NRG Energy ($NRG) — FY21 Update

🟨
Price: $38 Market Cap: $9.2bn Valuation: 8x EBITDA Category: General

FY21 Review

Q4 results were fine — EBITDA was up 31% from $330m to $433m and FY21 finished at $2.4bn. Here are some highlights for the year:

  • NRG sold 4.85GW of fossil fuel generation for $623m (recorded $210m gain on sale).
  • In process of retiring 1.6GW of coal generation by June 2022
  • Winter Storm Uri in Texas caused $380m in losses vs. previously expected $500-700m impact
  • Buybacks were $120m on $1bn authorization — current share count is 242m
2022 guidance — sets the bar a bit lower than 2021 performance despite the Direct Energy acquisition; there were some asset sales that will lower earnings
image

Balance Sheet

Management gave a capital allocation rollforward (slide below) highlighting the cash that will come in during 2022 and how it should get spent. The end result is net debt of ~$7.14bn at end of 2022. With some EBITDA growth in 2023, leverage should be coming down nicely into 2022-2023.

image

Capital Allocation

With shares trading cheaply, management is shifting capital allocation priorities from deleveraging to buying back shares. They plan to “grow into” the desired leverage target of 2.5-2.75x instead of rapidly paying down debt to get there sooner (a strategy being taken by peer Vistra as well).

image

2021 was dominated by Direct Energy acquisition + debt paydown; 2022 is focused on share buybacks (~$1bn):

2021 — how capital was allocated
image
2022 — allocation forecast
image
image

Final thoughts

NRG has already made a ton of progress over the last 5-7 years on changing the mix of business, reducing the reliance on wholesale generation, and delevering the balance sheet.

At yearend 2021, I have gross debt at $7.97bn and net debt at $7.7bn. Midpoint EBITDA guide of $2.1bn implies 3.67x leverage and an 8x EBITDA multiple with the stock at $38/share.

Midpoint FCF guide is ~$1.3bn but this is “before growth investments” which total ~$60-100m per year — as an aside, I wish they’d just include ALL capex when calculating FCF. I’m going to call true FCF $1.2bn or $5/share on the current share count, a 7.6x P/FCF multiple.

There aren’t a ton of companies trading at <10x FCF that aren’t majorly cyclical, very levered, or secularly challenged. In some cases, those trading at low multiples are just coming off a massive 2020-2021 positively-impacted COVID period (think Peloton or Zoom -like earnings)... NRG generates plenty of excess cash for deployment each year and outlined a reasonable path to $12.50/share in earnings by 2025... As a reminder NRG plans to have $8bn in deployable cash from 2022-2025 — $1.3bn going to dividends, $2.7bn going to buybacks, and $4bn available for opportunistic activity

image

If they repurchase the remaining $960m on the buyback at prices below $40/share, that’d leave an ending share count of 220m or lower = $5.90 per share (using their definition of FCFbG).

🟥
At 8x FCF = $47 price target, at 10x FCF = $59 price target — these would equate to 8.6x EBITDA and 9.8x EBITDA — I’m simply bracketing the 3yr average multiple for NRG in calculating but I think they’ll ultimately deserve a higher multiple given the actions taken on reducing risk and volatility in the business (no longer a merchant power plant).

For simplicity — call it 9x $5.90 in 2022 FCF per share for a $53 price target and 40% upside within the next 12 months.