Why New Fortress Energy Plunged This Week

Key Points

• New Fortress reported plunging revenue and profits last Friday after the end of trading.

• This week, the company lost half its value as the prospect of bankruptcy looms.

• New Fortress is in violation of its debt covenants, and some debt could be called if an extension isn't granted.

• 10 stocks we like better than New Fortress Energy ›

Shares of liquid natural gas company New Fortress Energy (NASDAQ: NFE) plunged this week, falling 45.7% as of Friday at 12:41 PM ET.

New Fortress delivered a disastrous second-quarter earnings update this week, showing a dramatic decline in revenue and profitability. The company noted the drop in profitability had put it in violation of its debt covenants, which raised the possibility of bankruptcy.

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The fortress shows cracks

Last Friday after the market close, New Fortress released its delayed quarterly results for the second quarter. When a company makes a filing late on a Friday, it's almost always bad news.

Revenue fell 30% from the prior-year quarter to $301.7 million, while the company also recorded a massive $556 million net loss. While the net loss did encompass some noncash write-downs of goodwill, even the company's adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) fell to a $3.7 million loss from a $120.2 million profit in the year-ago quarter.

The decline in profitability put New Fortress in violation of covenants on its first lien debt ratio on its letters of credit facility. In its quarterly filing, New Fortress also said it will be in violation of the covenants on Sept. 30, and that its lenders could demand full payment if they do not waive the noncompliance condition.

Though part of the decline in revenue was the result of an asset sale in Jamaica, the natural gas production and transport company continues to deal with last year's cancellation of its grid stabilization project in Puerto Rico. While revenue fell a lot last quarter, New Fortress' costs didn't change much, leading to a big decline in profits.

Image source: Getty Images.

Bankruptcy a real possibility, despite $800 million in cash

At first it may seem far-fetched that a company with $821 million in cash on its balance sheet would go bankrupt soon. However, New Fortress is also carrying nearly $9 billion in debt, and the company burned just over $1 billion in the first six months of the year, if you strip out the sale of the Jamaica business.

So while that sale bought the company some time, this looks like a situation investors should stay away from until bankruptcy is either declared or definitively avoided.

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Billy Duberstein and/or his clients have 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.