By skyforbes I read their 10-k yesterday, and this stock is pretty compelling.
Basically what this company is doing is building an LNG facility in Texas. Their business revolves around taking in natural gas from natural gas producers, liquifying it, and charging LNG buyers a premium basically as the cost for liquifying it.
They do this using an LNG train, which is a complete processing line that is rated for a certain amount of production (for example 6 MTPA which stands for million tonnes per annum). This amount is the designed production and guaranteed by the EPC contractor (this will be explained later), although trains often produce more once they are able to run for a while, and bottlenecks can be alleviated.
To build a train, there's 3 stages:
- Development (permitting, design, etc)
- Commercialization (SPAs, financing, profitability analysis)
- Construction (actually building it, and once it's built, revenue and cash flow will start coming in)
$NEXT currently has 3 trains in construction (slated for completion in 2027), and 2 trains that have just completed commercialization (with a positive final investment decision) and about to begin construction.
The neat thing about the LNG business, is that a lot of stuff is set in contracts before any construction begins. The way it works is that LNG companies will figure out how much LNG a train will produce. Then they will go out and find buyers for that LNG prior to construction through these SPA (Sales and Purchase Agreements). Basically they sell the LNG they will produce prior to producing it. Usually they diversify these agreements with different customers in different regions to minimize credit risk (e.g. a customer unable to take delivery when the time comes, customers going bankrupt, etc). These SPAs dictate how much per year, for how long, and what type of delivery.
$NEXT has SPAs for these first 5 trains for I believe around 75% of capacity, for an average of 19.2 years, with most of it being FOB (which means buyers are responsible for shipping). I think I saw only one DES which is where $NEXT will be responsible for shipping.
Once they have these SPAs, they go out and get financing for building the train. This is through debt, equity, etc. During that time they also go out and find an EPC contractor (Engineering, Procurement, and Construction). The way these EPC contracts work is that $NEXT will pay a fixed sum for the entire delivery of the train on a certain date. That means the contractor takes on the risk of timeline and construction overruns (barring any acts of god, etc).
So now we can see that LNG companies know exactly how much they will make (SPA), exactly how much they will need to raise (EPC + buffer), and so they go out and get financing for that amount.
The financing is usually secured once they have the SPAs because they can then guarantee cash flow to be able to pay back the debt (given they contractually know how much they will make once the train is running).
These are expensive projects, with each train costing upwards of $6 billion dollars.
So as of today, $NEXT has 3 trains that are in construction. With each train being already fully contractually funded (so there's no need for additional funding, and low risk of additional costs given the EPC agreements), and the output of these trains are already contractually sold (which means there's low risk of not having anyone to buy the product). Trains 4 and 5 just closed commercialization which means they've secured all the financing they need to build them, along with the EPC, SPAs.
I think this is the most compelling thing about this business is how seemingly locked in their future cash flow is.
So… how much will they make?
The completion of the first 3 trains is phase 1. Phase 1 is actually a joint venture, so $NEXT will receive 20.8% of distributable cash from phase 1. Distributable cash means cash left over after everything is taken out (interest, maintenance, operation cost, etc).
Contracted fixed fees for phase 1 is $1.8 billion per year. After paying down interest, maintenance, operation, etc, $NEXT projects that it will receive $200-$300 million in distributable cash flow per year from Phase 1. That's cash that can be used to pay out dividends, buy back stock, etc. $NEXT has said that they will use the cash flow from the first 5 trains to deleverage. But that's already an insane amount of cash (DCF is basically like FCF but better) for a company worth $1.8 billion dollars.
So that's the plan by 2027, but what about trains 4 and 5? $NEXT owns a larger portion of these trains with train 4 being owned 40% -> 60% (if they meet certain obligations) and train 5 being owned 50% -> 70% (if they meet certain obligations).
The obligations are paying back lenders if I remember correctly, and the expected increased ownership will take place in the mid 2030s.
These trains are projected to generate an additional 300 – 400 million (bumped up to 500 – 600 million upon increased ownership) of distributable cash flow.
The site they are building at also has additional space for trains 6-8 (although these are still in the development stage). Trains 6-8 will be wholly owned by $NEXT and each one is projected to generate an additional 600 million of distributable cash flow. If this vision comes to light, this company should be worth around the same as Cheniere energy (which produces $2.3 billion -ish of distributable cash flow) which is currently sitting at a market cap of $40 billion (as opposed to $NEXT's $1.7 billion). That's a 23 bagger in the Next Decade. It's also not like Cheniere is overvalued, it has a PE ratio of 12 (which is crazy low in this market no?).
There's still a lot of risk involved. Execution risk is always there despite the EPC contracts. LNG demand could drop off a cliff, although current projections don't show that. Financiers could pull out for whatever reason, and although legal action may be a possibility, it definitely won't be good. There could be solvency risks, whatever with buyers who may not be able to fulfill their SPAs. Russia could flood the EU market with natural gas if the war in Ukraine ends, although I believe that EU will still probably not want to get 100% of their supply from Russia just because of the geopolitical risk.
I think the benefit outweighs the risk though. Once the first train gets up and running, a lot of estimates will turn into actual numbers and actual profit, and once that happens, the whole vision could start becoming more of a reality, driving up the stock price, I think a potential 2x once the first train is operational.
And honestly, I'm not an expert in this market, and it's very possible I missed something key, but if so I'm not sure what it is. And if you know, please let me know as well. But with the insider buying, and the CEO actually said recently (might even be today) that the stock is undervalued, I feel like there's a real opportunity here.
And the thing about this business is that it generates so much cash, additional investment is much easier and you don't have to take on as much debt.
I'm in for $14k stock, and some leaps dated 2027 and 2028, will post position in the comments. And also given this is a longer term play, you get some long term capital gains tax benefits.
See you in the Next Decade.