New Fortress Energy (NFE) has endured a challenging stock market performance this year, registering a dramatic 93% decrease in share price. This decline starkly contrasts with the modest 0.03% increase logged by the S&P 500 index. Extending the time horizon to the past five years, the company's shares have tumbled by 98%, while the S&P 500 has appreciated by 86% over the same period.
Some investors maintain a cautiously optimistic outlook on New Fortress Energy, viewing the company as fundamentally intact but facing significant hurdles. The key driver behind this optimism lies in a recently secured long-term contract that could potentially reposition the company's financial trajectory if fully realized.
Significance of the Puerto Rico Contract
The core of the bullish sentiment is a seven-year agreement New Fortress Energy entered into with the Puerto Rican government. An analyst projects that this contract could represent revenues amounting to approximately $3.2 billion over its duration, averaging about $457 million annually. The contract's main aim is to stabilize Puerto Rico's electrical grid by integrating natural gas, which supports the transition to cleaner power generation on the island.
Although it is important to recognize that the entirety of this projected $457 million annual revenue would not translate directly into profits, the infusion of this contract revenue could substantially bolster New Fortress Energy's financial position. For context, the company reported revenue of $301.7 million in the second quarter, reflecting an almost 30% year-over-year decline. Should the Puerto Rico contract proceed as anticipated, it could effectively double the company's annual revenue intake.
Furthermore, the company has indicated in its second-quarter press release that forthcoming developments in Brazil, Nicaragua, and Puerto Rico are expected to contribute positively to core earnings once operational.
An Examination of Financial Health and Risks
Despite the promising outlook linked to the Puerto Rican contract, New Fortress Energy confronts significant financial obstacles, particularly relating to its balance sheet strength and solvency.
Recent developments have underscored these challenges, including the company's entrance into forbearance agreements following missed interest payments this month. Such missed payments are typically considered a serious red flag, signaling deep financial strain.
The company is currently facing a substantial cash outflow, with interest expenses exceeding $200 million each quarter. This represents nearly two-thirds of the company’s revenue reported in the latest quarter, which has led to considerable net losses during this period.
Delving deeper into the balance sheet reveals total current assets of approximately $1.48 billion juxtaposed against current liabilities totaling roughly $2.20 billion. This imbalance paints a picture of tight liquidity and raises concerns about the firm's ability to meet its short-term obligations without relying heavily on projected contract-related income.
Moreover, maintaining profitability to offset these liabilities appears uncertain, given the company’s historical net losses and low quarterly margins. The company’s past operational performance offers little indication of the high margins necessary for the Puerto Rico deal to substantially improve its debt situation.
Market Perspective and Investment Considerations
While there remains a possibility that New Fortress Energy can successfully navigate its fiscal challenges and capitalize on its growth projects, including those in Puerto Rico, Brazil, and Nicaragua, the company's precipitous 98% stock price decline over five years suggests significant headwinds.
The situation demands flawless execution of these contracts and development plans merely to maintain ongoing operations. Late interest payments are demonstrative of financial stress, which often forebodes operational difficulties ahead.
From an investor's standpoint, the relative underperformance of New Fortress Energy versus the S&P 500 suggests that alternative investment strategies, such as index fund investing, have yielded more consistent returns over the recent past. Ultimately, investors seeking to outperform the benchmark indices might find better prospects in companies with stronger balance sheets, dependable growth pathways, and more stable earnings fundamentals.