LFG

Publicly traded companies mentioned herein: Ameresco Inc (AMRC), Archaea Energy Inc (LFG), Montauk Renewables Inc (MNTK), Waste Management Inc (WM)

Highlights

Archaea Energy is an alternative fuels/biogas company that is one of the largest and fastest-growing RNG producers in the US. This was a SPAC sponsored by the Rice family (Rice Acquisition Corp), which has significant experience and understanding of the cost paradigm in shale production. At Archaea, they are now applying their significant experience in shale product cost management to landfill biogas production. 

The average daily volume of about $10 million may be low for some institutional investors, but the presenter believes trading volume will increase meaningfully in the coming weeks or months as lockups expire and the company gets past a wave of secondary private equity sellers exiting the stock. 

RNG is used to displace pure dependency on geologically sourced natural gas. This biogas is completely fungible to natural gas. RNG can be used interchangeably with NG to heat homes, power transportation, and to produce electricity or generate hydrogen. The RNG largely comes from landfills currently, but there’s potential for the company to extract RNG from dairy digesters, wastewater treatment plants, and other sources.

Use of such biogas creates very high carbon intensity (CI) scores and energy credits, but the presenter’s investment case isn’t based on the inherent value of such credits for Archaea. The company’s strategy from a commercial perspective is to contract out its RNG, where pricing has improved significantly.

Pricing is coming in much better than what the company had originally anticipated during the SPAC process. When the Rice family underwrote the SPAC, the assumption was $13 in MMBTU for 10 - 20 year contracted deals. Pricing of deals has gone up dramatically since then to roughly $20 MMBTU. Demand has massively outstripped supply for RNG, and because Archaea was early in the curve on capex investment, it now has a first-mover advantage.

There are two somewhat pure-play peers in the space. They are Montauk Renewables (MNTK) and Ameresco’s (AMRC) Landfill-to-Gas operations. These stocks are trading at 12x+ 2024 EBITDA compared to Archaea trading at 6.5x the presenter’s estimates. By 2024 - 2025, he believes Archaea will have a debt-free balance sheet and will be generating a 45% EBITDA margin with high free cash flow. By 2025, earnings and FCF may reach a point where the company can start to buy back stock. 

The company is guiding to $400MM EBITDA in 2025, whereas the presenter thinks that can reach $450MM - $500MM based on a conservative Renewable Identification Numbers (RINs) assumption of $1.50 in his model. The value of the RINs is actually closer to $3 today. He ultimately expects a $45 - $50 stock price by that time, implying an IRR in the high-20% range. 

Looking at the gas utility landscape, many don’t even have a renewable energy portfolio standard yet. The presenter believes that is a big trend coming at the utility level, namely, the credits and more generally the environmental attributes that utilities can talk about by blending in RNG. 

Management is well aligned with the shareholders, and is led by CEO Nick Stork, whom he views as young, ambitious, and aggressive. Another participant describes the Chairman, Daniel Rice, as one of the few energy executives who genuinely cares about total shareholder return. The presenter and another investor discussed the potential red flag of the CFO and Chief Legal Officer recently departing the company, but both investors conducted diligence checks and concluded that these were not signs of trouble. They were hired due to their track records of setting up public companies rather than capital allocation strength in the case of the CFO, so these were likely viewed as interim hires that Stork was unwilling to offer ownership stakes to.

The biggest risk might be an upcoming “land grab” in RNG which could reduce the return profile over time. For example, he wonders whether landfill operator Waste Management (WM) could eventually decide to get into this business. That could be viewed as a longer-term competitive risk, but the presenter’s model doesn’t call for underwriting a lot of potential upside. Rather, the model is based largely on a known backlog of business over the next 3 years.