New Fortress Energy Inc. Q1 2023 Earnings Call
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Speaker 1: We.
Speaker 2: At this time we're currently admitting additional participants and we hope to be getting underway in the next couple of minutes. We thank you for your participation and ask that you continue to stand by.
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Speaker 1: yeah.
Speaker 2: Good day ladies and gentlemen and thank you all for joining us for this NFE first quarter 2023 earnings conference call. As a reminder all lines are in a listen only mode but later you will have the opportunity to ask questions. To get us started with opening remarks and introductions I am pleased to turn the floor to Mr. Patrick Hughes with Investor Relations.
Speaker 3: future for our business.
Speaker 3: As Jim said, the call is being recorded and will be available by replay on the investor section of our website under the subheading events and presentation. And in fact, at that same location on our website, you'll find a press release regarding our first quarter 2023 results and the corresponding presentation that we'll walk through on today's call.
Speaker 3: As we proceed through the discussion with Wes and the team, we'll be referring to that presentation and in that same presentation you'll also find a series of important disclosures related to forward-looking statements and non- GAAP financial measures. We encourage participants to review these important disclosures in addition to the description of risk factors contained within our SEC filings.
Speaker 3: Great, thanks Patrick and welcome everyone.
Speaker 3: Have a lot of the good updates to go through today, so let's start with the deck as usual So you'd start on page number three? Just looking at the financials. They're starting from left to right Very good quarter and very good start to the year.
Speaker 3: Segment revenue for the quarter, $601 million. Adjusted EBITDA, $440 million. Free cash flow, $185 million. Push to the right a little bit on the page, you can see that our guidance for the year, we are confirming at segment revenues of $3.5 billion.
Speaker 3: I adjusted EBITDA $2 billion net income 1.2 billion as gap income and estimated free cash below $1.4 billion. So significant increases from last year, which themselves were significant increases from the year before. On the right hand side in the box, I basically...
Speaker 3: Provide a couple of the metrics that we look at. So segment revenues, the $3.5 billion in 2023 versus $2.6 billion in 2022, that translated into revenues of approximately $16.50 per share. Adjusted EBITDA goal and objectives of $2.0 billion would be roughly $10.
Speaker 3: revenues into free cash flow at 37% clip is an extraordinary ratio and one that reflects the health and wellness of the business. So with that, let's look at page number four. What I've tried to do here is just simply lay out the way that I look at the earnings and the way that we actually try and calculate ourselves.
Speaker 3: our progress and our scorecard. We are making every attempt possible to make the financial statements conform to this simple way of laying things out. GAAP financial s are the way of ultimately leveling the playing fields. The gap numbers are of course are there, but we are putting a lot of effort this quarter, and I think you'll see next quarter as well.
Speaker 3: going to attempt to make this be as clean as simple actually as the business really is. And just to start from the top to the bottom, the math of the business is the terminals business, the gas and power that we sell, our terminal operating margin.
Speaker 3: Plus cargo sales because we do sell cargos that are free volumes for us to sell. We make money on our ships. We have a ship's portfolio that's financed and there's some complexity in accounting on that, but the simple numbers are reflected in the financials. Minus the core SG&E that gives you just an EBITDA.
Speaker 3: Then of course, subtracting interest and taxes and depreciation brings you down to gap net income, adding back depreciation and amortization gets you free cash flow. So I'm oversimplifying for the purposes of example, there's lots of nuances that of course are very important in gap rules and how we actually count, but this is the way that you should be able to follow the business. I'm on the right hand side, some rules.
Speaker 3: That's the way we view the business and that we will try to put through the financial. With that, let's put to page number six. The earnings growth is supported by the needs of expansion and terminals business. The organic growth has been material. It's what we expected. We basically, the business...
Speaker 3: Construct is to go and establish terminals and operations in countries that we think have got significant needs for energy and power and clean energy, which is our business. And then once you have established a beachhead, basically overtime to grow those operations and continue to expand both operations, volumes, and eventually cash flows.
Speaker 3: You're seeing now in this first quarter that's throughout the course this year and forward, the impact of what these are. We'll go through an example here in Puerto Rico in just a second that Brandon will walk through, but the numbers are significant.
Speaker 3: In the last couple of years, dislocations in the energy prices caused in large part with the Russian invasion has paralyzed customers and many respects. TTF went from modest prices to very, very high prices. And prices really that were not relatable and usable by people and making new energy commitments.
Speaker 3: And so if you look at our volumes over the period of time, they remain relatively stagnant. The energy prices have reset to what we think of as a new normal, which is very healthy for everyone. Higher than they were before, lower than they are for alternatives, and as a result you've seen significant increases in customer activity inquiry and significant increases in customer activity.
Speaker 3: fashion way, which is by and low in selling high, but the durability and the duration and the quality of earnings that come from the terminals business is what we paid the most attention to. So if you look at the following page, I'll just walk through these numbers and I'll turn over to Brandon just a second. But this basically looks back at the historical numbers of 2021-22.
Speaker 3: and the guidance for 2023 and our estimates for 2024. If you just follow along the top line, you can see what our annual estimates are for the terminals P&L. It's actually moved obviously very, very substantially. $236 million in terminals in 2021, $221 million in 2022. So they said higher energy prices really did paralyze people at that point in time. That has changed dramatically. So our current guidance for the year is $1.3 billion. So.
Speaker 3: over a billion dollar increase from last year. Cargo sales relatively flat over that period. Ships also relatively flat down a little bit, but a modest decrease. Core SGNA roughly the same. Adjusted EBITDA been going from $605 million in 2021. A billion knows 71 is number in 2022. Our guidance is $2 billion for 2023. So obviously a massive increase from...
Speaker 3: last year, which itself was a big increase from the year before. Net income, if you skip down $97 million, $2,021, $194 million in 2022, $1.2 billion in 2023. Not only is there a significant amount more of economic activity, but there's lots of noise from past transactions, the non-control transactions.
Speaker 3: the heliies and the Brazil stuff, et cetera. There's a bunch of different things that have basically been washed out of it. This quarter there still is a bit of noise, but from this point forward, we expect you to see very normalized numbers. And then free cash flow, which of course, is the ultimate measure of the health of the business. So $195 million in 2021.
Speaker 3: $337 million 2022, $1.4 billion as are asked for for 2023. 2024, these are not official guidance numbers, but I wanted to reflect what we see in the business today. The simple, you know, in fact, is that where we see the business going structurally in the terminals business.
Speaker 3: We expect that to continue over the course of this year and next year, especially with the incremental ethone and G volumes that Chris will talk about coming online here later this year and next year. We think we have significant amounts of opportunity for us to grow our business on a core basis. So again, not only the total quantity of earnings and cash flows to increase, but also the total amount of cash flows to increase.
Speaker 3: for the quality and the durability of this cash list to go up as well. Nowhere had we had a bigger impact on our business in over the last 12 months. In Puerto Rico, there's been some significant developments there, all the constructive. With that, let me just walk through the example and give a turn over to Brandon. Brandon? Great. Thank you, Wes. I really appreciate that. I'll refer to Page 8. As Wes mentioned, the Puerto terminal for us is a terrific example.
Speaker 4: in the power industrial, commercial, and transportation sector. From an infrastructure perspective, it has regas capability, truck loading bays, which allows us to move LNG around the island to various customers that are on an upgrade. And of course, a very robust and...
Speaker 4: expandable LNG supply chain that allows us to drive significant volumes to the terminal. All of that really uniquely positions the terminal with embedded expansion capacity which puts us in a position to respond to customer needs when and as they arrive. So I'll flip to page 9.
Speaker 4: What this has allowed us to do is earlier this year, the government of Puerto Rico put out a call for additional supplemental power and just to kind of give you a sense of the situation on the island. The energy system there is about 750 megawatts short of power.
Speaker 4: which really translates into a situation that creates a very high instability in the grid, which puts them about 55% more likely to have an outage than let's say you or I would in mainland US. And from an economic perspective, every outage costs.
Speaker 4: Puerto Rico $14 million of economic activity. And so over the course of the year, it's expected to result in about $700 million of lost economic activity. So obviously extremely significant. This situation is further exacerbated by the fact that they are extremely vulnerable to natural disasters, such as hurricanes and earthquakes, which there are many examples of the last 24 months.
Speaker 4: So what the government did is they came out and said we need additional capacity to help us stabilize that situation, particularly before Hurricane season, which starts in about 45 days. That power would both stabilize the grid. It would provide coverage for maintenance work that needs to be done on their existing fleet, which has an average age of about 30-35 years.
Speaker 4: And then most importantly, it ensures an adequate reserve margin so as things come off unexpectedly, that they can maintain stable and reliable power for essentially an economy that's 50% driven by industrial output. And flipping to page 10, so to give you a sense of what we've done.
Speaker 4: The call for power came out earlier this year. On March 3rd, we signed our first contract for 150 megawatts at an existing power station they have at Palos Seco. We brought in supplemental generation to augment the existing capacities that they have. From the time we signed the contract, I'm pleased to report that
Speaker 4: for 200 megawatts, so that's 350 in total. And we expect to turn that supplemental power on around June 10th, and both sides will be fully operational by June 15th. In addition, we believe that this particular strategy has the ability to go from 350 megawatts to 600 megawatts.
Speaker 4: to further complement the strategy that the government has in terms of increasing available capacity. And we also believe that this particular strategy can be replicated in other jurisdictions around the world that are suffering from the same issue as they struggle to manage through the energy transition. So with that, I think I'll turn it over to Chris.
Speaker 4: Great, thanks Brandon. Good morning everybody. Let me direct you please this slide number 12 and I'll give you an update on our fast LNG projects. You know from the beginning we've always known that fully integrating the business is the best way to produce the maximum value not only for our shareholders but also for the customers.
Speaker 4: Fast LNG enhances our business in three critical ways. It provides us access to LNG supply in a competitive market that's tight physically and from a credit perspective. Second, it will increase control over our portfolio of LNG supply, which provides valuable flexibility for our logistics chain. And three, Fast LNG enables us to extract incremental economics when we sell into our downstream assets.
Speaker 4: as twice as long.
Speaker 4: Turning to slide number 13, our first fast-on-ge project is nearing completion. At this point, we're executing the final phases of our construction program while we prepare for offshore operations. The modules have been completed, lifted, and set on the rigs, and are currently undergoing integration and testing. The pipeline and mooring anchor installation is complete and awaiting rigs to arrive on site.
Speaker 4: Our team is expecting to have the rigs sail from Ingleside over the next 30 to 60 days and gas to be introduced into the system in the month of July . Finally, our expectation is that we will announce COD in August . Our full commissioning team is on location in Ingleside now and working to complete as much commissioning in the yard as possible in order to shorten the time between first gas and COD. For more information, visit www.agilent.com
Speaker 4: And finally regarding operations, the full installation team is currently working from the rigs and undergoing simulator training, control room, competency drill and familiarizing themselves with the asset.
Speaker 4: Turn to slide 14 and let's just quickly talk about modules. We've ordered all the critical long lead procurement items and the construction is underway obviously on modules for FLNG 2 and 3. Both units were expected to be completed by Q2 2024. Now one new thing we're excited to announce is that we've signed a letter of intent with the CFE to install them on land. Higher versions of our FLNG contemplating putting these.
Speaker 4: modules on fixed jacket platforms offshore, but this new partnership would allow us to deploy the modules quicker and operate them much more efficiently. Turn to slide 15 and I can provide a bit more color. We're very excited about the Onshore Ultimira Project for reasons similar to the one offshore. Our modular liquefaction design allows us and the CFE to operationalize an underutilized asset.
Speaker 4: The massive, onshore import terminal has been sitting effectively idle for the past five years, but the infrastructure remains highly valuable if it's paired with the right technical solution. So much the same way as was done was to be in past ten years ago, NFV and CFE will convert the Altsamira LNG import terminal into a 2.8 million ton LNG export terminal.
Speaker 4: extremely impressive and well-maintained facility. The new export terminal we utilize to a Vanity's modular 1.4 MTPA trains and all of the terminal's existing infrastructure. Our significant and procurement and construction progress coupled with the strategic alliance with the CFE provides an at the at tremendous timing advantage versus starting the development from scratch today.
Speaker 4: Both trains will be constructed, installed, and operational during 2024, years ahead of any other new build-niclifier.
Speaker 4: With that, I'll turn it over to Andrew. Thanks, Chris. Good morning, everyone. I have three points I want to make this morning. The first will be a quick macro update for the global gas markets. Second, we'll try to zoom in and apply that to our business and what we're seeing in our core geographies. And third, we'll go through the sort of current year and 2024 view on our LNG portfolio supply and our contract details down.
Speaker 4: after last winter have led to much lower prices and also much lower volatility. West hit on it. We think it's actually a new normal and a very positive situation for us to be in. Reprices have settled in at a level that people are willing to transact that and do engaging conversations over long-term contracts. We certainly see upside risk remaining as Russian gas remains offline in terms of supply to Europe .
Speaker 4: As we enter next winter, the Ford curve today is at about $12 and we already have a curve that kind of by December is $18 or $19. So the market is certainly pricing some of that risk in, but we remain in an undersupplied some of the jittery scenarios on these prices.
Speaker 4: Henry Hub has also experienced dramatic, even more dramatic price declines. This time last year we were at $8. Today we're in the low $2 per MMBtu. That forecast remains flat over the next couple years as you have big US gas production largely from the associated gas that's in the Permian and other places in the US. But you don't really have meaningful export capacity to return online until 2026 and beyond.
Speaker 4: So what that means is the Henry Hub to TTF spread in the bottom of this page remains really supportive for our business, which is basically taking US gas and exporting it to our growth markets. So you can see today we have about a $10 per MMBtu spread. That widens to about a $15 per MMBtu spread between Henry Hub and TTF by the end of the
Speaker 4: our business. So what we've tried to put here is to show at the bottom of the page an illustrious portfolio cost for NFE, then in the middle of the page where the global energy indices for gas and diesel, which is typically what we compete against in our core geographies, and then at the very top we've tried to put specific prices for the Q1 averages.
Speaker 4: graph to the middle of the graph, which is basically that we control our LNG supply, and then connect the middle of the graph to the top of the graph by having the terminals, the downstream infrastructure, and the midstream infrastructure to actually deliver to end customers. So we go all the way from our kind of $5 to $7 from the BTSU supply context, and below 20 is probably an BTU. So let's try to give you a sense really for the overall margin opportunity.
Speaker 4: And then really how the power of integration to these downstream markets allows us to serve customers rather than just selling into the short-term global energy industries that are in the middle of the page. I'm starting to page 19. The story here is growth. So this is a bit of an eye chart of the numbers on the left side. So apologies for that. But I do think it's important to kind of go through it.
Speaker 4: In 2023, our overall LNG supply is going to be 152 TvTUs. That's up 75% from 88 TvTUs in 2022. You can see the contribution from our existing supply contracts and then from FLNG1 turning online this year. We have contracted sales, so contracted today.
Speaker 4: of 122 TBTUs in 2023. That's about 80% of the volumes. And we have about 30 TBTUs at open volumes, which is a great foundation to do more customer visits in 2023 and beyond.
Speaker 4: In 2024, we're going to have continued growth, so 150 TBTUs will go to 217 TBTUs. That's 150% up from 2022. That includes 82 TBTUs from FLNG 1 and then 2 and 3 on the schedule Chris showed earlier turning online in 2024. We have 180 TBTUs of contracted sales in 2024.
Speaker 4: That comes from turning on the Barca Arena terminal, the Santa Caterina terminal, and the Nicaragua terminal in 2024, developments that are nearing the end of construction or done with construction and are basically completing what's right in front of us in terms of 2024. Then we're looking at seven TB2s of open volumes and 30 TB2s of contracts we have in discussion today.
Speaker 4: run rate those assets. The thing I point out as well is our organic growth in 23. So, I tried to show this but we basically have increased by 34 TBTUs which is about 40% year-over-year in terms of organic growth in our terminals.
Speaker 3: With that, I'll turn it back to Wes. Great. So two other kind of green spots, and I'll give Chris walked through the financials. One is we need to look back at the construction of our earnings and the conversion of revenues to EBIDA and revenues to free cash flow.
Speaker 3: The numbers jump off the page at me. And we've thought about this a lot and tried to understand what it is that allows us as an industrial business that has got a capital intensive enterprise to generate free cash flow conversions of 30, 35, 40%. When you look typically across industrial businesses, they are much, much lower.
Speaker 3: And the answer, obviously from our standpoint, is that of the integration. When we look at our business, there really are four distinct groups of activities that we have inside there, each of which has public market and private market comparable of companies that perform those activities in a fine way. But of course, for each of the companies that are solely focused on one element of business, they themselves have a profit motive.
Speaker 3: So there is liquefaction, there is shipping, there are terminals and terminal managers, and of course power providers. The free cash flow conversion in those sectors across the board tends to range broadly speaking from 10 to 20%. So 20% free cash flow results for any of these industrial complexes.
Speaker 3: free cash flow conversion to 30, 35, 40 percent. And I think you'll see this point out over time. We've done some work on this internally that we'll probably share at our next quarterly call to kind of go through this, but that's that really is the backdrop for this.
Speaker 3: We have one other incremental business update that I want to provide is on our hydrogen business. The board authorized the filing with the SEC for our company, Zero Parks, last night. We expect to file that last night or this morning, I think. And the filing basically is a separate registration statement for that as an enterprise.
Speaker 3: that will allow us basically to dividend out to shareholders, that company sometime this summer. The process of registration is a fairly straightforward one. You basically file documents with the FCC that describes the business, describes the accounting for it, gives you the full picture of the company.
Speaker 3: They then comment on it as a period of going back and forth, that depending on how busy they are and how complex the businesses that can range from 60 to 90 to 120 days. But any event is our expectations by sometime this summer will have an effective registration statement and thus will be in a position to give an end to out this company to shareholders. In simple terms, I would expect a shareholder of NFD to end up with this share of this stock.
Speaker 3: This is, I think, a material development for that business. I am more optimistic than ever of the impact of green hydrogen, green ammonia, steel, you know, cement impacts on it. The approach that we have taken is to geolocate plants next to users of it. So
Speaker 3: I said before when you start with an electrolyzer or a green hydrogen you start with a chemistry problem of breaking the molecule up and taking the hydrogen out. That quickly turns into a transportation problem because it's then challenging to transport. So from our standpoint the most logical way to do this, an approach to do it, is to basically geolocate next to big users of ammonia.
Speaker 3: steel, cement, etc. And in fact the first facility that we're building is in Beaumont, Texas, which is in the heart of those activities. There's ammonia plants all over the place. There are big petrochemical users. There are refineries. There's lots of users for it. So bottom line is that when we finish the registration process, we'll have a lot to say about this. The statements are filed confidentially.
Speaker 3: So there's not information available on the, you know, publicly on the, on the company at this point. When there is information publicly, we'll obviously, we'll spend a lot of time and effort to upgrade it on this. But I feel like the impact of Green hydrogen on the world is likely to be significant. I think it is, it is one of the principal ways to decarbonize some of these industrial activities. And we intend to be a big part of that. And I just want to share that with you. And we look forward to.
Speaker 3: talking with you and have more to to say about it. Matt, Chris? Yep.
Speaker 4: Let's turn to slide 21 for the financial results for the first quarter. For the three months ended March 31st, we had 601 million in revenue, 440 million in adjusted EBITDA. The adjusted EBITDA numbers the highest we've ever had in any quarter. The terminal segment operating margin was 405 million and 76 million from the ship segment. Obviously that's detailed in our appendix and the press release.
Speaker 4: During the first quarter, we did close the Hilly transaction. As a reminder, we sold our 50% interest back to GOLA in exchange for $100 million in cash, $4.1 million in shares, which have since been retired, and the discharge of $325 million in off-balance sheet debt.
Speaker 4: Turn to slide 22. This is a really informative slide. Be responsive to questions we've had in the past, demonstrating the company does not require external financing to execute on our near-term growth plans. We want to point out that historically the company has funded our growth by choosing to sell non-core assets.
Speaker 4: executing bespoke asset-based financing and through internally generated cash flows. These same drivers will continue to fund all of our development objectives including FLNG. On this slide, we provided information on inflows and expenditures to demonstrate we have ample liquidity over the next two years. The 2023 numbers include actuals from Q1 and our expectation for the remainder of the year.
Speaker 4: To provide a little bit more detail on the Catholics, we've broken this out by terminals, which includes growth and maintenance Catholics, plus any ship-related Catholics as well. For FLNG, this is showing the aggregate spend remaining for FLNG 1-3 and includes the cost spent to date for units 4-5. Finally, as you can see in this page, we're not forecasting any additional dividends beyond or currently poorly payment of 10 cents a share.
Speaker 4: Our view is that continuing to reinvest our cash flows into development projects is accretive and the best way to continue to grow earnings. Move please to slide 23 and as you all know throughout 2022 we executed on the Surchipe sale and Energhost transactions and in 2023 we sold back to Golar 50% interest in the hilly. As Wes alluded to, these transactions reduced our overall debt and simplified the capital structure greatly. On the left side of the page we show the current balance sheet is comprised of really just three things.
Speaker 4: our upgrade path. As we've mentioned on prior calls, our goal is to be one day to be investment grade, but the first step is to increase your notching within the double B category. In working toward that goal, the agencies outline things that would lead to an upgrade, including earnings predictability in the duration of cash flows, maintaining a modest leverage ratio, contract with diverse, high-quality credit counterparties, and have a fully funded capital planning.
Speaker 4: And frankly, to put it bluntly, we've done exactly that. Number one, we have earnings visibility over 2 billion adjusted EBITDA this year, growing to approximately 2.3 in 2024. Two, our leverage ratios are under three terms on an LTM basis and under two for fiscal year 2023. Three, we estimate over 80% of our 2023 sales to be to investment grade counterparties.
Speaker 4: And for, as I mentioned, we can self-fund all of our development activities. If you turn to slide 24, we've included some quick credit metrics that have evolved over time and supports our case for an upgrade. As you can see, we've gone from negative EBITDA at the time of our first rating to over $2 billion this year, which has in turn has dramatically lowered leverage. The combination of increased EBITDA as well as the debt retirements associated with the asset sales puts us below $2 billion. And for the next year, we've included some quick credit metrics that have evolved over time and supports our case for an upgrade.
Speaker 4: We delivered approximately 25 TBTU and maintained near perfect reliability. Last and certainly not least, with our collective focus around the club, we had no safety incidents during Q1 and maintain our 0.0 total recordable incident rate. With that, I'll turn the call back over to Patrick.
Speaker 3: Thanks, Chris. Jim, I think we're ready for some Q&A if you could...
Speaker 5: Thanks, Chris. Jim, I think we're ready for some Q&A if you could tee up the queue, please.
Speaker 2: Thank you gentlemen and to our audience joining today if you would like to ask a question please signal by pressing star and one on your telephone keypad. If you are using a speakerphone please make sure your mute function is turned off to allow your signal to reach our equipment. Again press star one to ask a question and we'll pause for just a moment to allow everyone an opportunity to signal.
Speaker 6: my nested question. So any update on how all of this impacts the Louisiana and the Merritt process, also the the Latchit process, and then as it relates to Altamira, curious how the operating economics might be any different.
Speaker 6: both with respect to op-ax onshore, but then also any update on how we should think about the profit sharing for CFE. Hey Ben. Tid them in sequence. So we still have our application in with Merad for the Louisiana project. Thank you.
Speaker 4: We're continuing to try to work with them on Q&A and try to get a permit as an option for outfell and cheese in the future.
Speaker 4: Regarding LaCosh, there's active engineering work and negotiations with Pemex for the release of equipment that would be needed to be installed, and we'll deal with that over time, but right now we're just working on the engineering and permitting side.
Speaker 4: For operating economics onshore, we do believe that there are significant efficiencies.
Speaker 4: operating economics onshore, we do believe that there are significant efficiencies.
Speaker 4: Not to go through too many details, but offshore you have standby tugs, you have more frequent ship to ship transfers, you have to ferry people offshore, which takes crew votes, you have to move supplies, consumables, water, etc. All of that is not needed onshore.
Speaker 4: Adding to this, and this has not been negotiated, you could receive significantly cheaper power. I mean, we have a partner in the CFE who has power access and over a gigawatt worth of power generation in the area, and so we see there may be some efficiencies there. And as far as the profit share, we have not disclosed that and we're in active duty.
Speaker 3: discussions with the CFE and we'll expect more information to be released to you and shareholders over the course of the coming quarters. Yeah and just to amplify a little bit. I mean the the site that Chris described the import term that they've got is the thing of beauty, Ben. And say we tour the site now a number of times there's not a weed or a piece of rock out of place. It's really a beautifully constructed import terminal.
Speaker 3: And it's ironic, of course, that this will follow the path of really the LNG exporting in the U.S., where first take an import terminal where many of the infrastructure elements that are there are usable. So as Chris said, the 150,000 cubic meter tanks, the warfage in the marine infrastructure, the pipeline activity, the access to power.
Speaker 3: Of course, all those things are directly usable. And there just happens to be a completely flat and perfect piece of land next to the worst that would actually be ideal to receive the trains that were put in place. So it is an ideal situation. It's one where it's underutilized in its current form by the CFE. They've been a great partner of ours. And we cut...
Speaker 3: really good dialogue about this and the modular construction that we have engaged in basically allows us the flexibility to put the modules. The liquefaction models, the gas treatment modules can go anywhere. They can go on to jack up rings, they can go into a ship, they can also go to land. I think that with the location of this where it is,
Speaker 3: unquestionably the most reliable LNG terminal in the entire Gulf Coast, right? Because you're really out of the direct pass to the hurricane zone. So, Texas, Louisiana, of course, are frequently hit by hurricanes. In some cases, they're significant. There's downtime as a result of that. Here, you are due south of that, and so as a result, your reliability, I think, both compared to our our
Speaker 2: Our next question comes from Devon McDermott at Morgan Stanley . Please go ahead. Hey, good morning. Thanks for all the helpful detail today.
Speaker 4: So my first one is just following up on the Altamira onshore LED opportunity. And specifically, as long as you just talk through what some of the milestones are from here, and turning this into a formal deal from an L.O.I. And then also, there's only differences in the permitting path onshore, versatile, sure. I'm trying to put this in the context with the 2024 targeted service dates and what needs to happen to get there.
Speaker 4: Yes, so to deconstruct a little bit, modules are undergoing construction right now. All the long lead procurement has been executed on, will arrive to the Ingleside yard and be kitted and put into a final module, and we expect that all to be completed two years
Speaker 4: and three to both be completed in the second quarter of 2024. The onshore component is civil work, and it's really balance of plant tying in those modules to the existing marine infrastructure and into the existing gas infrastructure. So, our teams are currently doing engineering and design right now in conjunction with the operators at the terminal and with the CFE.
Speaker 4: to make that efficient and to finalize all the contracts for that work. From a permitting perspective, we have experienced great partnership with the CFE to move through all of their related permit hoops. The President, the Secretary of Energy, the CFE, all are very supportive of this. Again, this is an underutilized asset by the CFE, so we're saving this.
Speaker 4: installed on shore. Hopefully that answers your question, Devin, happy to circle back on a separate call later today to go through anything more detailed.
Speaker 4: Where the units fall within this, and also the assumptions that you're using on the 2024 cargo sales in next year's guide.
Speaker 3: The FLNG is really a source of product into the portfolio. So it's Android laid out where you see an aggregate cost of our LNG. It comes both from the third party contracts we have from providers like Shell, Engineer, Engineer and...
Speaker 3: and venture global, and the F1G will just simply feather into that for an aggregate cost. And so what we do from an economic standpoint is basically take an aggregated cost, allocate that to terminals, and then use the revenues generated by the terminals to calculate kind of the net spread. I think that's the simplest and fairest way of doing it, so we don't do the...
Speaker 3: F-O-N-G itself to be a profit center, but rather just a source of goods sold, basically, to go into that.
Speaker 6: On the forwards, we're just using the current Henry Hub and TTF strip prices, basically marked for the quarter. Then we obviously have the transport costs. It's built into our SHIPs portfolio as well. We're using market prices for the forward. Great. Very helpful. I mean, there should be a lot of stability in that guide as well. That's great. Thanks for the detail. I'll do that. Sam Margolin with Wolf Research.
in a pure play within the supply chain. But...
in a pure play within the supply chain. But I think what we've seen in the market is just sort of commercial.
questions because demand is just very sensitive to these prices and it seems like the solution of regulators and policymakers is to press more renewables capacity when power markets get short because it's still viewed as the lowest part of the cost curve. I guess as you prosecute this plan across the whole value chain, commercially, what are you seeing in specifically in industrial markets, not just power where...
where gas at this price is really in a position to grow and not just sort of see kind of curtailments and headwinds. Well, look, I think a couple things. One is, uh,
Yes, there are definitely efforts by people all over the world to introduce renewables in their systems, but I'll use the same example because it's a real one. Jamaicans use 10% as much electricity as Americans do. Kenyans use 10% as much electricity as Jamaicans do. So the average person in East Africa uses in a year what you use in three days. So it's not simply a matter of a decarbonization trade, which of course the Western Europe
When prices were very high, nobody can really afford $60 gas or $50 gas or $40 gas. Today, and I thought the chart that Andrew laid out is actually quite an effective one, the gas at this price is still a material discount to the diesel at this price. So to the extent that you need to turn on electricity in any place else.
it's a bargain to use natural gas versus using diesel. And I think, you know, the thought or the notion that somehow renewable power is going to displace all this instantaneously is just simply fiction. It's just like that it's obviously we're all for, you know, carbon-free energy everywhere, but there's also the matter of access to energy, energy stability, energy security, and I think that there's the amount to use.
significantly greater than industrial complexes that are more than pure play, number one. And number two, with respect to our business, we feel like that's what we have to do because it's a logistics chain we have to provide for everybody. And there are significant impediments to bringing gas and power to people, namely there's the infrastructure that's needed to be constructed and the capital that is needed for that.
And in any logistics exercise, if there are 10 things that have to be done, and not have them are done perfectly, and one is done inadequately, the whole chain breaks down.
And I think when you look at the development of energy systems around the world, again in the non-industrialized countries in particular, a lack of access to capital to build infrastructure is probably the top of the pyramid, but actually then beyond it is credit issues, it's supply issues, it's a whole host of other issues, and that's what creates the value in these things. And the last thing I'll say, and I'm going to give you a long answer to a very short question I though that we were clear, the question is where are we at today?
We see significant incremental demand in Bacarain and we see significant incremental demand in Seta-Canaria, significant incremental demand in Mexico, et cetera, et cetera. And we know that these are grounded terminals that provide us with an entry into the country, but it's very, very simple. If you can build infrastructure for one purpose and it makes economic sense.
and use it for two or three or four, the market actually, the margins increase and the flows of the bottom line, and you provide a better product to your customers because now you can actually take your costs, spread them out over time and be more effective than the next guy in. So.
But I think that the decarbonization thing is a great point, and of course we're all for that, but it is not close to reality in many of the places in the world where we do business. It's just the access to energy is the trump card for it. Thanks so much. I just have a quick follow up at the maintenance question. It's about Louisiana, and if there's any gas purchasing or procurement.
that would change the timeline of the project either.
timeline of the project either. Thank you so much.
Thanks, Sam. Our next question comes from Chris Robertson at Deutscheab. Please go ahead. Hey, good morning, everyone. Thanks for taking my questions. Chris, can you just give a quick update on any permitting remaining for the first FLNG project and the non-construction timeline around that project from here?
No, we have excellent support from the team at CFE and the regulators. We have all construction permits in hand. We're waiting on operating permits that are all expected to be received this month. We've received our FTA export license from DOE and the Mexican export license is expected by the end of next week.
Okay, got it. And just going back to the second and third module here regarding the Altamira project, can you just talk about when those discussions kind of first came about how that really transitioned from being more offshore focused to onshore focused and kind of the process behind that?
Sure, I mean, we said it a little bit on the slide. I mean, the module is key, right? So the module is the secret sauce, and it can be deployed in any ship rig.
land-based opportunity. The simple answer is it's cheaper and it's faster. Offshore infrastructure takes longer, depending on if it's a fixed jacket. This is able to use and capitalize on the marine existing infrastructure, the existing tanks, for cheaper.
for cheaper deployment. And we've spoken to the CFP about this. They have said that they really support the project and want to have this thing operational as quick as possible. We've been talking to them over the last three months. And this is something that they want to see happen and see us use the asset that they're not able to make the most out of.
Okay, yeah, I got it. Thank you. Cameron Longridge at Bank of America, please go ahead. Hey, good morning guys. Thanks for taking my questions and thank you also for some great discussion. I really appreciate that.
I want to really quickly start off and just ask about margins on the terminal side of the business. So if I look at your downstream terminals guidance for 24, see the imply about a $10 margin, down a little bit from the implied margin in 23, presumably on Spark Arena and Santa Katarina, come online, but just want to have you kind of unpack that a little bit and help us out.
got it.
And it's not particularly complicated from that perspective. We just have long-term contracts and we kind of average into them over time. And I think now you can get a relatively clear sense of how the overall pie, you know, shakes out in terms of margin. So that way you'll see is that as a, when a terminal is new and you can get a base load, the margins tend to be the lowest that they're going to be, right? Because you're loading up the bulk of your expense in that.
getting that first terminal done. So we looked at the, I didn't do this separately, we looked at the margins for the terminal in Puerto Rico from three years ago when we first turned it on, which is just about now three years ago. Those margins versus today would obviously be lower than where they are today because we're using much of the same infrastructure. And our capacity factor across our terminals is about 25 to 30%. So obviously we have a ton of incremental capacity into the extent we learn.
deploy that across other customers or other power solutions, your margins are going to get better over time. Yeah, Big Buck Rain is a perfect example too, Cameron, where it's like we start with the base load next year and then the power plant in 2025 will kind of go right to the bottom line because we'll be thanks to the infrastructure.