Chaos and speculation, and more recently formal accusation of sabotage, surrounding the rupture of the Nord Stream pipelines is another reminder of the importance of energy security at this time. Since the Russian invasion of Ukraine, Europe has struggled to find new sources of energy. Among the companies working to provide access to alternative liquefied natural gas is Excelerate Energy (NYSE:EE). Despite the many catalysts that I have described in my previous postthe company’s share price (along with other strong LNG players like FLEX LNG (FLNG) fell as oil retreated. This disconnect between the ever-increasing importance of LNG and the declining share price presents an opportunity.
Macro environment remains stronger than ever for gas, despite sentiment and selloff
The rupture of the two Nord Streams pipelines this week, after the previous indefinite stoppage of the Nord Stream flow to Europe, has again raised concerns about Europe’s dependence on Russian gas. In addition, spot rates have soared for LNG ships – above $200,000 amid tension and record demand for LNG. Despite all this news supporting a historically good market for LNG import projects and FSRUs, Excelerate’s share price fell as the market took a risk-free approach with lower oil (CL1 :COM) and Excelerate followed other energy actions for Let the worst performing sector over the past few weeks.
Compare Excelate’s one-month chart and you’ll see the company closely tracking the price of oil on the downside.
With Oil and Excelerate selling around 13%, it is clear that we are seeing a correction in the Energy market (although Oil is falling more over a longer period from its peak).
However, as I will illustrate, Excelerate has a number of solid projects that are not tied to spot prices and which should support the company’s earnings improvement despite the increasingly hostile macro environment in which we seem to find ourselves.
The good news for Excelerate is that energy security always comes first, with recent moves by innumerable Governments guarantee gas supply and cap prices to consumers while paying the market price to suppliers.
The growing importance of Excelerate for European LNG supply
In addition to the arrival of one of Excelerate’s vessels in Finland in December, I have already mentioned the company’s plans to turn Albania into a new gas hub for southern Europe. Although not much has changed in Finland, the Albanian project is getting closer to completion. We still do not have a formal contract or terms for the project in Albania, but recent developments indicate that there will soon be one. The energy ministers of Albania and Serbia signed a memorandum of cooperation on energy beginning of September, relating mainly to the construction of an Albanian LNG terminal. North Macedonia too reached an agreement work on setting up a working group on common strategic projects, including a new Balkan gas hub. At South East Europe Energy Forum on September 12, the Albanian Minister of Infrastructure and Energy said:
“[The US Embassy in Albania] allowed us to establish contacts with prestigious American companies such as Excelerate Energy, which works closely with us for the Vlora thermal power plant and LNG terminal project”
All of this suggests that the project is moving forward, and with recent events only strengthening Europe’s resolve to secure alternative sources of natural gas, I am confident that we will have more details on this project by the end. of the year. Which should be a boon for the company’s share price. There was another development in early September with Excelerate sign a condition sheet with Engie (OTCPK:ENGIY) to deploy an FSRU in Germany for five years, adding another reliable counterpart to the company’s roster.
New business plans elsewhere too
Currently, Excelerate’s primary source of revenue is Brazil, since the company is actually involved in distribution there. A risk I mentioned earlier is the end of the company’s contract with Petrobras (PBR) at the end of the year. However, Excelerate appears to be positioning this as an opportunity for the company to expand further into Brazil, either by re-chartering its FSRU elsewhere or by continuing to be a gas importer for Brazil. Additionally, the company’s Vice President for Latin America hinted that the company aims to enter gas-to-power and small-scale LNG markets in Brazil.
Another project Excelerate has been working on for some time is a new LNG terminal in the Philippines. As of September 27, the company is still waiting for a permit from the Philippine Department of Energy. Although it may be several months before construction begins, this project would have a capacity of 5 million tons of LNG per year, which would be significant.
Valuation update in an unfavorable market
As mentioned earlier, Excelerate’s stock price has fallen significantly over the past few weeks. Even just retaking the recent high of $28.23 gives us a 20% upside. The company is currently trading at less than 10x forward earnings, according to my estimates (presented here). I think the company will earn almost $2.40 in 2022 if the Albanian project manages to come online in the second half. A fair valuation of the company at 15 times earnings would give us a stock price of $36, a significant upside of 50%.
Risks haven’t changed much since my previous in-depth article on the company, but I’ll quickly recap and update them here.
The company’s revenue concentration in Brazil is slightly less of a concern with such strong demand from Europe and the new German deal. Additionally, it is now clear that the company intends to continue doing business in Brazil, which was previously more ambiguous.
Organizational risk, with Kaiser as the majority stake, has not changed and remains one of the downsides of Excelerate as an investment. At the same time, I don’t think he is delisting the company completely because its shares will not receive dividends and will eventually be converted or cancelled.
Fluctuations in spot LNG prices, as mentioned earlier, have little to do with Excelerate’s business model, but investors should pay close attention to the terms of new transactions. Finally, Excelerate’s business is highly politically involved given the nature of energy and infrastructure security. Fortunately, the company is well connected and the global energy crisis has put the company’s services in high demand, meaning finding another country as a client is hardly a task.
In a hostile macro environment, where investors are increasingly de-risking and moving away from energy as oil prices fall, putting energy stocks at the bottom of the S&P 500, Excelerate Energy remains an attractive buy. The company’s stock sometimes trades like oil, but the company’s business is far from tied to fluctuations in spot prices. In fact, its contractual nature provides not only security, but also a short-term advantage. Once the contracts for the Albanian and Philippine LNG import terminals are concluded, the company will have a much improved revenue profile. Ultimately, even though inflation may put pressure on oil and the risk seems high, gas to heat homes will still be needed, and that’s what Excelerate Energy makes it easy.
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