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New Fortress Cancels Contracted LNG Cargoes in Favor of Cheaper Spot Volumes
New Fortress Energy LLC (NFE) has canceled liquefied natural gas (LNG) cargoes it contracted to receive for the remainder of the year in exchange for a payment of $105 million to supplier Centrica LNG Co. Ltd.
The move comes as LNG prices have fallen precipitously, or by 85% over the last year and a half, according to NFE’s estimates, due to a supply glut and global demand destruction caused by the Covid-19 pandemic.
The company said its 2020 cargoes were contracted at $7.00/MMBtu. That’s compared to spot prices that are around $2.00/MMBtu, of which NFE wants to buy more.
“Our flexibility to opportunistically purchase LNG at market prices completes our transition from a development company to an operating company that we expect will generate significant operating margin and cash flow,” CEO Wes Edens said. “We continue to advance a number of compelling new business opportunities and expect significant growth in 2020 and beyond.”
Management said during NFE’s first quarter earnings call in May that the company had more contracted volumes than it needed, particularly in the Carribean, where the bulk of its small-scale LNG operations are located. The company’s first quarter margins were also squeezed by higher gas prices as it worked through legacy cargoes that were purchased before the sharp declines in spot LNG prices that have characterized the market amid a steep supply and demand imbalance.
NFE said this week that it expects to net $15-25 million by purchasing cheaper spot cargoes. The company estimated that the global gas market was 6% oversupplied at the beginning of 2020 and said volumes are expected to grow by another 7% this year. As a result, NFE believes spot prices will remain low through 2021 and start normalizing in 2022.
New Fortress essentially has been in a transition from a start-up to an operational company. It went public last year and is focused on introducing LNG in markets that lack access to the fuel for power generation and other needs. The company operates or is developing small-scale LNG assets across the world, including import terminals, fuel management facilities, regasification infrastructure, gas-fired power plants and midstream facilities in the Caribbean, Europe, Latin America and the United States.
Despite the decision to cancel longer-term cargoes from Centrica, NFE also said earlier this year that it would need to secure more LNG supply as its operations grow. CFO Christopher Guinta said in May that more than 60% of the company’s current LNG needs are uncontracted.
NFE said this week that it expects to finish an onshore LNG import terminal and merchant power plant in Baja California Sur, Mexico, and a natural-gas fired power plant in Nicaragua by the end of this year. The Nicaragua project also would be supplied by an offshore storage and regasification terminal.
Ultimately, NFE said its strategy is to contract for 80% of the LNG volumes it needs once its projects hit “run rate.”
NFE reported record LNG sales volumes of 1.65 million gallons/day in April. Average daily volumes sold in the first quarter were about 750,000 gallons/day, or an increase of 200,000 gallons/day from 4Q2019.
Sales volumes are expected to average between 1.5 and 2.5 million gallons/day for the remainder of 2020, but management indicated that they could slow as customer uptake and new projects could hit bumps given the pandemic.
Even still, committed volumes and “in-discussion volumes” are above 19 million gallons/day, management said in May. The company has 10 key target markets for growth that also include Africa, India, South America, Southeast Asia and other areas of the Asia-Pacific region.
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