2 Things Every New Fortress Energy Investor Needs to know
Key Points
New Fortress Energy is in active financial distress, with nearly $9 billion in debt -- $6.5 billion of which is due within one year -- and is already behind on $500 million in payments.
The company burned through $1.73 billion in free cash flow over the trailing 12 months and is currently in negotiations with creditors to avoid default.
While a successful restructuring may avoid a total wipeout for common shareholders, the risks for investors are substantial.
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New Fortress Energy (NASDAQ: NFE) is a liquefied natural gas (LNG) company operating worldwide. It's a company with significant assets and a place in the growing global LNG market.
But it's also a company in active financial distress, and investors need to understand that investing in New Fortress Energy is extremely risky.
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1. NFE's debt situation is dire
There's no gentle way to put this: New Fortress Energy is on the brink of collapse. The company is saddled with massive debt and has fallen behind on payments even as it sells assets to stay afloat.
The cash burn is immense. The company's trailing-12-month free cash flow (FCF) was negative -- a whopping $1.73 billion out the door.
That is a major problem for any company, but New Fortress Energy has nearly $9 billion in debt to contend with. Oh, and $6.5 billion of that is "current" -- that is, due within one year.
And New Fortress is already behind on payments on about $500 million of that. It is temporarily in forbearance while negotiating with its creditors to avoid default. If the talks succeed, the creditors would receive preferred equity and significant company assets in exchange for relief. While the company has said it may avoid a total wipeout of common shareholders this way, there is no guarantee of that -- and there is certainly no guarantee that the negotiations will be successful.
There is a very real scenario where common shareholders are left with nothing.
2. There could be upside -- but I wouldn't bet on it
The company's current market capitalization of just over $300 million stands in stark contrast to its $1.7 billion in trailing-12-month sales and enterprise value of $9.6 billion. It has a very low price-to-book value ratio; if common shareholders survive a restructuring, there could be significant upside from where the stock is now.
There are some things the company has going for it: significant physical assets, a fresh, seven-year contract to supply Puerto Rico, and strong global demand for LNG.
What should you do with New Fortress Energy?
None of these, however, solve the company's core problem: New Fortress doesn't have enough cash flow to service its existing debt, and the restructuring process is designed to protect creditors, not common shareholders.
This is more of a bet than an investment, and I would stay far away from New Fortress Energy.
Should you buy stock in New Fortress Energy right now?
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Johnny Rice has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
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