British Columbia Regulation Will Boost Renewable Diesel Production

Key Takeaways

• Regulatory changes in British Columbia and potential U.S. import duties are expected to boost demand and market share, enhancing Tidewater's revenue and margins.
  
• Operational improvements and financial flexibility through credit amendments position Tidewater for sustained production growth and long-term profitability.
  
• Regulatory uncertainty and asset sales pose risks to Tidewater Renewables' profitability, with past financial challenges and market volatility affecting future stability and revenue potential.

Catalysts

Engages in production of renewable fuel in North America.

• Regulatory changes in British Columbia are set to increase renewable fuel content requirements, doubling the diesel mandate from 4% to 8%, effective April 2025. This shift is expected to boost demand for Tidewater's renewable diesel, enhancing revenue growth.
  
• Anticipated government-imposed duties on U.S. renewable diesel imports of $0.50 to $0.80 per liter may reduce competition and help increase Tidewater’s market share, potentially improving net margins and earnings starting from September 2025.
  
• Improved operational efficiency at the HDRD complex has already increased daily throughput beyond targets, suggesting capability for sustained high production levels and thus stronger revenues and earnings.
  
• Amendments to credit facilities have increased liquidity and extended maturity dates, providing Tidewater with greater financial flexibility and stability, which can support long-term growth and profitability.
  
• The firm's strategy to sell fully loaded barrels of renewable diesel which include emission credits could increase profitability if credit prices rise in response to regulatory changes, positively impacting future net margins and earnings.

Tidewater Renewables Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Tidewater Renewables's revenue will grow by 4.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from -83.9% today to 4.1% in 3 years time.
• Analysts expect earnings to reach CA$20.0 million (and earnings per share of CA$0.54) by about April 2028, up from CA$-357.8 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 10.5x on those 2028 earnings, up from -0.3x today. This future PE is lower than the current PE for the CA Oil and Gas industry at 11.8x.
• Analysts expect the number of shares outstanding to grow by 4.43% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.15%, as per the Simply Wall St company report.

Tidewater Renewables Future Earnings Per Share Growth

Risks

• Tidewater Renewables is subject to regulatory uncertainty, as political changes or delays could impact the implementation of favorable policies, potentially affecting revenue and profitability.
  
• The company's financial health was previously under threat, demonstrated by a going concern uncertainty, which, while currently resolved, highlights past challenges that could affect future earnings if similar issues arise.
  
• Dependence on the successful resolution of trade complaints and favorable regulatory environments introduces risk; potential failure could negatively impact competitive positioning and margins.
  
• The sale of EBITDA-generating assets led to a decrease in EBITDA by 44% compared to the previous year, which may impact future revenue-generating capacity.
  
• Volatility in the diesel and credit markets poses a risk to stability, as fluctuations in pricing and market demand could impact revenues and earnings.

Valuation

• The analysts have a consensus price target of CA$3.95 for Tidewater Renewables based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$5.5, and the most bearish reporting a price target of just CA$3.25.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CA$486.0 million, earnings will come to CA$20.0 million, and it would be trading on a PE ratio of 10.5x, assuming you use a discount rate of 9.2%.
  
• Given the current share price of CA$3.07, the analyst price target of CA$3.95 is 22.3% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.