TD Cowen has downgraded NextDecade Corp from Buy to Hold and lowered its price target from $11 to $8. The brokerage cited higher-than-expected equity financing for the company’s Rio Grande LNG expansion and worries about long-term natural gas prices.
According to Cowen, NextDecade’s recent disclosures show that Trains 4 and 5 of the Texas project will be funded with about 40% equity. This is higher than the 25% Cowen had previously assumed. The shift means there will be less cash available for shareholders in the early years. Cowen said this cuts roughly $2 per share from its valuation.
The firm also questioned some of the assumptions in NextDecade’s own $14-per-share valuation. That valuation relies on spot marketing margins that assume global gas prices around $10 per million cubic feet. Cowen expects that new supply in the market will likely push prices closer to $8. This would reduce another $2 per share from the company’s value.
Analysts noted that the stock’s performance will likely follow global gas prices. If margins are weaker than expected during the early ramp-up, it could slow debt repayment and reduce returns for shareholders.
NextDecade recently made a final investment decision on Train 4. The company has said it expects to generate $2 billion in cash during the ramp-up of its first five trains. Cowen said lower gas price assumptions cut that expected cash flow by about half.
