What's the idea?
- Growth in demand for LNG: by 2026, the production of this type of fuel will increase by 19% compared to 2019, in monetary terms until 2028 the market will grow with a CAGR of 6.75% and will reach $103.4 billion.
- A shortage of fixed regasification terminals in Europe is forecast to lead to an increase in demand for floating units (FSRUs). This market in 2023-2027 will increase with a CAGR of 7.88% and reach $805.25 million by that date.
- The company operates one of the largest FSRU fleets in the world, and by 2026 it is expected to be extended with at least one more vessel.
- The company has been paying dividends since 2022, with a current yield of 0.51%.
Excelerate Energy (EE) operates a fleet of 10 floating LNG regasification terminals (FSRU), 8 of which are owned by the company. These terminals are installed in ports and connected to them via gas pipelines so that the ship can also be relocated to other ports. In addition, starting from 2021, the company acts as a gas merchant itself.
Why do we like Excelerate Energy Inc?
Reason 1. Growing global demand for LNG
In recent years, due to the global energy transition, natural gas has increasingly diverted the role of an intermediate fuel on the path to a carbon neutral economy. This is due to the fact that CO2 emissions from the use of natural gas for energy production are approximately 2 times lower than that of coal combustion. Thus, a global shift from coal to gas would be a significant step towards reducing carbon emissions. This strategy is used across many countries, for example, Germany.
At the same time, the ability to transport natural gas in its natural state is limited, and key producers of blue fuel, as a rule, are separated from main markets, as, for example, USA and Qatar from Europe.
At the same time, the role of Russia as the largest supplier of pipeline gas to Europe decreased significantly after the start of the Russian-Ukrainian conflict following the sanctions of the European Union.
These trends inevitably lead to the growing demand for liquefied natural gas (hereinafter referred to as LNG), as well as its production.
According to the Bloomberg forecast, by 2026 the global demand for LNG will reach 460 million tons, exceeding the levels of 2021 by 19%. At the same time, Europe and Asia will be the main consumers of LNG.
Growth in demand and supply of LNG in the world
According to the data by Mordor Intelligence, in monetary terms, the global LNG market in 2023-2028 will increase from $74.6 billion to $103.4 billion, and CAGR in the indicated years will be 6.75%.
At the same time, countries that will be the main growth drivers in new gas liquefaction capacities, according to the Institute for energy economics and Financial Analysis (IEEFA), are the US and Qatar.
New LNG production capacities by country (in million tons per year)
It is also important to note that, due to the nature of LNG, it must not only be liquefied, but also dewatered. For this reason, both new capacities for liquefying and reception of gas are of significant importance. However, currently there is an imbalance between gas liquefaction and gas dewatering projects depending on the regions of the world.
According to the data by IEEFA, in 2023-2027 new gas liquefaction projects will be launched, the total capacity of which will be about 132 million tons per year.
At the same time, according to data by the International Gas Union, in 2022, LNG regasification projects with a total power of about 164.8 million tons per year were under construction. Of these, about 80% accounted for the Asia-Pacific region, and not Europe, which needs significant volumes of LNG following the diversion from the Russian pipeline gas.
According to the International Gas Union, more than 50% of all regasification capacities in the world are located in Japan, South Korea and China.
LNG regasification capacities by country (in million tons per year)
Under these conditions, the role of companies such as Excelerate Energy intensifies. They run FSRU (Floating Storage Regasification Unit) — special floating facilities that perform the functions of regasification terminals. At the same time, since FSRUs are not stationary facilities, they can be sent to other countries with a shortage of regasification capacities.
As global LNG production grows, the demand for FSRU will grow. According to the forecast by TechNavio, the market for ships of this class in 2023-2027 will increase with a CAGR of 7.88% and reach $805.25 million by that date.
Thus, due to the geographically uneven distribution of new LNG projects and, according to the above forecasts, the demand for floating regasification terminals is growing in the world, which benefits Excelerate Energy.
Reason 2. Leading position in the FSRU market
Excelerate Energy currently operates 10 FSRU vessels, 8 of which are owned by the company. As of April 2022, according to the International Gas Union, Excelerate Energy had one of the largest fleets in the industry. At the same time, in 2026 the company is expected to get another ship.
Number of FSRU vessels owned by various industry players
As of the end of 2022, the average charter period of the company's vessels was 6.3 years. For 1H 2023 Excelerate Energy renegotiated a time charter agreement with the UAE Government, extending it until 2031, and increasing the value of the contract. In February 2023, a company-owned vessel Excelsior started to fulfill a 5-year charter for the Government of Germany.
In addition to the FSRU management business, since 2021 the company began to independently carry out gas sales through specialized LNG terminals. Despite the low margin of the gas sales business, entry into this market allowed Excelerate Energy to diversify its business, which the company is striving for as part of its strategy. Company plans to increase gas sales, as well as expand their participation in various LNG projects around the world.
Gross profit of the company
Thus, in the face of growing demand for floating LNG regasification vessels (FSRUs), Excelerate Energy has one of the largest fleets of vessels of this class, which creates preconditions for healthy financial performance.
Reason 3. Dividends
From 2022, Excelerate Energy started paying quarterly dividends of $0.025 per share. At the moment, the dividend yield on shares is about 0.51%. Further improvement in Excelerate Energy's financials is likely to boost dividend payouts.
Excelerate Energy's financial results for the past 12 months can be summarized as follows:
- Revenue amounted to $1.90 billion, which is 23.10% less than in 2022.
- Adj. EBITDA increased from $294.86 million to $334.26 million. Marginality increased from 11.92% to 17.58%.
- Net profit amounted to $28.17 million against $13.32 million last year. Net margin increased from 0.54% to 1.48%.
Revenue has declined over the past 12 months due to lower sales of the company's natural gas, primarily in New England. At the same time, operating and net income grew due to higher freight rates in Finland, Germany and Argentina, where the company has FSRUs, as well as due to the expansion of its activities in the UAE, which, in turn, was reflected in the financial results for the 1st half of 2023.
Dynamics of the company's financial indicators
The results for the 1st half of 2023 are presented below:
- Revenue decreased by 47.03% year-on-year: from $1.21 billion to $643.43 million.
- Adj. EBITDA increased from $129.11 million to $168.50 million. Marginality increased from 10.63% to 26.19%.
- Net profit amounted to $12.81 million against a loss of $2.03 million a year earlier.
Dynamics of the company's financial results for 1H 2023
- Over the past 12 months, operating cash flow increased to $259.07 million from $225.09 million in 2022.
- Free cash flow decreased from $105.82 million to -$110.96 million in the last 12 months.
Operating cash flow increased due to an increase in net income, an increase in working capital, as well as due to the early repayment of lease payments in connection with the acquisition of Sequoia. In turn, free cash flow decreased precisely because of the acquisition of Sequoia, as well as due to the modernization of ships at the Finnish terminal.
Company cash flow
The company has a healthy balance:
- The total debt is $867.15 million.
- Cash equivalents account for $462 million.
- Net debt is $405.15 million, Net Debt/adj. EBITDA was 1.2x over the last 12 months.
- The interest coverage ratio is 5.5x.
This level of debt burden indicates the absolute financial stability of the company. It is also worth noting the high cash reserve, which allows the company to launch new projects and participate in the M&A market without significant external financing.
The company predicts positive dynamics of financial indicators for 2023, specifically with the growth of adj. EBITDA by 14% to $325-335 million.
Thus, management's forecasts give confidence in the potential growth of the company's value.
Excelerate Energy trades at a discount to the industry average of 0.48x EV/Sales, 2.76x EV/EBITDA, and 18.40x P/E.
The average price target from Wall Street's top 6 investment banks is $28.8 per share. According to our consensus, the company is undervalued on industry average multiples; the fair market value of the shares is $30.4, which implies 63.9% upside potential.
Price targets of investment banks
- A possible faster transition of the global economy to renewables could reduce the need for increased LNG production. In this case, the demand for this type of gas will stagnate, which may adversely affect the implementation of the company's strategy.
- Possibility of accidents. The company works with cargo transportation and regasification of LNG, which is an explosive substance. Despite the fact that there have not yet been explosions of LNG ships, the consequences of possible accidents can cause significant damage to the company.
- Fleet obsolescence. Most of the ships the company manages were built prior to 2010, and the company may face rising fleet maintenance costs in the future.