US-listed charterer and LNG terminal company New Fortress Energy has "vast opportunity" to cash in on gas power markets, according to Fearnley Securities.
The Norwegian investment bank started coverage of the firm with a "buy" rating on Wednesday.
The bank, a unit of Astrup Fearley, has a target price of $40 per share on the stock, against a closing price of $27.05 on Tuesday in New York.
Fearnley described New Fortress as a fast-growing company transforming a rapidly expanding $500bn oil-to-gas sector.
Analysts Espen Landmark Fjermestad, Peder Nicolai Jarlsby and Ulrik Mannhart said: "NFE has in just a few years transformed the power markets of Jamaica and Puerto Rico, increasing their share of natural gas usage massively and in turn reduced both energy costs and emissions."
By the end of 2020, the company will have five terminals in operation, generating nearly $500m of operating margins.
Fearnley is "conservatively" forecasting two new terminals by the end of next year, and another two by the end of 2022.
"NFE’s vast opportunity set, mid-teens unleveraged returns and speed to market will drive valuations higher in our view," the analysts said.
Hydrogen a 'game changer'
In the longer-term, its renewable solutions through green hydrogen could be a real game changer as well, they added.
Fearnley said: "The world is long [on] gas and short [on] power. This is particularly true in developing countries where diesel and heating oil are still being used as the key energy source in power generation."
The bank added: "Already NFE has converted Jamaica’s power usage from nearly 100% fuel oil to more than 70% LNG. A similar story is unfolding in Puerto Rico."
Annual operating margins could rise to between $1bn and $3bn depending on future projects, Fearnley said.
It is tipping the company to quickly deleverage as its new projects complete.
Universe to expand
The dividend policy of 20% to 25% payouts "will allow NFE to continue to grow its business and simultaneously expand the universe of potential investors," the analysts said.
Earlier this month, TradeWinds reported that New Fortress plans to transfer LNG directly from large vessels into ISO containers stored on barges or other ships in a bid to cut shipping costs and infrastructure holds ups.
Co-founder and chief executive Wes Edens said the company has been using small-scale LNG carriers offloading cargoes from large vessels to bring volumes into the ports where it is working.
The challenge is that these small ships need marine infrastructure, which can take 24 to 36 months to develop, he said on a second-quarter results briefing.
Edens described the supply of small LNG ships as a "real constraint" and said the company has come up with a solution called ISO Flex.
This would allow the 40m gallons carried onboard a 160,000-cbm LNG carrier to be moved into 10,000 gallon containers stored on a barge or offshore supply vessel using an efficient manifold system and then transported to the shore.
More projects under discussion
This would axe capital and operating costs by half or more — because the company is essentially losing one ship — and cut the time from 24 months to three to six months.
New Fortress has said it is in "serious negotiations" over a further 10 projects but declined to name them or the countries in which they are being developed due to the "competitive situation".
The company tripled its loss in the second quarter at $167m, compared with $51.2m in the same period last year.
