are in the market seeking new LNG supply at all during Q1, we arent really in Q2, we have maybe two cargoes Max and we would need the rest of the year. So we have a pretty known cost of LNG for the remainder of 2021 and as we've talked about before were largely purchased and.
And the Caribbean Basin for 2022 bus and have a little bit of exposure is still in the Pacific Basin for 2022, which we intend to use F LNG to supply, but you're you're a.
We are protected as a company and that about 75% and about three quarters of our contracts on the offtake side are also index to Henry hub. So.
Where we are indexed on the supply side of our index on the other side of it. It does I mean its interesting its a good good question, though and that gas.
Gas prices definitely went higher both on LNG as well as on Henry hub over the course of the.
Especially here in the last month or so and it does really underscore. This this this point of the F and G. So to the extent and we can really.
And successfully deploy those assets on largely fixed price gas, we have changed or.
Our operational risk perspective dramatically and also we then have the potential of offering a more certain prices to our customers, which I think and have a huge impact in terms of some of our downstream uptake. So it's more to follow a but it's all it's all good.
Okay, but just to clarify some of those contracts on the revenue side or more a Henry hub base, which we did see was kind of stable versus your Cogs, which are bought somewhere and advance but in a spot market on the and on a deliberate LNG basis, there's going to be more variance there and that's why we saw that kind of margin decrease a little bit in a quarter.
Well as we've said Henry hub is a direct pass through so a Henry hub, we buy a Henry hub, plus we sell at Henry hub, plus and the contracts and the Caribbean.
Going forward, we would expect to be a but what we want to provide is clarity and visibility into a cost of LNG, which then gives you confidence and the margins of a project.
Okay.
And any change in margin really it was just that's just a timing perspective, because there's not really a material risk factor for that at all and then it should really work itself out quarter over quarter, that's right and we forecasted the increase and LNG costs for Q1 versus what we experienced in Q4 and that is the biggest component of the margin.
<unk>.
Okay. So maybe just a little volatility and the quarter alright. Thanks, Chris.
And your next question comes from the line of Devin Ryan with JMP Securities.
Okay, great. Good morning, everyone and maybe want to start coming back to the JV with <unk> Thai and I'm sure I'll get some questions from investors since I cover that also.
And just love to maybe get anything more you can provide around just the structure and split and <unk>.
Capital investments and economics will.
And work in terms of what you will provide versus a tie.
And then it sounds like Theres, a number of projects potentially behind the two that are about to go into <unk>. So I'm just kind a curious around the bell.
And timeline more broadly and.
And a thought of kind of what it would take for this business to be ready to be split off and take a public.
Yeah well.
And the.
The relationship with advertise one that'll be formalized during this period when we go off and the first two projects. So the specific answer is that will have great clarity on that when it's finalized over the next 90 to 120 days, we signed an LOI with them that is conceptual and the concept basically be they provide a land and they provide.
Access to their terminals and operational support.
And we provide all the technical and commercial activities and.
Our estimate today is that the.
The appropriate split of the company to be 75% for NSE, 25% for F tie that's rough justice for what we think is being contributed to either side. Once that number is established and we have agreed on it and then then the capital provided would basically flow.
Measure it with that so if it was 75% with us and <unk> 25 per cent for them and there was a $100 a capital needed you would split along those lines. So that's something that is yet to be determined but I think that I expect that the final numbers to be a along those lines and.
We think it's a it's a we.
We get great benefit.
By and by being associated with these terminals, because we think that it's actually a meaningful logistics and land and.
Access to capital they get great benefit from our operational and technical teams and commercial teams and so the two of those that's a that's a fair transaction and we think that has the makings and a very.
Public company that has a very very exciting one and.
We're talking earlier and looking at a different estimates on what we think this could be worth again, when you look at to clean a.
Tech Universe. There are a very few examples of companies that are actually a commercially viable produced a significant amounts of cash flow have material growth prospects that are meaningful I think that the valuation for this company could be extraordinary and could have a significant impact in terms of the overall valuation of ours will we'll have to see but I mean this is not something that we are anticipating doing.
Years from now something we are anticipating doing months from now so we'll have some some a clearer view of this by the end of this summer a if that's the time frame that and actually ends and holding up so with respect to the other projects as Ken said.
There are literally.
Tens dozens actually a different projects we have looked at.
I think that the fuel sector is the most obvious commercial activity. It's one where we can make money immediately and we could have a big impact on the environment immediately and so we've looked at a lot a different technologies, we've actually talked to hundreds and hundreds of different forms of a.
Ventures that have looked at this and have concluded that fuels fit us very well as an organization again through the.
The old fortress at Cannes, and others, they've made over a $30 billion equity investments in transportation. So we have you know.
Truly one of the best track records, and the world and and understanding the transportation markets. So a pretty much everything that uses fuel that news, whether it's ships trucks trains planes and chassis east ports you name. It we've made material investments, we understand intimately with debt is and Ken as you know one of the senior partners of that business.
And it's been a very successful one so transportation and something we know a lot of that fuels a something we know a lot about we have great assets to start with and that plus all of the technology and the sustainability stuff from a N. F. E. We think is a very potent combination. So that's that's a.
The strategy for it and I think these first two are meant to be.
Representative of what we think the overall opportunity are but theyre not theyre not just science projects, there actually a meaningful projects and produce actual meaningful cash flow and profitability and we think really put this company on a great track to being a very very material Green Tech company.
Yeah, that's great color, Wes and definitely interesting.
And maybe you just for a follow up kind of a high level question. So I think a vertical integration.
And with the SaaS LNG as a incredibly disruptive and yes.
Now that it's been out there for a couple of months in terms of when you guys started talking about this and I'm just curious kind of what the market reaction has been and.
And how that maybe is impacting potential additional deal flow coming to NFC and and if there are other markets that are kind of interesting work and of the arbitrage opportunity is most compelling and I'm just kind of curious that I'm sure. This created some reaction and the market just given the kind of disruptive nature of it and lumpy just maybe get a little color on.
And maybe additional opportunities that are coming about as a result of it.
And we have very active dialogue with a number of upstream providers right I'd say that.
Especially as a deep water solutions, which are going to be more tactically.
There are definitely the most lucrative a are the ones that debt long term payoff and the most values because when you are far offshore and you're producing oil and theres a associated gas with it.
There's not really much to do with a gas you have to build a material amounts of infrastructure and a pipeline to take it to shore. It takes a lot of capital to do it takes a lot a time to do that so that's the place where gas is re injected or it's flared or it's really viewed as a liability and not an asset that's clearly going to be what we're going to find the cheapest resource and and have the biggest impact.
But even in this and the onshore basins and from that map you can see there is as many of those around the world.
Is there a similar situations that occur there as well for gas is being flared or it is being re injected or it's not commercialized and thats, where we really want to.
Play a part I think in a short term I'm very focused we're very focused on getting proof of concept of.
On the infrastructure and deployed so we're looking at what we think are some.
Kind of shorter put some easier.
Transactions that we think will be a good representation of what.
The production might be but there are many many offshore upstream opportunities for us to be a partner of and we're talking to a number of the firms. It's also a.
A very good timing and that many of the oil majors and independent oil companies are looking to divest assets or looking to commercialize them in some way shape or form and so.
There's a lot more to come on that but this is a.
This is without a doubt my single biggest focus on a daily basis, and we're only showing a two dollar as margin expansion for a one of these projects that we think the upside could be materially higher than that but that's a good representation. That's a $3 50 versus $5 50 kind of number and thats in our and our financial projection on just the first of these.
As I said when you look at that one page if you took.
We have all of our production you replace it all with LNG at $2, a generates a $1 billion incrementally.
Three or $4 and it's obviously, even higher than that so the impact to us on an earnings perspective as a.
Is potentially a very dramatic.
Yes, I appreciate it okay. Thanks, I'll leave it there.
And your next question comes from the line a spiral <unk> with credit Suisse.
Hey, good morning, everybody.
The first question and to keep our question on Euro parts first.
And first part can you talk a little bit about what your target customer base looks like and what Youre a unique offering is it seems like either at Empire and F. E. Those kind of found and edge or way to develop a better mouse trap curious what that and here and then on contract structure. You anticipate this being a fee based business with long term contracts similar N F E or something else.
Yeah, Hey, Spiro.
Target customer base and the renewable fuel space is just about everything I mean, the products are immediately interchangeable and immediately replace any fuel.
And the technologies that.
And where we're likely going to be announcing take multiple feedstocks and produce anything from renewable diesel automotive gasoline jet fuel.
So so it's a broad broad customer base I think for the.
For the Blue ammonia.
The broad the biggest customer basis as a shipping market.
Ships today.
Consume practically no renewable fuel over the next 2030 years that is going to transition to over half of.
Their fuel needs being.
Being from renewable sources at least according to the IMF standard centers that are being implemented.
Got it and then on contract structure or is this.
Just maybe a few based and long term and yes, no no absolutely I mean fixed fixed.
Feedstock supply.
And with guaranteed pricing.
And and offtake and to a degree we're selling some of the supply out to the.
Fuels markets.
In the event a sum of some of that you are a price risk taker.
Taker, but at the same time, you can enter into a variety of arrangements to kind of effectively synthetically fix that price. So yes, largely a fixed cash flow business with upside as you grow volumes.
Got it perfect. That's a that's helpful.
Second question just on asset sales West you mentioned zeroing in on one soon.
So curious if you've got and updated sort of a target amount or asset sale figure that you expect to sort of close on this year.
We're actually quite close to a two finalized and the first of these and the second one is in progress I think that and.
Our base case numbers, we think it's between 600 $900 million.
And asset sales so.
There are substantial numbers and and.
One of the things that we are going to work on is a way a represented in our financial statements that are actually accurate because and the accounting standards for a sale leasebacks a changed.
Dramatically and the last a year or so so and we want to conform this and show.
And I have a very simple.
Financial metric and I think of as the money and.
When you get cash flow from these and you don't pay tax on them because they are a financing it generates a substantial amount of capital and how best to represent that and.
And the in the past you know the real estate businesses and whatnot have used.
Measures like <unk> or like cash.
Cash available for distribution or whatever and so we need to come up with something I'm not a not a big fan of.
A non standard accounting measures and.
So that is one a limiting factor, but by the same token youre going to get a substantial amount of liquidity and cash flow from these asset sales and theyre going to be sold I think on balance at prices higher than what we paid or created them and so representing a that fairly is something that we need to do some real work on but you'll see.
And some gain.
We think that at the end of the day are kind a base proceeds number.
The middle for us is around $900 million the basis of those assets that we are potentially sign.
And he is about $350 million less and that.
It won't show up as an operating gain and nor will we pay tax on it but it will show up as cash and the register so we just have to figure out what the right way is with a finite with our accounting people and then work with a.
With you also and make sure that we represented new models correctly.
Got it that's a that's helpful. One last quick clarifying question I think and a previous question you asked with respect to your parks and becoming a standalone company or are there any sort of a specific major milestones you need to see before.
Starting that process I don't know if its a specific EBITDA amount you need to get to or maybe its something well start before that.
No no I expect that we will actually create a separate public company for its really the minutes of RFID on these two projects so on.
<unk> says we've got 90 to 120 days is what it's a.
And aggressive, but we think achievable goal and given where we are today on both of these projects and then we would look to have that would be a capitalized and on a and separate it out immediately and theres a number of different forms and ways that we can achieve that but.
But we actually are working on that now so that's not something we will wait to do a tell then but actually take that down the past we ended up with something.
And I think getting that as a standalone company, giving us on identity getting the shares directly into the hands of the shareholders. Those are all the right objectives and.
And I'm I'm.
And I'm very focused on doing that and the near term because we think that's the right the right thing to do.
Got it very helpful. Thanks for the time today guys.
Your next question comes from the line of Ben Nolan with Stifel.
Thanks.
Yes.
I wanted to shift it back to Brazil, you guys.
About a.
And <unk>.
On the three incremental projects there and appreciate that sort of your internal investment decision, but.
Are there any.
Hurdles or anything that needs to take place with respect to regulatory or commercial before.
And before you actually.
Break ground and start spending money and that kind of thing.
No it's actually a.
We're very fortunate that the team that we.
Inherited we bought a company that Golar assembled is incredibly capable. So we have as I said, we had the whole squad up here.
On a Monday, and Tuesday, and basically what we're looking to do is.
Marry up kind of a R.
On expertise and our operating experiences with what they had been doing and I think on balance and I'm very very pleased with what that group has accomplished thus far kind a where we are so.
Buck Arena, where EPC be signed and the next handful of days that is actually very much and production.
A like finalizing agreements with the port moving the debt.
The ppas into interest.
And to swap AIDS and converting them from diesel to natural gas. So that's a that's something that obviously the government's very very supportive a center kind of arena we are.
Deep and conversations there that is something that is a very straightforward development and we expect a signed EPC on that and a very.
And as well so there are always permits and processes to go through I'd say on balance given our experiences I would rate. These are very low.
And where they are right now and.
And and.
And the timing to accomplish.
And the appear to be aggressive when you look at Q1 of next year, but really you have to backtrack several years to get to where we came to on this. So these were a years and I'm, making productivity moved along great technical teams at each one place. So I feel very confident that we're going to hit these timelines and really the commercial side of it than we have.
Scratch the surface of and we just really have barely started to really go after and aggressively commercialize it and said.
A.
I'll be in the north of Brazil on Sunday, and we've got we think some really really interesting things there we signed up the LOI on that first terminal with Norsk hydro, but that is a.
That's the mouth a of the Amazon River the Amazon River has you know.
Gigawatts a power, it's a highest power prices in Brazil. They are all heavy fuel oil and diesel base. So.
And I think it's got potential economically to be tremendous and and and Youre also decarbonising power and the Amazon I mean, that's that's winning right. That's the best thing you can imagine.
I think that the commercial activity will follow I think youll get a lot of updates in terms of announcements on things that are going on there theres a big commercial groups that are down there, but we know that as projects get closer to completion and best in a commercial activity really ramps up.
And effectively that's what happened to us and Mexico right. So we're very very close to it to now being completed and and La Paz and it's not a.
A really surprised that that's actually what caused and the CFU showing up and sign a contract with us and and looking at other opportunities there. So.
Commercially this stuff is going to be.
I think extremely extremely productive.
Okay great.
And then.
Shifting to the other side of the equation a little bit on the Epsilon and he said he was sort of getting closer to a.
A commercial agreement are those and I'm curious are those on a fixed gas.
Price basis and.
And the reason I asked there's a lot of places.
Don't like to give up a upside economics, especially developing markets don't like to give up that uptake and economics are rethinking really pick price or was there some sort of a index.
Index linked.
Part of that equation.
Yes, you are a 100% right they don't but as a course for the most part they are very focused on the oil right and a lot of these cases and associated gas is a byproduct of it and I think that and the and there'll be a there'll be a number of different structures there.
My goal is to end up with as much certainty as possible on the gas price. That's good for our core business and as a good ultimately for our downstream customers and so that's obviously the goal, but there could be many.
<unk> of what that looks like and and probably at the and there'll be some combination where youll have some fixed price and you'll have some indexation and.
But on balance I think it'll it'll tend more towards the fixed price side, just given the nature of the resource that we are we're extracting and then look I think the other material factor for a lot of resource extraction is we are not just a resource extracting company we are a.
A problem solver from the power side, because really all of these countries and some shape or form want incremental gas one incremental power on shore and that's something we can also accommodate and do and a very very compelled.
A competitive and expeditious way, so I think yes.
There is a lot more to come on this I think the.
The reality of having the first of these is something that we're now kind of really like seeing the benefit of that with our conversations but we'll get the first one deployed and hopefully there'll be a lot more to follow.
Alright sounds good I appreciate that thanks a lot.
And your final question comes from the line of Craig Shere with Tuohy Brothers.
And question.
And West can you talk more about the.
Or a 10 can you talk more about the technology used for carbon sequestration and <unk>.
Are you working with chart on that as well.
No not specifically working with anyone.
And in particular, there are multiple technologies.
Some that sequester the carbon in terms of carbon capture and some that actually capture the carbon and converted into usable products.
It's the latter debt I think is actually more relevant for a first project.
A pretty interesting technologies, continuing to emerge, but actually pretty straightforward process.
But I think it's more likely.
On the carbon capture side to be a technology, where we both capture the carbon and actually converted into something that is useful and has a market value and theres, obviously, a huge focus on carbon capture and Houston, Texas, right, So and talk to the big oil companies down there. There is a lot of interest and trying to be a part of it I think.
The most straightforward and use of it as two respected use it underground, but I think that that really.
Under cells with a benefit of <unk> itself is a very very useful product and pure form you can create lots of products, where theres lots of things that you can do with it and so we're much more focused on that because.
We think that thats another incremental part of the value chain that you can capture but there is there are many many different folks that are looking to participate and that did have a lot of expertise and the upstream businesses that we think are a good folks and talk to so that's part of the process of going and finalizing that on the technology for our first plant here over the next two years.
90 to 120 days.
Great. Thanks, and one last one on fast LNG, where are you in terms of procuring additional oil field infrastructure with the use of semi submersibles involved and a greater complexity and seeing a liquefaction a top jackups and now that the market knows what are you using it or is the pricing starting to change.
Well.
The first two rigs we bought a total of $31 million to rigs that new cost just over a half a billion dollars. So we say pennies on the dollar is literally pennies on the dollar of what they are and theirs.
And with all that has happened and the world. There is an abundance of offshore infrastructure, which is available at basically a scrap values and so that's a good day.
And we focused on the Jackup rigs because we think that that's just an easier installation and the first time around.
As I said earlier, it probably is not the highest value when you compare it to some of the offshore opportunities, but it's still a substantial value and so it's a good place to start the semi submersibles a deepwater stuff, that's where I do believe that the greatest benefits will be because thats. The as I've said many times if you want to.
Make it a great fortune and find a big problem and solve it and the offshore gas and is a big problem I mean offshore development focuses on the oil gas and the infrastructure that is needed to deal with that is it takes a lot a capital which is not that available and a lot of time and so this is a big solution for it and but.
Our technical team, which is.
On a very very capable and they think that the offshore installation is very much we'll follow the same pattern. So the.
And the modular <unk>, if that's a word I met and made that up but moving a modular rising the liquefaction gas treatment all of those things and making them fit into smaller spaces. That's.
And that's my late.
A description for what these guys actually do and a very very spread.
Okay that works the same on a on the deck a a semi submersible and does on the deck of a of a jackup rig. So a lot of those things we think not obviously mooring systems you know how it all connects and whatnot. There is different things you have to account for but we very much feel like the application will work and both shallower as well as deeper water and eventually.
Thank you.
I would now like to turn the call over to Wes Edens for closing remarks.
Great well thanks, everyone for dialing in this morning, there's a lot a lot going on and it's fun to have a chance to update you and as I mentioned earlier I think we're going to have a road trip sometime this summer and I think it'll be fun to get people and give them a chance to see a some of our operations and business I mean, we're we're a busy operating company today.
Day that is transitioning from this development company, a new operating company the pace of that is going to intensify as we now open these new terminals and Nicaragua and in and.
And Mexico, and I think it would be a great opportunity to get people in front of it and have a chance to interact with our our operational folks and see what's going on we're very very happy with kind of what is going on down there would be great to share it and I think there's a lot more to follow on on all of these different fronts, but thanks very much for you.
This does conclude today's call you may now disconnect your lines.
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