Q2 2021 New Fortress Energy Inc Earnings Call
[music].
Good day and thank you for standing by welcome to the New Fortress Energy second quarter 2021 earnings call. At this time, all participants are in a listen only mode.
After the speaker's presentation, there will be a question and answer session to ask a question. During the session you will need to press star 1 on your telephone keypad. Please be advised that today's conference is being recorded if you require any further assistance. Please press star zero I would now like to hand, the conference over to your speaker today, Josh Jayne.
Go ahead.
Thank you.
I would like to welcome you to the new fortress Energy second quarter 2021 earnings call. Joining me here today are Wes Edens, our CEO and chairman of the Board, Chris Jensen, Our Chief Financial Officer, and Andrew Guidi, Managing director, leaving a Brazil efforts throughout the call. We were going to reference the earnings supplement that was posted to the new energy a website new fortress energy.
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 in the earning 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. We encourage you to review a disclaimers in a press release and Investor presentation regarding non-GAAP financial measures and forward looking statements and review the risk factors contained in our quarterly report filed with the SEC now I would like to turn the call over to west great.
Thanks, very much Josh and welcome everyone.
As a as always we'll refer to the investor presentation, which we posted a website as Josh said that a.
Before we get into that new will make just a couple of thoughts I mean, it's been an extraordinary quarter for us and a remarkable 6 months. Thus far this year our company is in the energy transition business.
No surprise the world needs to Decarbonize and do so quickly in a business is to do so while addressing energy poverty and energy inequality, whilst also making significant returns for shareholders. As we do so my goal is to be the world's leading company in the energy transition space and we're making pretty good progress on a thus far this year.
Well, we have today, just a level set as a constellation of terminals and operations in countries around the World, Jamaica, Puerto Rico, Mexico, Nicaragua, Brazil, Ireland, Sri Lanka, It's a geography test and spans the world.
<unk> has established a all of these assets and terminals and now that we've made the investment done much of a hard work expected. Each of these markets will show incremental a substantial organic growth from this point forward.
You would expect to see 1 more power plants switching to gas in places like Puerto Rico and Mexico.
2 new power plants being built in places like Brazil 3.
3 soon you'll see a bunkering as a a without using LNG as a marine fuel a in places like Jamaica is a hub we've already paid for the operations. We've already paid for the infrastructure. We have a massive competitive advantage that is both money and time.
And I believe we're going to show now a tremendous organic growth across the portfolio in the months to come.
Second of all earlier this year, we made the decision to.
You introduce that for LNG into a portfolio and go deep on our first project a earlier.
Back in March.
A I believe that the.
The path that we're following a <unk> F. LNG will change a liquid occasion, a LNG around the world and is already doing so faster and cheaper to liquefy a construction combined with access to stranded gas is a powerful combination the technical solution that we have is on time and on budget cheaper feedstock stock not only represents a big cost advantage to our business.
But also provides a host countries a path to develop a homegrown power and economic activity that day, they desperately need its a big win from both sides. Its a huge step for us as a company.
Lastly, true energy transition a longterm means a clean fuels natural gas is much better than oil and diesel it's cheaper it's much cleaner, but the real goal is clean hydrogen based fuels hydrogen ammonia methanol et cetera.
The first part of that journey for US is to identify the problem, which we have and then coming up with a plan to solve it.
It's crystal clear to me with a total of the problem is in with a solution needs to be a now it's simply a matter of executing the first industry that youre likely to see decarbonize the material way as the shipping industry and it's already happening alternative fuels make up just 3% on a fleet in the water today, yet makeup over 30 per cent of the ships being built in shipyards. The first steel will be LNG.
Soon to be followed by a hydrogen based fuels. This represents a gigantic opportunity and our goal is to be a big part of the solution and we have the terminals and infrastructure that would be a part of that so it's been a very good start to a year. So with that now, let's turn to a quarter itself and start with page number 4.
We have several significant highlights to report this quarter, but it all starts with earnings.
Significant increases in Q2.2021 operating operating.
Segment operating margins with further increases expected in Q3.
If you look at page number 5 net to skip a rad, we actually lay out by quarters over the last year and then what we expect this year to happen and you can see that we are making material strides now and actually transforming from a development company into an operating company.
Q2 last year, a $15 million and the operating margin Q2. This year, a $130 million our expectation is approximately $210 million for Q3, and a $170 million in Q4. Those are those are expectations based on what we see right now given that we're roughly halfway through Q3 I feel very good about the forecast that we have.
Got there we'll talk about this more in detail, but you can you can see clearly the benefits now of not only a.
The the terminals themselves coming online, but also the diversification of income sources.
To go from terminal operations to shifts to a third party contracts to gas sales merchant power operations et cetera, our business is diversified by the day and it is growing materially my expectation for next year is that will be over a $1 billion in.
And operating margin in 2023, a $1.2.50, and this is all without any incremental benefit from F. LNG any incremental benefit from Ireland.
Cereal economic benefit from the organic growth that I expect to see across the portfolio. So we really are at an inflection point as a company and from an earnings perspective, and I think there is much more on that to come.
Number 2 the big story for the quarter and for the year, thus far as for the gas and I'll talk about that in some detail, but our gas position bottomline today is essentially flat after the portfolio purchases. We've made this year so.
So you can make a lot a bad decisions around around here, but we make a few good ones and the decision to basically take the volatility out of our business has been a very good 1.
At a time in a market, where roughly where prices have increased by roughly 50% in a last handful of months, we have essentially very little to no volatility in our business and in fact that volatility now creates gas merchant power opportunities and Andrew will talk about some of the things we've seen down in Brazil about that in just a second.
3 years liquidity, we expect a projects to be self funded between financing and asset sales a Chris will detail that in his section, but the bottom line is everything that we have committed to we can pay for ourselves.
<unk> committed on the first leg of our Janaka, a sale leaseback, which funded in the last couple of days.
A ship financing to fund later this quarter from a very much on track from liquidity standpoint, a pay for everything that we've done internally financers horses my goal.
And last what I already mentioned, a fast LNG, we're making significant progress with a technical work we're on wrong on time and on budget with a a lot to talk about there the gas sourcing has been very productive and we expected it to.
<unk> our gas source. The next 60 to 90 days.
So with that let's let's flip to page number 6.
And just by way of a recap.
Let's just talk about where we got to today over the last 6 years, we've been largely just focused on development and today. Many of the projects are either completed or nearing completions and as I said, we're very focused on our operations and organic growth 2016, almost a the day was the first contract that we sign so.
We signed a 2015, where we signed our first contract with a.
J P S. The utility in Jamaica.
In 2016, we had 1 LNG import facility operating margins a negative $7 million.
Today this year full year, we expect 6 terminals up and operating.
By the end of the year for a total <unk>.
Margin, a $550 million 2022, 11 terminals, a $1 billion moving.
A invested over $7 billion in these projects over the years, we've made enormous investments in both time and money and are now really at the point, where we can we can start to see the economic benefit of all of those assets I mean, when you look at page number 7.
You can see this is the map that shows where the assets are we obviously have a very significant presence in the Caribbean and Mexico, and Central America, and South America are first.
Investments in Asia, and Colombo in Sri Lanka, and Theres, a handful of other markets, which we are actually exploring but I would say that the focus of the organization has shifted less from new markets. Although there's a handful of things that a material that I expect a show up here in the next month, a jail, but less from new markets and more just minding the operations that we've got in our operations around the globe right now.
Wow.
P. J. The path ahead is clear and I already mentioned this energy poverty is very very real this chart on the left hand side shows you. This very graphically electricity consumption of the United States, a 11500 kilowatts per person Nicaragua at the bottom of scale a 552. The GAAP is it creates tremendous.
Disparities in terms of both health and economics and is 1 that can be addressed by by exactly the activities that we have a.
Number 2 a though has been a sustainability and energy transition is a is a modest 51 billion tons of greenhouse gases.
Our admitted every year.
So enormous weather events happening daily.
It's no surprise that the entire world has woken up to this is an issue of our generation is something that we address the day. Just this morning, Exxon announced that they intend to be carbon free by 2050. This is a this is just another 1 in a very long string of decarbonising events by different companies announcing over the over the years and we think it's only going to accelerate from here.
That creates not just huge problems, but huge opportunities for companies like ours.
So we look at the gas briefly and again I've mentioned this already so I'll flip to page 11, what.
What are we done since last quarter, we brought in about 50 cargos and are now fully committed.
For the demand that we have on the books for the next 6 years.
The chart on the left hand side of the table shows you by year, what our cargoes are that we think that we need in order to satisfy our customer needs and what we bought in and you can see there were essentially flat the average cost of our LNG portfolio right. Now is Henry hub times, $1.15, plus $2.56, so a material discount to where the market is today, we do.
A lot intend the.
LNG book to be a trading book, but a very happy to have reduced our volatility in this regard to be matched and have done. So at a price that is materially below where the market is and that protects us a.
From LNG price volatility going forward.
Briefly next section and then I'll turn it over to Andrew to talk about Brazil, but let's just touch on <unk>. So a page 13.
This is a cartoon shiny before that shows basically how this works and really the point of it is really twofold, 1 is to take existing marine infrastructure and modify it. So they can actually be used for <unk>.
LNG liquefied.
Our case, what we've done is we bought a couple a jackup rigs those are being cleaned off of the equipment that we don't need repopulated. The equipment that we have modularized and have made fit on there and it was a.
A lot being deployed offshore that that allows us to do 2 things allows a liquid occasion, a stranded offshore gas and delivers a tactical solution this faster and cheaper.
How big is the opportunity on page 14. The answer is it's a gigantic 1 theyre stranded gas all over the world in different geographies, there's only 7 <unk> that are actually.
Operational or under development today, representing less than 3% a what we think are the total amount of the market. So there is a huge huge need for access to be a.
A solution for these these stranded fields and we think that we have the right a tool for the there's a job.
Page 15.
We are a.
Talking about this the other day and I was reflecting back on another business, which has involved in many years ago.
Back in a private equity day as we made an investment in a modular housing company, maybe 20 something years ago I've spent a bunch of time looking at the production of a major warehousing and what I discovered was that in the process of making a house inside of a factory. There is 2 things that happen a it happened a lot faster than if we built it out in the field and be it happened a lot.
<unk> is a modular housing was 20% cost savings, 40% to 50% a savings in cost and Theres a lot a parallels between that and what we're doing here because essentially we're building a factory for a liquid fires that were bringing the gear 2 and installing as opposed to stick building and the field.
Traditional liquefaction cost 600, a $700 million.
A million dollars a tonne takes 4 to 5 years to complete and is hard when you're actually you'd have to bring all the technical people to the far corners of the world where a lot of these gas fields are it's very hard to get welders.
Steelworkers cryogenic engineers, all the technical people that you need on site and in production they're building it in a shipyard in Corpus Christi, Texas, which is where our first 1 was getting built allows us to access all of that.
A high quality talent in the Gulf Coast do so both faster and in a much cheaper. So we think that the potential savings or a 30% 30% to 40%. We think the savings in time is even greater at 75%, so cheaper faster and more reliable and you can see on page 16, where we are.
These are the first 2 jackup rigs that we bought I think we paid just over $31 million for the 2 of them. So basically bought them for scrap purposes. Those are both in the shipyard now at Kiewit I'll be down there.
2 weeks.
Going through them firsthand, but basically the process is a strip off what is their reinstall and assemble we've got and we think that our schedule a being ready to install this if the second half of next year is very much on.
On the path.
With that I'll touch oil and redeem rooms, a Brazil start Andrew.
Thanks, everyone great to talk with you again and excited to share more in a business in Brazil with you.
So 2 goes we have today.
And it came out of Brazil first is to share a bit more information in our views kind of on a macro thesis in Brazil, and how some of the current events playing out in Brazil around power and gas shortages really accelerating the opportunity for us and.
And then 2 is to talk about.
How that situation translates to a commercial momentum for us and to give you some information on where we are commercially in Brazil.
Good we feel about the next steps so starting on page 18, we wanted to kind of simplify and distill.
A message.
About what's happening in Brazil today on the power side and on the gas side.
So kind of go left to right on this page we have in Brazil today, our hydro shortages, leading to power shortages. So.
The electric getting Brazil is basically underpinned by hydro. However, you measure it it's about $65 to 75 per cent hydro power Theres about 2 over 200 hydro power stations in the country.
However, what we've seen kind of in a sustained downward trend over the last 7 years is.
Hydrological shortages, so lower rainfall and lower water inflow to the dams.
This year in 2021, we're seeing.
Real acute hydro shortages, leading a power shortages throughout the country.
What that does in Brazil is that means you have to you have to compensate with.
Thermal dispatch a a power and so basically all of a natural gas power plants in.
Frankly, some of the oil and distillate fuel power plants turn on at that point.
And you ship basically at a domestic gas production to power and the gas shortages, which youre seeing that in a second box here.
And Fred a fee this situation, which has become really acute in the last few months in Brazil.
Leaves a significant opportunity and will take you through that so page 19 gives a little bit more data and information on what we're seeing so on the left side you can see the data here on kind of what I'm talking about where in 2021 were actually 50% below a 20 year average.
For the water inflows in the reservoirs in Brazil.
And almost more importantly, what we've seen is really a sustained downward trend. So it's pretty normal debt in Brazil, you would see fluctuation.
On the hydro data a year over year and certainly like seasonally.
But what we're not used to seeing us as kind of a sustained downward trend. So typical management practices would be reservoir management or <unk>.
Compensating with with some renewable fuels and kind of a thermal dispatch of a power, but when you have this kind of secular downward trend on hydrogen flows.
You end up relying a lot more on that thermal generation, which isn't really built to sustain a system and so on the right side you see the consequence of that which is the last.
We've seen spot power prices that are 10 times about a 20 year average and thats caused by having a turnaround not only all of the gas fired power plants.
But to turn on the sort of older inefficient a much more expensive diesel and age of Pope a fired power plants as well.
So what's that mean on the gas side on page 20.
We wanted to still down.
It kind of simple situations happening on the left side of this page.
The Blue box is really the domestic gas demand. If you assumed there is no demand from thermal power.
The gold bar is basically a domestic gas supply so even in kind of a note thermal power demand situation you still rely on a bit of imports, which come from Bolivia or come from LNG imports that Petrobras has.
And then what happens is when you fire all of the thermal power plants, you can actually increase the gas demand by over 65% it's.
It's about 11, a M tpa or 18 million gallons a day.
And so you go from kind of a needing a a little bit of imports to cover your supply demand balance to needing a ton of imports.
And in a situation, where you have Bolivian gas declining.
You have a really high LNG prices in the spot market and frankly, you have a limited infrastructure buildout of the Petrobras 3 LNG terminals today only 1 of those is operating.
Actually being able to import this amount of gas is very very difficult.
What that means is for us.
A N G provider not relying on domestic gas.
We're really a extreme value to the system.
<unk>.
We're just seeing massive shortfalls today, so on the right side of page 20, it kind of follows the same pattern. We've been talking about so we just tried to pick out 2 things from the press that kind of fit on a same time when we're talking about so first a.
A lot a report on really high spot prices and noticed that the <unk>.
<unk> system is not set up to deal with the current crisis and then secondly, we have some big announcements and a very big 1 yesterday about gas shortages to Petrobras is now announcing that they won't be able to renew gas supply agreements to the state distribution companies in the northeast, which is really the area around our swap a terminal and so we're seeing the same trend play out in the press for first we noticed.
High power prices and that leads to significant gas shortages.
So on page 21, the Big question, obviously is how does that translate into opportunity tried a fee and what are we doing about it and so on the power side.
We have our 1.5 gigawatts, a J D power plant up and running today, receiving capacity payments and dispatching at a 100% a availability given the situation we're talking about the gp's fully dispatching.
And receiving payments.
For emergency security or in Merit dispatch as required.
We have the swap a power plant and 288 megawatts.
By our analysis, it's actually the next thermal power plant in Brazil that can turn on to the fastest in Q4.2022. So.
A strategic national interest and we're seeing that in a relationship with the regulators.
And then we have a 605 megawatt bucker in a power plant expected Monday Q1.2025.
On the gas side, our brokered a LNG terminal EPC contract is signed it will be online in Q1, our extent to kept arena LNG terminal EPC contract is signed also will be online in Q1, and then we have signed an Mou with Norsk hydro at a bucker in a terminal for 1 million gallons a day.
We're actively negotiating.
And hope to finalize a very soon and then we are announcing the signing of an agreement with an industrial customer that swap a terminal for $1.4 million gallons a day.
And so those 2 agreements I think really just are starting to show the value proposition our terminals have for gas supply in the country.
Both due to shortages indicates a swap in Santa Catarina and a Buck arena, where you don't have any gas today, and we're really the sole supplier.
And then we have tremendous momentum in our off grid business, So ISO container business and.
And we've signed a 3 exciting agreements right. So a central Catarina, we have 2 agreements signed 1 with a C gas who's the state distribution company in Santa Catarina 66000 gallons a day and then we have a pulp and paper customer a 50000 gallons a day also from inside the country and a terminal and then we've signed an important partnership with gusto per us who's the distribution company for gas.
In a bunkering in a terminal.
8000 gallons a day with a lot of room to grow as we continue to invest in infrastructure with them.
And increase the Gaslog print in the state.
And so what that really means is on the right side were sort of re underwriting everything we've seen in Brazil and so.
In April when we closed I think we announced a $410 million.
A number in terms of our opportunity in Brazil, and as we look more of that number really raising that base case to a $525 million and that includes everything we're talking about on the power side as.
As well as GAAP sales from our terminals and then our off grid business.
We're seeing real momentum across all of those businesses given the sort of underlying macro situation. We're seeing and then we're excited about the upside in those businesses as well, we think especially on the terminal side.
In the building a new power expansion power emergency power and then we think the most upside opportunity might honestly would be in the off grid business where.
Not only in the bunker in a terminal with a sole importer of gas, but really in the other.
Other terminals, where we're connected to the coastal pipeline system, but frankly, a large municipalities and industrial customers, who are just off the coast or not.
And are very hungry for gas.
And we're bringing kind of knowledge and knowhow from our other operations to really start that that sort of off grade ISO container business in Brazil. So the demand in momentum there is a tremendous for us and we're really excited about what our team has been able to do there. So we see $225 million a further upside for a total opportunity a $750 million.
So on page 22, we sat around and try to kind a think about the main messages a 120 days on from the acquisition of <unk>, which closed April 15th so a little less than a 120 days.
We have 3 kind of main takeaways.
As we sort of a look back on our thesis at a time and exact acquisition and where we are today. So.
So first is we believe in a very high volume gas supply opportunity in Brazil, a country over 200 million people with limited infrastructure build out and a real need for energy.
And we're also seeing strong margins in that business.
A couple of effects sort of conspire towards that 1 is the.
The passing of the new gas law in Brazil, which is basically accelerating the reduction in Petrobras has a monopoly on gas supply.
As well as.
So it's sort of overarching macro trends on on commodities, we really see a strong margin business as well on the pipelines to is.
1 of our thesis for buying hydro was that we saw a strategic terminals, but also a terminals that we are in advanced stage of development. So we're really benefiting from great permitting work that the hydro team has done to get us in a place to actually turn these terminals on in Q1.2022 for sinter, Catarina and Buck Arena and in the first half of 'twenty 'twenty 2 from swap day. So.
We've also made great strides in terms of quickly getting those EPC contract sign.
And really excited about our progress on the construction side.
And then third is continuing to hit on our small scale in off grid opportunities.
I think this is a this is a business in Brazil, that's going to continue to grow diesel prices in Brazil are 18 to $22 per Btu, we have an amazing value proposition, we have a really great team in place and we're seeing really small scale partnerships across our terminals that are going to be really great for us and were seeing frankly, a really large off grid opportunities for large.
Oil companies that don't have gas assets today, and can really benefit from it. So there is a kind of our 3 takeaways on re underwriting the business and how we're seeing it and look forward to any of the questions. We have as we make progress in Brazil. Thanks, a lot.
Thanks, Andrew and good morning, everybody a couple of opening points that are important dimension I'll ask you to turn to page number 24 in the presentation with.
With a hydro in the GMO P transactions closing on April 15th this is the first quarter, where a consolidated financial statements reflect the performance of those newly acquired assets and subsidiaries. So considering this I wanted to take a quick minute and tell you about the changes and where the cash flow show up throughout the financials. The footnotes in the MD&A included in the 10-Q.
This quarter, we are including the results of our business broken out into 2 operating segments, which we are calling our terminals and infrastructure segment and our ships segment in.
In the past volumes were the biggest indicator of revenues, but where the businesses. Today. We are a much more diversified portfolio a cash flows in our terminals and infrastructure segment, we make money through gas sales at a regasification terminals power sales, which include capacity payments long term sales under Ppas and merchant revenues.
Direct to consumer small scale gas and power sales, including equipment rental charges and trading activities of our LNG cargo portfolio.
Also we have a ship segment that makes money from both the long term charter vessels out to third parties and trading the vessels in the spot market. This segment includes the 11, GM LP assets and the 2 LNG carriers that were acquired in the hydro transaction now.
Now the new ones in this segment as a as vessels go off hired a third parties and then are used as part of our downstream gas sales the cost of that ship would be included in operating expense in the terminals and infrastructure segment.
The second major change about the way our financials are reported as a result of the accounting treatment for entities that we do not effectively control 100% for NFC. This is the sergipe power plant, which we own with our Brazilian partner and the Hilli, which we co own a GOR.
On the income statement, our share of operating income from Sergipe, and Hilli will be seen in the income from equity method investments. However, if you look at the segment measures in the MD&A, we're showing a 50% share of this revenue and operating margin contribution to their respective segments.
Turning your attention to the financial performance for Q2, we sold an average of just under $1.5 million gallons per day for the quarter and earn a revenue of $224 million, starting first with a terminals and infrastructure segment. The operating margin was $55 million, which is up 12 million from prior quarter on the ship segment, we had quarterly.
Margin of $76 million, which is slightly above what we were expecting when we made the acquisition.
As you take a look at the balance sheet, we added about $2.3 billion a debt, which is comprised of $1..7 that was raised at the NFL corporate level and approximately $660 million that was assumed as a result of the transactions. The bulk of this is in the form a sale leasebacks, which we further outlined in the notes to the financials in a 10-Q.
On slide 25. This is an important page to convey the SG&A cost that we incur in running our business and how those are broken down between core operations and growth.
$40 million per year. However, a gross SG&A reflects are choosing to invest in opportunities that we believe will result in increased cash flows over time.
If you turn to the next slide this will be pretty familiar to you. If you listened to our investor call a couple of weeks ago, but the headline truly speaks for itself the capital for all of our projects under construction or under development are expected to be self funded through a combination of cash flows from operations ship financing that we are currently in the market with and selected.
Asset sales the.
The uses on the left side of the page totaled $1.6 billion and include the cost to complete construction on all of our terminals, including the 3 in Brazil, Ireland, Sri Lanka, and the remaining cost for a first fast LNG assets.
Turning to the sources quickly we recently put in place a $75 million a letter of credit facility that allows us to free up restricted cash and we will use a facility to a more effectively manage working capital for things like LNG cargo purchases.
Our first asset level financing the sale leaseback transaction of our <unk> power plant is progressing very well with approximately $100 million funded to date the balance expected to be committed and funded by the end of the month.
On the ship financing facility. We are currently in the market with $300 million committed and strong interest in the balance. This facility will be secured by 9 vessels has a 3 year term and is price at L. Plus 300, and finally, we have a strong portfolio of assets with long term stable cash flows that would be ideal for asset level financing or sale leasebacks, we put a.
$400 million here at a level the sources and uses but we believe that we have over $2 billion a possible proceeds against these assets.
Ill turn the call back over to Wes.
Alright. Thanks.
From.
The last section I put in here is 1.
Valuation, maybe even before I get to that just a kind of summarize the half point a year I think that this is a.
We are.
And the public markets, we're in a business of providing quarterly updates.
Pretty short periods of time, a 6 month update and a 1 year update is a good is a good scorecard to look at how we've done.
On a roll back to the beginning a year and I think a the decisions we've made.
Make the 2 large corporate acquisitions.
A few thoughts about it we've made as I said plenty of poor decisions over time in a handful a good ones and I think that these are both going to go down is very very good investments just when you think about the hydro transaction. So what we bought.
At the time was a $130 million in cash flow, we paid about $3 billion for now we are a late stage developments and set a kind of arena block arena and a swap a but we're still a missing a handful of the permits to complete on it and we had as Andrew said Danskin no commercial contracts at a time. So it was an aggressive acquisition.
But it was 1 that was based on the market opportunity that we saw in front of US which has only improved actually since we have not.
As our belief that we can actually also given our experience in the development business takes us from being close to be completed actually completed and so where are we now we finished the permits and we signed EPC on Santa Catarina in block Arena and swap a is right behind.
As Andrew said, we'll sign next week, a long term commercial contracts that approximately double the size of our commercial contracts and volumes as a company.
This is barely scratching the surface, Brazil is a huge market that has significant challenges in the energy front that presents a massive organic opportunities for us.
As Andrew said.
The current re underwriting the investment is materially higher than we underwrote in a base case upside could be double that or more. This is a very very good investment. It's a very large ones, we feel great about that.
Secondly, a decision to buy the shifts in large part was a defensive 1 we know that we need ships and we need to fsrus to conclude our terminals and I was concerned about the pricing on a market getting away from us in hindsight that also looks like a very good decision shifting.
Shipping prices and shipping costs are up 25% or more across the board timelines to get new assets are extended.
He bought the ships in the Fsrus that we needed at the time when we need them. We get income from those that they are being used by third parties right now eventually as a.
As Chris said, those will be integrated into our terminals, but as we bought very high quality assets and we did so in a way that both like prevented us from the downside of actually having to go out and the marketing contract a buying these assets and do so and kind a 1 fell swoop. So these 2 decisions together I think are both very good months.
In terms of valuation I have got a very very simple way of looking at it. We have spent as I said, a little over $7 billion to get to where we are today. So when you look at our expected margin for next year of a $1 billion.
1 divided by 7 is about 15%.
So what you are building essentially is irreplaceable energy.
Infrastructure assets in these markets you're a development yield next year is 15%. So it's a very very high yield relative to the value of those assets today.
And we're just beginning at.
At $135 billion in margin, that's about an 18% development yield a $2 billion. That's a 28% so you're building assets that you're buying in the market today at a huge discount in terms of what the capital value of those assets would be assuming nothing else happens assuming nothing else happens on the LNG side. So if nothing else happens on the energy transition side.
That said energy transition is 1 of the most powerful forces in the world right now the weather events. The climate change the focus on people on a carbon tax into force de carbonization across industries is a massive massive massive emphasis and we are in the forefront of that and unlike most of the other companies in the sector.
Actually make a lot of money and so we're just now at a point in time, where you can see material amount of economics rolled in the Bottomline.
So from a year ago, a $15 million to today at a $130 million to next quarter at 200 plus million next year and a $1 billion. So we're right now just starting to actually turn the assets that we have as I was joking a sum of the other day I feel like the 6 year overnight sensation, maybe it's a seventh year that really matters southern's here from the Bucks ended up being a pretty good 1 so maybe a bit.
A seventh year. That's ahead of us and this is going to be equally good. So from a valuation standpoint, I think it speaks for itself I mean in any metric as far as I'm concerned. These are vastly undervalued and now as we execute and continue to grow the business I think will presents some great opportunities for shareholders in the future so with that I'd like to turn it over to the operator and a happy to open.
I'll open up for questions.
At this time to ask a question a question number 1 on your telephone keypad.
A question comes from Euro net.
Credit Suisse.
Hey, good morning, a movie.
First 1 for you the slides pointed to a transition for a year.
Just sort of a team from a development company to an operating company.
It feels like this is probably the first.
<unk>, where we haven't really seen as a new Big initiative announced so I'm curious is this kind of a pivot now.
Bore execution on a project that's running in kind a what you see is what you get.
No I mean, we actually had made announcements this quarter that we had actually have an agreement in Sri Lanka, which is a island a 20 million people. It doesn't have any natural gas. So we think it's a huge opportunity and theres a handful of other new opportunities that are out there. So those are all things that are in the works what's a very clear, though is that with the current list of businesses that we have.
And a market opportunities in front of them. We can generate we think billions of dollars a repeatable income from the existing assets. So that obviously is a focus I mean the company is.
As a really got 3 very distinct phases. The first is the development stage, a going into a market identifying the opportunity getting permits and building something number 1 number 2 has been to commercialize that and that's a that's what we're writing a thick have been doing in.
In Brazil, right now, it's hard to commercialize until the actual assets exist or assets that exists now changes everything so I was down in Mexico from the opening of that.
The terminal where in a host investors down there in the month of September So if youre interested that would be a good field trip to go and see firsthand what is down there, but these are a massive infrastructure assets that are irreplaceable and theyre amazing I think they are works a beauty and it works a beauty not only because they look great because the economic potential of that they have is actually really substantial.
And a third part of it is then just the operations. It's a operations we're going to go from a development company to a commercial company to an operating company. When you think of a right now.
And so at the end of the day, it will be dozens of terminals and dozens of ships.
A 1 hundreds if not thousands of people kind of running around.
Quite a bit of operating experience across a year is in many many different businesses. This is a very very simple 1 to operate because the the nature of what we do is not that complicated. It just its like any good operating business. The question is like can you do it cost efficiently and can you do it safely and all these different markets around the world.
So it is a pivot point for the company to go from.
Purely focused on developing into operating it doesn't mean that we're not going to continue to develop new markets and then I think that but I think that with what we have right now I think there's so much value in the ground in these different markets that we think that simply a mining what we got right. Now is a very very productive thing to do but no you should expect I expect that we'll have at least 2 or 3.
New countries that we'll open up for us that a material between now and the end of the year based on what we see right now, but it's simply not the focal point of a call like this we've got so many other things to talk about.
Got it understood that's helpful.
Just on that just in terms of the countries.
A year now in Asia, J P sooner or at least 1 of those 2 or 3 is also a need Aegean just curious if you can.
Help us triangulate around that.
Asia Africa, those are a big markets more in South America more on Central America more opportunities in Mexico.
And we're in the growth.
And I read a read a note I looked at the other notes. This morning, I think you guys I honestly think that the market is missing the point a little bit when you. When you developed these terminals that's not the end point of the commercial transactions, it's the beginning point.
And each of these markets as I said youre going to see more transition a fuels and power plants in places like Puerto Rico, and Mexico, absolutely Youre going to see significant Bunkering I mean, it is not in any year in the bunkering opportunity in the marketplace is gigantic.
1 ship that fills up just to put it in context, 1 ship that fills up in Jamaica is going to take on 10 to 12000 cubic meters a fuel and 1 loading.
I mean, any kind of a bunkering activity in Jamaica has a possibility a doubling or tripling the volume that runs through the country and there are already quite a substantial.
So these are these are essential pieces of infrastructure with massive organic opportunities and where our development yields on them on next year's numbers, a 15% and.
Our other analysts I heard that people are concerned about the execution of this thing I think you missed the point with all the money in the World you can't go back and rewind the clock that the developments that that Andrew was talking about in Brazil, those developments from most part starting in 2015 and 16.
So they are right now at the point of turning on and a commercial opportunities are just beginning.
And so I think it's.
At the end of the day. It is what it is and the numbers will speak for themselves, but I think that the.
The value of the commercial value of these terminals is gigantic because as I said in the infrastructure business. It's quite simple if you build something for 1 reason and they don't use it you lose all your money. So you build a toll road that nobody drives on Thats, a bad infrastructure investment if you're.
The infrastructure investment that not only 1 person uses but 2 people use our 3 or God forbid for a 5 you make all the money in each 1 of these infrastructure assets now has the ability to bring natural gas as a replacement fuel which is both economically cheaper. It's cleaner, it's a much better alternative to diesel and heavy fuel oil into all of these countries and it's just now.
Matter of doing the work to do it in a place like Brazil, Yes, it's a big competitive market <unk> 95 per cent of the cities in Brazil are not on natural gas.
And we have we will have 4 terminals by this time next year that actually a ring it from from north to South.
I'm not I'm not frustrated by because I think at the end of the day it'll it'll take care of itself, but I just think that from my perspective on it is that building. These assets is incredibly valuable and you're just starting to see and barely scratched the surface frankly of what the organic growth is going to come from that.
Yes.
No pushback.
A lot there and a system.
Sorry second 1 from me I'll be quick about it just in terms of a capex timing.
A pretty clearly you've got a sources and uses lined up pretty nicely and so it's a total dollars.
I'm curious if you're a piggyback.
That's sort of timing when the store versus come in a windows that you just have to go out any sort of GAAP that could materialize. There and then how you plug it if that happens.
Thanks for your assets, Chris. So obviously the biggest driver that changes how you use cash flows from operations to fund capex as the pace of that Capex.
So when we take a risk.
Walk through a very quickly. An example, when we say debt and a new terminal or a power plant that begins the development cycle, which usually lasts somewhere between 9 to 18 months, depending on the project the geography.
Greenfield versus something with existing infrastructure et cetera. So initially the costs are largely engineering or permitting or other soft costs that may have some deposits on long lead procurement items. Then the project will pick up you'll have more labor more construction activities and then finally commissioning and commercial operations.
I Oversimplify Theres about 10% of the total Capex spent in the first quarter of the project about 10% spent in the second quarter of the project and then it ramps at about 50% being spent in the back half of the development timeline, but here's an important point.
It leaves around 30% of the Capex spent coast COPD, which provides both a little bit of a warranty against the providers of equipment and services, but it also allows us to match the capex outlay with some of the cash flows from operations.
Got it helpful. Chris Thanks, Chris Thank you Wes.
Thank you.
Your next question comes from Alonso Garcia.
Oh sure.
Thanks, Hey, guys good morning.
Maybe a honeymoon on Brazil, and what he alluded to this a little bit.
About your competitive position obviously, the opening of the gas market is allowed for new entrants and from your slides here that I think a participating in a couple a public tenders for a sloppy and Senate can arena.
How do you see the competitive landscape there I mean, obviously it doesn't seem like other developers can provide what you can in those markets with your with your projects and new development, but I Wonder if you can talk to your competitive advantage at all.
I'll, let Andrew talk about in a second but I think the big.
A big picture on Brazil is that you've got.
A massive country.
It has been served by a monopoly that Petrobras historically, but it is actually really change.
And the other big.
Aspect of the market is it's a market that is dominated by a hydroelectric power 65, 70% of it that is currently experiencing the 100 year drought and maybe not a 100 year drought because maybe this is a way then it's going to be going forward and so when you shift people in the electricity and a shift those gas supplies onshore to providing electricity you end up with mass.
A gas shortages and the price has been reflect that and it's a.
A a mass and a bit of a mess creates an unbelievable competitive dynamic unbelievable competitive dynamic and really I think long term planning in Brazil has always been focused on the offshore gas because theres. So much in a pre salt gas fields that are there those are a long ways from being realized and those are a substantial competitive.
Our.
Industrial challenges in bringing it onshore it's very very expensive to do so so I think long term, we believe that there will be gas that comes from from offshore, but it's not going to be anytime soon and so what <unk> got today is exactly as Andrew described it which is you've got these terminals that are in place.
There'll be completed their EPC. So unlike a lot of the other developments, we've done which have been self.
Developed essentially share we've got a third.
Third party price certain time certain contracts to be developed and we have a massive like industrial contracts as a result of it and.
And I think that we are literally just scratching the surface. Each 1 of these terminals represents a portal into that geography, and the often grid opportunities both at power plants and industrial customers up and down in Brazil is really a gigantic so.
Yes.
It's a great and layered question because we're doing so much across power gas off grid et cetera, but let me try to quickly hit a couple of things. So on the terminal side on the commercial side and then kind of on the overall demand side. So terminals. There is 2 things we really think about a combination..1 is we have a really big headstart, so permitting in Brazil as hard it takes a long time buying hydro gave us.
A great head start on a strategically located terminals. So what I'm, what I mean by that is Bunkering is a sole important point of gas from the northwest Mountain a Amazon basin.
Swap a is at the end of the.
Kind of close to a pipeline system in the northeast and a.
In a region that a needs energy needs gas and has traditionally economically kind of.
Were soft from the rest of Brazil.
And then in the south kind of at the end of the Bolivia pipeline system Libyan gas is growing up and so.
I think we I think about it as a head start and we also got a realized we're sort of not in the middle of things right. We're not these aren't terminals kind of in the middle of Sao Paulo, where all the offshore gas is coming online is there a terminals are really thoughtfully located to take advantage of all of the kind of trends, we're seeing which is high transport costs high molecule cost et cetera that leads me into a what I what I'm seeing every day on.
The commercial side, which is our contracts versus Petrobras contracts.
And so we have.
A lot more flexibility than a state owned.
A monopoly that is.
Basically charging people kind of various fees that don't need to be there a total lack of flexibility and.
And so we have an offer in the market that I think is is better from that perspective, and also from a price perspective.
It's a less volatile I think 1 of the trends, we're seeing a Henry hub pricing frankly is less fault on the commodity side and overall has more of a fixed portion and then Brent based pricing which has been.
Kind of a difficult thing in Brazil for consumers.
And then we also bring the small scale opportunities. So if you think about how we work with some of these distribution companies, which are going to be really a big pipeline volumes. We go in there and we work on both the off grid side with them, where we're going to provide gas to municipalities that don't have a today in their state and also worked through on large pipeline volume. So we're kind of a differentiated offering on that.
Hi.
And then the last quick thing I would say is.
We are hyper focused on competition.
I think we haven't mapped and we love to talk more about it but we also are just seeing kind of a when you look at the demand side in Brazil, I think 1 of the things rises it's supply constrained and so the other thing we've realized just in our travels and experiences is the amount of overall stranded gas I think is probably undercounted, meaning that.
Demand that would be there if there was supply and it's a hard thing to kind of.
Put numbers around.
Easily or to present in kind of an earnings deck.
But our experience is that.
There's a tremendous amount of more demand that we think will come from having gas in these strategic places.
Okay, Great. That's really helpful. Andrew I appreciate that and then this 1 might also be for you.
Follow up.
It's been several months that you guys highlighted $1.50 a $2.50 per btu.
Btu margins from Brazil, and it sounds now that you're I mean, you are advancing on the commercial side here with that industrial contract and some others underway.
Are you expecting to see higher margins, there is that sort of a fair characterization or I guess keep a path that the economics are developing there.
It's really both higher and lower I mean, the the estimate we gave is kind of a blend of it all and I think ultimately the margin for the country will be a question of how much of it is off grid instead of a higher margin versus the on the pipelines a higher volumes lower prices, but I think we feel very very good about pricing overall in the estimate that we gave before we think is a.
A good 1 but.
So I think on pricing, we feel like the guidance we've given in the past is what we expect the future I think on volumes I think it is possible we have greatly underestimated what the volumes can really be book given what the landscape of whats happening down there and just now that we're seeing as we get closer to it.
Completion of the other.
The developments and really start to get into a real serious commercial conversations.
Got it great and I appreciate it.
At this time.
Your next question comes from Sean Morgan Evercore.
Thanks.
It was.
I know you guys are obviously going to try to do the LNG a little bit more expeditiously than we've seen in the past and I think another.
50% owner in the Hilli, you are probably well acquainted with a history of that projected I think 1 of the biggest sticking points was debt debt.
Golar partner had had a lot a leverage over over the pace of production and so it's likely that the fourth trend is not going to be fully utilized before the contract expires.
You sort of look at potential E&P partners for these shelf field well developments, how are you sort of a wing.
Tony agreements versus just control of E&P, and then having like the ability to sort of set the pace of development of those assets.
Well I think the healing is a great learning experience for us certainly a good to see it firsthand and see how a lot of operators I think debt.
That is basically a net lease asset for the moment right now it's a piece of equipment is leased out as you said and they don't really control the production of the of the LNG at least at this point and that could change, obviously, but thats where it is today.
Our focus is quite different on the on the projects, we're looking at and really.
It could take a lot a different forms but in the simplest form it would be to go to somebody.
That has a currently producing oil field that has got a lot of associated gas that they are flaring, a reinjecting or not using right. So thats, 1 where we can be an offtake partner with them and we would liquefy and actually monetize that and so.
I think there is a.
There is a special place and having from people that can actually stopped flaring and actually also commercialize it and so those are those are the highest priorities, but there's a number a different situations net debt as I said, there's a fair bit a variety of 1 versus the other the 1 thing that is clear is that there is no shortage a stranded gas fields to be monetized.
And the approach that I'm, taking which I think is the right..1 that we're taking as a company is we want to be partners with the countries that have got those fields and not only off of them an economic solution for the gas, but also being a industrial partner to help them develop.
<unk> power plants onshore the.
The gas is cheap enough I do think in a hydrogen side.
<unk> feedstock gas is what's going to lead to hydrogen and ammonia production is quite possibly maybe a a producer of gas in a place a producer a power and a producer of ammonia all in the same place. So there's.
Theres a lot a different aspects to it but I think that the key thing is.
O&M control the hardware, which is the LNG unit and then find a good commercial partnership that can really benefit both parties and that's that's what we're looking for right now, but we have a lot a different I think very interesting situations and discussions going on in a <unk>.
1 of them will make a decision on 1 of them here in a fairly short term.
Okay.
And then it's good to see debt.
The former GM opioid sets are contributing.
I guess really at the revenue level and at the operating income level, but have you found identified new ways since you've kind of taken control of those assets to use them internally that you can talk about it at least.
<unk> plans.
Well I think.
We will be reporting this from third quarter results, but I already know what some of the results are because we're in the middle of a third quarter, but.
What's happened for the first time, you see really the benefits of having an integrated gas and ship and power business and allows you to move in.
And a different transaction. So for example, the high prices and gas in a world with shortages of gas have led to.
Some some very very high prices and transactions that are out there and the ability to access those is in part having gas as a part of having access to ships.
So I think we'll have some good things to talk about with that I think in a very near term, but a needed from the second quarter results not the third quarter results, but there are some clear examples of why having that integration is really.
Useful and necessary the biggest cost that we have in our business as gas. The second biggest costs, we have in our business shifts and so.
These are from a defensive standpoint, we want to mitigate our exposure to changes in prices and costs, but also there is a material upside to then being able to take advantage of a situation where somebody may need some gas in a situation. If you have both a gas and you have the transportation to get it. There you can take advantage of that so there is some very.
Tangible a very specific things that we'll talk about but it's really good and I think that is.
It's just part of the development cycle, a as a company as we move from building stuff now operating stuff, we want to have best in class capabilities. In every aspect of it and I think we do the development side I feel great about the gas side I feel great about the ship side, we feel great about and now just making those all work together in harmony is what really creates new opportunities.
Okay. Thanks Wes.
Your last question comes from Devin Ryan JMP J.
JMP Securities.
<unk>.
Hey, great. Good morning, Wes I. Appreciate you guys squeezing me in here I just wanted to talk a bit more about Brazil, I guess to start and really appreciate the update on power challenges.
Accelerating the opportunity for NFC.
Curious, how the contract or how long the contracts are that youre, signing how much more infrastructure.
Outside of what on a fee is doing its been kind of contemplated and brought online and just.
Whether some of the solution from looking at or to bridge the gap versus your real kind of a long term kind of operating opportunities.
Yes, thanks for the question.
It's a it's a mix I wouldn't I wouldn't say, there's anything that I feel like a bridging the gap necessarily so I'd like to kind a move away from that but then I'll say that our contracts are a mix kind of just based on where we are in the market. So if you look at broker arena.
Youll tend to see longer contract terms there.
Because obviously, we're coming into a market, where we're shifting from <unk> and diesel based fuels to a gas and actually I think a lot of those consumers want to have kind of longer term.
Price certainty on the pipeline I think youre going to see.
Kind of a 5 year type contracts, which are a little bit more in line with what people are used to doing on the pipeline, but actually for them represented a decent amount of term and I think 1 of the things we feel like from a value proposition standpoint, we can do is offer that term instead of what they have with Petrobras today, where they basically have 1 or 2 year terms and frankly, they have quarterly re ratings of the price.
Based on a Brent price level at the time and so on a pipeline for those guys 5 years actually is a long term.
And then on the off grid stuff I think youre seeing kind of somewhere in the middle a 5 to 10 year terms and so it depends on a customer for share.
It doesn't look that different I think from the rest of our business, but right now I think we've said, there's always going to look a little bit more like the rest of day in a few portfolio.
And I think we'll be able to soon to kind of show you some of those details.
Next quarter, but on the pipeline a little bit shorter, but I still think we're expressing our value in having some longer term than they have today, yeah. I mean, the first 2 big contracts that are a 1 is a 5 year and 1 is a 15 year and these are for a million plus accounts I mean can these are very significant gas as a.
A $1 billion out $7 billion and is kind of a development yield.
The broad side of the barn is the margins for the overall business. It's a.
Billion goes to $2 billion, because we actually get a bunch of organic growth and the capital stays relatively the same then you've kind of double that from 15 to 30.
And list the number of infrastructure development companies on Earth that have 15% to 30% development yield I think it would be a pretty short conversation.
And so it's an extraordinary business and I said, I think I'm a little bit frustrated because people are very focused on maybe just rightly. So on this quarter and this this dollar in that dollar I think that.
It is abundantly clear to me that we are headed to a $1 billion plus in margin and that alone.
As a development yield on infrastructure is an extraordinary business and it's 1 that has a massive additional needs. If you look at that energy.
A equivalency in terms of like what People's access to energy is around the world. So energy poverty is a huge thing as a massive needs and it has massive.
A competitive natural advantages it takes many years and many billions of dollars to get to a place where we are right now and so I feel like that.
The offering of the company right now is an extraordinary 1 and so its system and and you don't have to wait years from now and wait and see how things work out you can see tangibly. What the results are right now and we expect there'll be a for the rest of this year and then going into next year. So yes, I think I think development yields in the in the mid teens debt.
Double that if you actually hit your kind of organic growth. That's that's a simple way of thinking about it as kind of how I think about it and I think thats extraordinary.
Yes.
A great well said thanks. Thank you I appreciate it.
Great great well, thanks, everyone for dialing in middle of a summer hope everyone has a great a remainder of August.
Back on a summer's come up quickly and as I mentioned, we're definitely in a host a trip.
Pending COVID-19 and everything else and September would love to if Youre interested in your hosted on that talk to Josh and Investor Relations folks and we look forward to seeing you. All soon thanks very much.
This concludes today's conference call you may now disconnect.
Okay.
Yes.
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