Excelerate Energy, Inc.

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 3/5

Excelerate Energy, Inc. is an LNG infrastructure company, providing flexible LNG regasification solutions through its fleet of floating storage and regasification units (FSRUs) globally.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

Excelerate Energy (EE) is a global liquefied natural gas (LNG) company focused on providing flexible and reliable LNG regasification solutions. They operate a fleet of Floating Storage and Regasification Units (FSRUs), which serve as a crucial link in the LNG value chain, allowing customers to convert liquefied natural gas back into its gaseous state for distribution to local markets and energy grids.

  • Revenue Distribution: EE generates revenue primarily through time charter contracts for its FSRUs. These contracts typically have a fixed term and a fixed day rate, although some may include variable components related to usage or market prices. Revenue also comes from ancillary services related to their operations. The geographic mix is wide, with most of their revenue coming from Brazil and Asia.
  • Industry Trends:
    • The LNG market is characterized by strong long-term demand growth due to its cleaner-burning nature and ease of transportation.

The full switch to green energy still seems to be far away, and in the meantime countries want cleaner forms of traditional energy and LNG seems to be benefiting from it. * The growth of emerging markets and the increasing industrialization of countries have increased the demand for LNG imports, leading to a need for regasification infrastructure. * Europe, in particular, has seen a dramatic shift in the LNG landscape due to geopolitical instability, which has created unprecedented demand for natural gas. * The move to increase energy security by diversifying gas sources has led to an increase in use of FSRUs.

  • Margins: EEs gross margins are strong, however, profitability is affected by significant interest expense and debt amortization, which impacts its profit margins.

It is important to note that interest expense and debt amortization are not related to the business itself, rather how the company has financed its operations. So it may be a better measure to track operating margin, instead of total profit margins.

  • Competitive Landscape:
    • The FSRU market is moderately concentrated, with a few key players controlling a large share of the market. Competition is based on factors such as operational efficiency, vessel availability, pricing, and contract terms. Competitors include large-scale LNG companies and a small number of focused FSRU owners.
    • The FSRU sector is less prone to commoditization than that of regular LNG carriers. Differentiated designs and strong relationships with clients and countries can help to mitigate price competition.
    • The LNG market’s inherent structure is that long term infrastructure projects need very little flexibility. So these large FSRU projects, where costs are quite high, are not easily and cheaply duplicated by competitors, which creates a small moat.
  • What Makes EE Different:
    • Global Presence and Operational Expertise: EE has a very wide operational experience around the globe, a lot of their assets, and the infrastructure to operate in many countries.
    • Flexibility and Reliability: EEs FSRUs offer a flexible and cost-effective solution to regasification needs that can be rapidly deployed with high levels of reliability. This flexibility is a great advantage over permanent on-shore regasification units.
    • Integrated Services: EE offers a range of integrated services, including vessel operation, technical support, and project management, further enhancing its value proposition for customers.
    • First Mover Advantage: Being one of the early players in the FSRU sector, EE has had a lot of time to build strategic partnerships and expertise which makes it difficult for newer entrants to compete with.

Financial Analysis

Profitability and Margins

  • EE’s gross margins remain strong (around 75-80%), which is a positive indicator of pricing power and business efficiency. However, this has been declining over the years.
  • Operating margins and net margins are lower due to high operating costs and financial costs.
  • EBITDA margins and adjusted EBITDA margins vary from quarter to quarter, but are quite volatile. This implies that costs and income are difficult to predict for the business.

Revenue and Growth

  • EE has consistently grown its revenues in recent times, mainly because of increase in contracts for FSRUs and their increasing utilization.
    • The growth has been very lopsided with much of the growth being from EMEA and the USA.
  • EEs revenue has been increasing, however, as it scales it is seeing a decline in profit. This means costs are increasing as well.

Debt and Financial Position

  • EE carries a substantial level of debt, a large portion of which is fixed, while only a small portion is floating. Therefore, its debt payments are largely predictable.
  • The debt was taken to secure FSRU building, or acquisition of other companies, and has led to high interest payments.
    • Although it has increased its revenue as it took more debt, net profits have been quite volatile, and the company has not consistently produced profits.
  • The total liabilities are also quite high.

Cash Flow:

  • Ees cash flows from operating activities (which show core business cash flow generation) is extremely volatile, with lots of big variations from period to period. They are barely generating any positive operating cash flow, which is concerning.
    • The cash flows are heavily affected by investment and financing activities, and in particular capital expenditure.
  • They have been spending large amounts of capital on their acquisitions and investments.
    • Even the debt that has been taken for financing seems to be barely enough.

Capitalization and Dilution

  • EEs common stock outstanding has increased dramatically, almost 2x in the past few years.
    • This has helped them to raise capital to grow and develop but has diluted the value of the shareholder.

Recent Concerns and Problems:

  • In a recent earnings call, management noted that while the total project is on schedule, the financial close for the project has been pushed back, meaning delays in cash flows. However, it reiterated that project would go ahead.
  • They have been facing increased competition in some sectors, however, management seems to be confident in its strategy.
  • The company has also been struggling to maintain long term growth due to their high capital expenditure costs.

Moat Assessment

Based on the above analysis, EE has some elements of a moat, but it is not particularly strong or sustainable.

  • Economic Moat Rating: 2/5

Justification:

  • Weak Moat: EE operates within an industry that has moderate barriers to entry. New FSRU projects require extensive upfront investments and take long periods of time to construct and make operational. However, these are not insurmountable for well capitalized entrants.
  • Limited Differentiation: While EE has some knowhow and operational expertise as a first mover and a wide operational network, the services offered by FSRUs are fairly similar, making it hard for EE to extract above-average profits consistently.
  • Geographic Advantages: EE’s strategic presence in several key regions, where LNG imports are growing, gives it an edge over competitors. Also, their wide operational network may be difficult to replicate, giving them some advantage. However, this is not really a moat that will generate profitability for a long time.
  • Financial Issues: Their current financials do not seem great, and they are seeing problems with decreasing profit margins due to the increasing interest payments and debt costs.

Unless it can fix their financial situation, no matter how good their other business is, it will have a hard time extracting long term profits.

Risks to the Moat and Business Resilience

These are some key risks that could harm EE’s moat and overall resilience:

  • Technological Disruption: New technologies that reduce or eliminate the need for FSRUs can have a disastrous affect on EEs business. Such technologies can be more affordable, or easy to deploy than FSRUs.
  • Geopolitical Risks: Geopolitical conflicts, policy changes, or international trade disputes in their main regions of business (Brazil and Asia) can disrupt supply chains and contracts, and their profits.
  • Operational Risks: Technical failures in their FSRUs, and other operating accidents can affect profitability, due to downtime and compensation.
  • Competition: Increased competition from new entrants could put pressure on pricing and profitability. Companies can start pricing them lower and taking their contracts.
  • Reliance on Long-Term Contracts: Any cancellations or changes in contracts from long term partners can create considerable impact. Also, if interest rates rise, they might face higher costs to service debt.
  • Debt Burden: Their high debt burden will remain a concern unless operations can generate enough free cash flow consistently and quickly.
    • High debt burden will also make them more vulnerable to economic down turns, since the high leverage would amplify its downfalls.

The business resilience seems to be moderate, where while they have an edge in operational expertise and flexibility, they are also highly exposed to market forces.

Understandability Rating

  • Understandability: 3 / 5

Justification:

  • The concept of an FSRU is not incredibly difficult to understand. It’s a ship that regasifies liquid natural gas.
  • However, assessing a company like EE, which is not just a simple operator, and whose contracts are also a complex mix, and where most of their finances are based on loans and long term debt is tricky.
    • It requires an understanding of complex financial statements, especially how revenue, margins, expenses, and debt impact profitability.
  • They also have complex joint ventures and partnerships, which also make it difficult for an average investor.
    • They rely heavily on technical financial data and it can be difficult to understand the full picture for a normal investor.

Balance Sheet Health

  • Balance Sheet Health: 3 / 5

Justification:

  • EE carries substantial long-term debt which it has taken to purchase the FSRUs. These high debt payments can restrict future cash flows.
  • Cash flows have been inconsistent, with periods of cash shortages.
  • There are large amounts of intangibles present in their balance sheet.
    • While not necessarily bad, it requires deep knowledge of the company to determine whether it is a positive asset or just an inflated debt claim.
  • Working capital seems to be a point of struggle for them as there is always a requirement of high capital spending.

While these issues are concerning, their assets are quite substantial, and the high revenue and margins provide some cushion. But because of increasing interest rates, they do seem more vulnerable to financial crises.