New Fortress agreements plus Shell LNG expansion & schedule +4

09:09 06-Jul-22

Shell has followed up with the decision to proceed on building Holland Hydrogen I to supply Shell's energy and chemical production in Rotterdam.  However, Westport investors will also note that supplying the coming age of heavy duty hydrogen trucks is referenced.  HH1 will use electrolysis powered by wind and should operational in 2025 as Europe’s largest renewable hydrogen production plant.  Being able to finance projects like this is the one advantage Shell has.  We should have heard about New Fortress making a similar decision about Zero Parks by now; it did reference tight financing conditions yesterday...

New Fortress has made 3 transformative announcements this morning.  The first two are with Mexico:

• agreements with CFE (Comisión Federal de Electricidad) to increase and extend the supply of natural gas by New Fortress from its La Paz FSRU to multiple power plants in Baja California Sur, including the the 135 MW La Paz plant to which will be sold to CFE.  Terms were not disclosed.
  
• an agreement with Pemex to develop the proved reserves of the Lakach offshore gas field and for New Fortress to produce LNG for export as well as supplying the domestic market.  New Fortress will supply a 1.4 MTPA FLNG as well as investment to complete an initial 7 wells, with a projected 10 years of supply and further development could increase the supply as much as 3-fold.
• To pay for this, New Fortress has sold an 80% share in the 11 infrastructure vessels it acquired in the Hygo transaction to Apollo for $2b almost half of which will go toward extinguishing debt on the ships.  As the existing charters expire, New Fortress will take out 20 years contracts on all of the vessels except the Nanook, which is already under charter for 22 years.

There was only 1 question on the associated call, as I think Wall St. was not back from vacation.  Management would not comment on price of 20 year charters other than to characterize them as at "market rates".  That may not be advantageous over the full term, but New Fortress profits should be front-loaded on the Apollo deal.  I'm further comforted by the composition of the fleet: 6 of the vessels are FSRUs, 3 are floating storage units, and only 2 are carriers.  Ultimately, this is a far better deal or shareholders than dilution to fund growth, in my opinion.

The fuzziness of the Mexican deals could also be seen as worrying, but given that New Fortress will be providing critical supply, I'm satisfied that they will be completed on reasonable terms.  I like the broad strokes here as New Fortress will partially own and have diversity in its gas sources and be ideally positioned to benefit from the global shortage.

It is not the only one making such moves.  Shell is taking a 25% share in Qatar's North Field East LNG expansion, which is the largest single project in the history of the industry at 32 Mpta.  By contrast, the initial volume on the Lakash project comes in at 6Mtpa.  The Qatar project is expected to be completed in 2025.  So, Mexico's pace of development will be important.  It's also time for Europe to step up on medium to long term LNG purchase agreements.

Finally, Shell has scheduled its second quarter report for the morning of July 28th.  The average of analyst estimates comes to $2.67 of EPS from $95.9b of revenue, increasing to $103b this quarter.  I will certainly pay attention and provide at least the numbers and macro notes.

SHEL is down 7% in the rout this morning, as crude oil craters almost 10%.  NFE is down 2.5% as natural gas remains somewhat more stable.