A company whose time has come
Interest in renewable energy sources looks to present Montauk Renewables with a promising future, writes
Very little is written about JSE- and Nasdaq-listed Montauk Renewables, despite it once attaining Holy Grail status for a listed domestic corporate.
The company turned a fledgling business around, consolidated its corporate structure, listed itself on the Nasdaq and became a proverbial “10-bagger” stock in the process.
What is this enigmatic stock that has a current JSE market capitalisation of R17.6bn and trades at R125? On Nasdaq the counter is trading at $6.42 a share with a valuation of $922m and an earnings multiple of 26.
From a peak of R362 in September 2022 (as the global gas market boomed due to the energy crisis created by the Russian invasion of Ukraine), to the year to date, Montauk’s share price has deflated as the global natural gas market has normalised. But there is more to the company than this.
The stock may be unfamiliar to many, but the group has a history that stretches back decades.
As things stand today Montauk Renewables is an alternative energy company with its operating assets in the US. It develops, owns and operates large-scale renewable energy projects using landfill, where it extracts methane natural gas used in the generation of electricity. It has 30 years of experience in this specialised field and the group is also developing proprietary technology to extract methane from animal manure.
The history of Montauk and the way it landed in the lap of former majority shareholder, JSE-listed investment holding company Hosken Consolidated Investments (HCI), is an interesting one.
HCI’s involvement with Montauk stretches back to 2005 — but in an indirect fashion. In April 2005, HCI acquired a 21% stake in investment holding company Johnnic for R311m. HCI and Johnnic each had a stake in Tsogo Investment Holdings, which controlled various casino and hotel assets. HCI’s bid stemmed from its aim to spur its interests in gaming.
That Johnnic stake was later, in 2005, increased to 40%, necessitating HCI’s mandatory offer to minority shareholders. The buyout was fraught and dragged on. It was finally concluded only in
2008, when HCI acquired full control of Johnnic.
It was Johnnic that originally acquired a stake in Montauk in January 2007, paying $61m (R432m at the time) for 93.5% of the alternative energy landfill gas business as part of its diversification policy. The plan involved bringing Montauk’s technology to South Africa to extract methane from the country’s 400 landfill sites.
The investment did not live up to expectations. When HCI took control of Johnnic it inherited the Montauk stake.
HCI unbundled its Montauk stake in 2014 with a separate JSE listing. But the counter never attracted much interest in what was then an unusual alternative energy business. Again, does this have parallels with what Renergen is now facing from sceptical and uninformed domestic investors towards its helium and LNG assets?
The catalyst for Montauk came in 2015, when HCI made a buy-out offer to Montauk minority shareholders as its indirect stake had risen to 44.1%. An offer of 320c a share was pitched to shareholders.
This consolidated HCI’s ownership of Montauk and also led to current HCI CEO Johnny Copelyn emerging as the largest individual shareholder. Due to the run in the Montauk share price since unbundling and US listing, Copelyn’s stake is now worth R7.2bn or $370m.
In 2020 Montauk looked for a listing in the US, which is understandable, considering its sprawling operating base in that country.
Montauk, at its original JSE listing, languished. At its lowest point it could have been snapped up for 220c. It had a market value of R300m. It attained a peak in
September 2022 at R324, with a market value of R46bn after the Nasdaq listing and a surge in natural gas prices.
Montauk stated that its rationale to list in the US was tied to its wish to raise the company’s profile and enable it to secure more funding. It
also decried the lack of interest from South African investors in alternative energy.
The company has come into its own as a business in the past few years as investor interest in environmentally sourced renewable natural gas (RNG), led by regulation and subsidies in the US, fundamentally changed the market.
The regulatory and subsidy landscape is complex and is driven by an annual number of credits called D3 renewable identification numbers (Rins) that are allocated by the US Environmental Protection Agency under its renewable fuel standards (RFS) programme for the production of cellulocity-based RNGs.
The US Congress created the RFS programme to reduce greenhouse gas emissions and expand the nation’s renewable fuels sector while reducing reliance on imported oil.
RNG has the same chemical composition as natural gas from fossil sources, but has unique environmental attributes assigned to it due to its origin from organic sources. These attributes qualify RNG as a renewable fuel under the federal RFS programme, allowing RNG to generate Rins when the RNG is used as transportation fuel.
Companies that develop and produce natural gas, especially from waste byproducts, such as Montauk, gain an effective subsidy from the government for its cellulocity renewable natural gas production. This subsidy is materially higher than the prevailing market price of other forms of fossil fuelproduced gas.
The renewable gas that is produced gains a Rin, and these Rins have a physical value. During the energy boom in 2022, which was driven by the Russian invasion of Ukraine, Rin prices peaked at $3.61 a unit, with an average trading range in the period of $3-$3.30 a unit.
The Rins that are produced are saleable credits, and the Rins generated by renewable fuel producers or importers are bought and sold “attached” to the renewable fuel until the fuel is purchased by an “obligated party” (a refiner or importer of gasoline or diesel fuel) or blended with a petroleum-based transportation fuel.
This trading, alongside the price of natural gas as well as the annual allowance of Rins allocated by the US Environmental Protection Agency, drive the market and thus the Rin price.
With a slump in natural gas prices over the past months, the Rin prices also fell. They bottomed at $1.88 a unit after the release of the new 2023 allocation and are trading at $2.29.
US natural gas prices peaked at nearly $9 a metric million British thermal units (MMBtu) in 2022 and today trade at $2.28 per MMBtu, showing the slide in the energy market for gas.
This is key to the Montauk share price rally and the results experienced in the boom period of 2022 as well as the consequent share price slide in 2023 as gas prices and associated Rins declined in value.
In financial 2022 results showed that Montauk’s revenue and profit had soared as natural gas and Rin prices rose steeply. The company’s RNG production dipped 2.9% to 5,532MMBtu.
For the year ended December 2022, revenue rose 39% to a record $205.6m, with operating profit soaring 1,350% to $44.6m. Net income for the period was $35.2m vs a prior comparative loss of $4.5m. Headline EPS, as expressed in rand, was 442c a share. This increase was despite a modest 2.9% decline in MMBtu renewable gas production. The average Rin price attained in the period was $3.25, vs $1.91 in 2021. This obviously powered the financial 2022 results.
Quarter one 2023 results were released on May 11 and showed Montauk revenue and results sliding on the decline in natural gas and Rin prices. Revenue declined 40.5% to $19.2m, with an increase in the like-on-like quarter’s loss of 240% to $3.8m.
There was a modest 1.2% decrease in MMBtu RNG production, and 46,000MWh in electricity was generated in the quarter. In the period the company took a decision to withhold Rins from the market due to the slide in their value. This contributed to the loss for the quarter.
From a recent low the Rin market has stabilised somewhat, supporting Montauk’s decision.
Growth of production sites as well as the plan to develop new RNG from animal waste is planned for 2023.
From the 12 sites in 2022, Montauk now has 15 operating projects. With cash in hand of $78m, the company has sufficient funds to meet its aims. In late March a new facility was planned in a new territory in South Carolina, which would add 900MMBtu to RNG production at a cost of $25m.
All of these acronyms and the jargon may seem confusing, but the business model at its core is simple: Montauk produces renewable natural gas from landfill and animal waste.
With legislation and trends moving towards more renewable and green energy sources, the future for companies such as Montauk looks sound.
However, politics could sway events, as under the previous Republican administration there was a cut in allowances for RNG. This was reversed with the Democratic government under President Joe Biden. Montauk runs some risk that a changed political party in the US could trim its subsidy and business.
Within the sector there has also been significant M&A as larger companies look to add to their green credentials.
With a market value just shy of $1bn, it is clear that Montauk, with its established business and expertise, could be in the crosshairs of acquisitive parties. IM hears whispers that such an approach has occurred, but was not concluded.
Montauk, aside from expanding its RNG sites, could also benefit from the growth of electric vehicle demand. Under a proposal, electricity produced from qualifying biogas and contracted for use in EV charging would qualify for electric renewable identification numbers (eRins) for use in EV recharging. If this takes place it could lead to significant growth in demand for RNG production as well as the companies involved.
At R125, Montauk is down 34% in the year to date and is sharply lower than at its 2022 share price peak.
With a transition under way from fossil fuels towards green alternatives, Montauk seems to IM to be well placed to benefit from a seismic shift in attitudes away from fossil fuels towards renewable energy.
With its rand hedge qualities and possible M&A attractions and despite the possible regulatory risks IM feels confident enough to recommend that investors interested in the new dawn of energy take a position in Montauk.