Electrification And Overcapacity Will Erode Margins Even As British Columbia Rules Cushion Declines

Key Takeaways

• Accelerating electrification and emerging battery technologies threaten core demand, while global competition and regulatory changes heighten operational and revenue risks.
  
• Industry overcapacity and concentrated contract reliance may trigger margin erosion, underutilization, and instability in servicing growing debt.
  
• Regulatory tailwinds, strong offtake contracts, financial momentum, project development progress, and strategic asset moves position the company for improved margins, growth, and stability.

Catalysts

Engages in production of renewable fuel in North America.

• Rapid electrification of transportation and widespread adoption of battery technology is set to reduce long-term demand for renewable diesel and biofuels, threatening the growth of Tidewater Renewables' core revenue streams as the company's market shrinks over the coming years.
  
• Intensifying global competition in renewable fuels, alongside accelerating technological advances, risks rendering the company's production methods obsolete and could force recurring, costly capital upgrades, resulting in persistently high depreciation and suppressed net margins.
  
• Growing regulatory uncertainty and the potential reversal or reduction of current government incentives, such as LCFS credits and carbon pricing mechanisms, expose Tidewater Renewables to abrupt changes in revenue, destabilizing earnings and undermining the predictability of future cash flows.
  
• The renewable fuels industry in North America is at risk of overcapacity due to aggressive capacity expansions and new entrants, which may lead to sustained price competition, margin erosion, and underutilization of Tidewater's existing facilities, altogether diminishing profitability.
  
• A continued reliance on a limited number of long-term offtake agreements exposes the company to renegotiation risk; the loss or deterioration of any such contracts may severely impact revenue stability and the company's ability to service elevated debt levels after recent facility investments.

Tidewater Renewables Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Tidewater Renewables compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Tidewater Renewables's revenue will grow by 22.4% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -117.7% today to 6.0% in 3 years time.
• The bearish analysts expect earnings to reach CA$32.8 million (and earnings per share of CA$0.91) by about August 2028, up from CA$-352.2 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 4.8x on those 2028 earnings, up from -0.4x today. This future PE is lower than the current PE for the CA Oil and Gas industry at 12.2x.
• Analysts expect the number of shares outstanding to grow by 0.22% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.04%, as per the Simply Wall St company report.

Tidewater Renewables Future Earnings Per Share Growth

Risks

• The British Columbia government's recent Low Carbon Fuels Act amendments, which doubled the renewable diesel requirement to 8% for 2025 and mandated Canadian production, have significantly strengthened long-term demand and pricing power for Tidewater Renewables' products, likely increasing future revenues and supporting higher margins.
  
• The company has secured offtake contracts for over 70% of its HDRD facility's forecasted production for the second half of 2025, most indexed to U.S. import parity benchmarks, which enhances revenue stability, underpins earnings visibility, and may support long-term profitability.
  
• Tidewater Renewables reported an $8 million quarter-over-quarter increase in both net income and adjusted EBITDA, driven by advantageous new sales contracts and improved emissions credit economics, indicating operational and financial momentum that could contribute to sustained earnings growth.
  
• Ongoing regulatory support from federal and provincial levels, particularly with approval for amending agreements and receiving additional credit allocations, continues to partially fund development and optimization efforts for future projects like the SAF initiative, which may improve long-term growth prospects and capital efficiency.
  
• The company's progress on asset sales, expanding its customer base for in-house refining, and integration plans (such as the acquisition of part of Pembina's pipeline) are positioning it for improved cost control, operational leverage, and increased liquidity, all of which could buttress net margins and support a stronger balance sheet in the coming years.

Valuation

• The assumed bearish price target for Tidewater Renewables is CA$3.5, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Tidewater Renewables's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• 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$3.5.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be CA$549.6 million, earnings will come to CA$32.8 million, and it would be trading on a PE ratio of 4.8x, assuming you use a discount rate of 8.0%.
  
• Given the current share price of CA$3.56, the bearish analyst price target of CA$3.5 is 1.7% lower. The relatively low difference between the current share price and the analyst bearish price target indicates that they believe on average, the company is fairly priced.
  
• 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.