On Tuesday, Deutsche Bank revised its stance on New Fortress Energy (NASDAQ:NFE), downgrading the stock from Hold to Sell and significantly reducing the price target to $7.60 from the previous $21.00. The downgrade is attributed to anticipated dilution of equity and reassessment of risks within the company's business model that may affect its valuation.
Yesterday, after the market closed, New Fortress Energy revealed a requirement to secure a binding commitment for its 6.75% Senior 2025 Notes and to execute the sale of $250 million in common or convertible preferred equity by October 7th.
This condition is part of an agreement to suspend the maximum debt to total capitalization ratio quarterly covenant tests. The implication is a near-certain dilution of common shares, with the potential for additional dilution if Ceiba Energy converts its preferred shares in the future.
The amended agreements with lenders also include several financial covenants New Fortress Energy must adhere to. These include maintaining a minimum liquidity balance of $50 million at the end of each month and $100 million at the end of each fiscal quarter.
Moreover, the agreements cap the Term Loan A, associated with FLNG (OL:FLNG) 2, at $350 million, which is a reduction from the original $700 million. The company is also restricted from further borrowing against the Revolving Credit Facility or Term Loan A Facility until these amendment conditions are met.
New Fortress Energy is prohibited from declaring any future dividends on common stock. The company is also obligated to use a portion of asset sale proceeds and the settlement fee ranging from $500 million to $659 million, which is associated with the termination of the FEMA contract, to prepay debt.
The downgrade and new price target reflect Deutsche Bank's updated perspective on the challenges and financial obligations New Fortress Energy faces. The bank's analysis indicates a more cautious outlook on the company's stock due to the expected equity dilution and the stringent financial covenants imposed by the amended lending agreements.
In other recent news, New Fortress Energy has reported a Q2 2024 EBITDA of $120 million, falling short of the targeted $275 million due to delays in deploying the FLNG 1 asset. However, the company now expects this asset to generate $500 million in annual free cash flow. Despite the initial setback, the company projects a positive outlook with quarterly earnings of $275 million for the rest of the year and an annual EBITDA range between $1.4 billion and $1.5 billion.
Adjustments have been made to the company's credit agreements, including suspending certain financial covenants and adding new ones. BTIG revised its price target for New Fortress Energy, reducing it to $15.00 from the previous $35.00, yet maintains a Buy rating on the stock. Deutsche Bank reaffirmed its Hold rating on shares of New Fortress Energy, with a steady price target of $21.00.
In the midst of these financial developments, the company has resumed production at its 1.4 MTPA Fast LNG 1 asset following a scheduled maintenance outage. New Fortress Energy is planning for organic growth with minimal additional capital expenditure and is looking to refinance its 2025 notes. The company is also bidding for 2.5 gigawatts of power in a Brazilian auction, which could potentially boost EBITDA by $400 million.
InvestingPro Insights
Recent data from InvestingPro paints a challenging picture for New Fortress Energy (NFE), aligning with Deutsche Bank's downgrade. The company's market cap stands at $1.86 billion, with a P/E ratio of 7.62, suggesting a relatively low valuation compared to earnings. However, this should be viewed in context with several concerning trends.
InvestingPro Tips highlight that NFE is "quickly burning through cash" and "operates with a significant debt burden." These factors likely contributed to the need for the amended agreements with lenders, as outlined in the article. The tip noting that "short term obligations exceed liquid assets" further underscores the company's financial pressures, explaining the stringent liquidity requirements imposed by lenders.
NFE's stock performance has been poor, with InvestingPro data showing a staggering -71.72% one-year price total return. This decline aligns with the tip that the "stock has fared poorly over the last month" and has "taken a big hit over the last six months," reflecting investor concerns about the company's financial health and future prospects.
While analysts predict the company will be profitable this year, the InvestingPro Tip indicating that "net income is expected to drop this year" suggests caution. This forecast, combined with the -1.16% revenue growth over the last twelve months, paints a picture of a company facing significant headwinds.
For investors seeking a more comprehensive analysis, InvestingPro offers 12 additional tips for NFE, providing a deeper understanding of the company's financial situation and market position.
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