NextDecade Stock: Positive Developments Seem Priced In (NASDAQ:NEXT)

Sky_Blue Investment Thesis Many positive developments have driven the share price of NextDecade Corporation (NASDAQ:NEXT) up 63% YTD, including a non-binding “20-year liquefied natural gas sale and purchase agreement” with Aramco, and Abu Dhabi National Oil Company’s strategic investment into Rio Grande’s LNG Phase 1 project. I believe however that most of these positive developments are already fully priced in, leading me to rate the shares neutrally at current prices. Significant progress has been made regarding their main project of the Rio Grande LNG, but an investment in this company will still require significant patience in my view. Company Overview The company is “committed to providing the world access to lower carbon intensive energy” according to its website. Their main project that investors are betting on is called the Rio Grande LNG, “a 27 mtpa LNG export project in South Texas” which “is expected to be one of the largest and most sustainable LNG projects in the world, linking Permian Basin and Eagle Ford Shale natural gas to the global LNG market.” To make this large investment worthwhile, the company has been keen on securing long-term LNG sale and purchase agreements with customers to make sure demand is there when the project is complete. According to the annual report, Rio Grande has entered into long-term LNG Sale and Purchase Agreements (“SPAs”) for over 90% of the expected Phase 1 nameplate LNG production capacity, pursuant to which Rio Grande customers are generally required to pay a fixed fee with respect to the contracted volumes, irrespective of whether they cancel or suspend deliveries of LNG cargoes. As the puzzle pieces get put together, investors can start to see the bigger picture slowly start to form: a large, profitable export facility that makes low carbon intensity LNG for the world to use. The project has seen consistent progress and shows no sign of stopping, with Phase 1 already under construction. While it may still take a few years for Phase 1 to finish, investors are gradually seeing the pieces being put together, and I think should continue to hold their investment based on recent positive developments. The latest quarterly filing reveals that “the overall project completion percentage for Trains 1 and 2 and the common facilities of the Rio Grande LNG Facility was 18.2%”, which signals the construction timeline is on schedule. This company is unique from other companies I’ve looked at as the company is still in its early stages of development, with no revenues yet. Yet, the market is confident enough to assign it a $2 billion market cap, signaling investor confidence in the recent positive developments regarding the project. Its focus on sustainable energy is remarkable, and many customers and joint venture partners continue to show their support by investing or agreeing to share purchase agreements. As a result, I believe this project has a high chance of success and believe the market is correctly pricing in recent positive developments. Eco-Friendly LNG A Potential New Standard It’s entirely plausible to me that if this project is complete, it will set a new precedent that all LNG needs to be more eco-friendly and sustainable. Thus, I see NextDecade as a major pioneer in the uncertain world of building a more environmentally friendly source of energy. In the future, I believe NextDecade’s competitive position will be extremely strong and its track record of completing such an ambitious project will set the new standard of what LNG should look like. As one of the first projects to utilize carbon capture and storage, this unique approach is a major competitive advantage to other LNG producers because it can be seen as a direct upgrade to other products on the market. At this point, I don’t really see any other company investing the time and money doing what NextDecade is working on, so in the next decade or so the company could be setting a new standard in which no one else can match them in terms of an eco-friendly, cheap, and high-volume source of LNG. Website To some investors, this may seem like a long-shot, but in my eyes it’s more of a long sure-shot that this project will set a new precedent in LNG. Other companies, governments, and competitors may see how effective the project is and follow suit, which ultimately benefits the consumers, environment, and investors alike. I think this company is working hard on setting the industry to be more sustainable and applaud their efforts to building “a more sustainable LNG for the world.” A Future Cash Cow I believe the company will eventually look like a cash cow, with relatively stable cash flows due to the sale and purchase agreements it has with customers. The company believes these SPAs are attractive to customers because according to its annual report, We believe our SPAs are attractive to our customers for several reasons, including long-term reliable supply, volumes to support growing demand for LNG and to replace customers’ contracts with legacy LNG suppliers, diversification of supply portfolios in terms of geography, price indexation, delivery points, and/or tenor, flexibility of volumes with no destination restrictions, and compatibility of some of our customers’ ESG goals with our expected lower carbon intensity LNG and planned CCS project at the Rio Grande LNG Facility. Therefore, once the facility is done I expect cash flows to be predictable and stable giving investors a nice reward for their patience. Its strategic location in Texas makes it unique because it helps diversify the routes and supply chain sources for customers, giving them added flexibility in my view. Also, many European countries may continue to import a lot of LNG and I think they are very pleased with NextDecade’s Rio Grande facility, potentially becoming loyal customers in the future. So in conclusion, I expect NextDecade to become a cash cow as they benefit from loyal customers that are interested in a long-term supply of LNG. Positive Developments As the world is set on reducing dependence on fossil fuels and finding alternative sources of energy, I believe in the future low-carbon LNG has a role to play as a sustainable source of energy for the world. According to Shell in their LNG Outlook 2024, Global demand for liquefied natural gas is estimated to rise by more than 50% by 2040, as industrial coal-to-gas switching gathers pace in China and South Asian and South-east Asian countries use more LNG to support their economic growth. A lot of the world still uses coal and other fossil fuels, so this could be a major replacement that has less carbon emissions. Furthermore, new recent developments indicate the story growing more positive, as Aramco has signed a non-binding agreement with NextDecade, Under the terms of the HoA, Aramco expects to purchase 1.2 million tonnes per annum of LNG for 20 years on a free on board basis, at a price indexed to Henry Hub. Aramco and NextDecade are currently in the process of negotiating a binding agreement, and once executed, the effectiveness of which will be subject to a positive Final Investment Decision on Train 4. Aramco’s vote of confidence shows investors that the industry is paying attention to the progress of NextDecade, and that they are willing to bet on the long-term sustainability of the project. They even mention in the press release, “We expect LNG to play an important role in meeting the rising demand for secure and efficient energy.” Going forward, I expect this momentum to continue as the story progresses, as more and more customers see the value of low-carbon LNG that can improve their carbon footprint, diversify their supply chain, and reduce their costs. An Uncertain Valuation – $8+ Fair Value Figuring out the intrinsic value of NextDecade is very difficult because the company has no cash flows currently, so historical data isn’t very useful here. I’m going to do my best here, but this is where valuation becomes more of an art than a science, so there’s a lot of room for adjustment. According to the investor presentation, the company reveals its expected distributable cash flow, Investor presentation If we assume that Trains 1-3 combined are complete, and apply a 10x cash flow multiple, then the company is likely worth around $2-3 billion, which is actually around its current market cap. I believe $2 billion is probably on the lower range of its value, so anytime the market cap dips well below $2 billion is likely some buying opportunity in my view. Trains 1-5 combined has an expected cash flow of $1 billion annually, so the company in the long term could have a market cap of around $10 billion if we assume a 10x cash flow multiple like before. Assumptions like these can vary depending on interest rates, multiples, and progress on the project. But my back of the envelope assumption is that the company is likely worth at least $2 billion, or around $8 per share. My view is that right now the shares are likely fairly valued, as they have priced in these positive developments correctly. However, if the shares dip below $7, it could be a good buying opportunity on the dip. I’m a little late to this story, so I may have missed the rally but I am watching for opportunities to enter the stock at more attractive prices. Risks LNG is prone to supply and demand economics which could make management’s projections way off as they show in the investor presentation. Slowing population growth and alternative renewable energies could make even LNG demand less than projected. Because the nature of this project requires a super long-term outlook, it is very hard to see what the demand-supply fundamentals for LNG will be several years out. Higher interest rates have made it more expensive to borrow money, and given the company uses debt and equity offerings to finance itself, these financing costs can increase dramatically. Given $2.5 billion in net debt according to Seeking Alpha, debts can accumulate to very high amounts, and the interest expenses can hurt financial performance. It’s likely that this company is completely off the radar, as it doesn’t show up on screeners or has significant major news presence. So, I believe investors may need some patience, as the market may not recognize the story that’s going on here. Hold NextDecade I like the story and the positive developments, but unfortunately, they seem priced in already. Buying opportunities may present themselves in the future if the shares dip below $7, so I think investors should keep an eye out on this company as they are progressing steadily to become one of the largest LNG exporters in America. Stories like these are likely to be mispriced as they involve high uncertainty, but at a low enough price the risk actually becomes low. This fits the low-risk/high uncertainty bet that I like looking for, so for now, I rate NextDecade stock a hold.

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