Favorable Policies Will Drive RNG Market Expansion

Key Takeaways

• Supportive regulations and increasing ESG mandates are driving demand for RNG, providing OPAL Fuels with revenue stability and improved margins.
  
• Expansion of RNG projects and an integrated business model are positioning OPAL Fuels for sustained earnings growth and reduced reliance on credit pricing.
  
• Reliance on unstable policy incentives, market volatility, execution risks, slow industry adoption, and increased competition threaten OPAL Fuels' growth, profitability, and cash flow visibility.

Catalysts

Engages in the production and distribution of renewable natural gas (RNG) for use as a vehicle fuel for heavy and medium-duty trucking fleets throughout the United States.

• Recent and sustained bipartisan regulatory support-including the extension of the 45Z production tax credit through 2029 and favorable revisions to heavy-duty truck emissions regulations-substantially increases policy visibility, which is expected to drive both topline revenue growth and EBITDA expansion as OPAL can monetize these incentives and faces less regulatory uncertainty.
  
• Increased ESG mandates among logistics and transportation fleet operators, coupled with the operational and economic challenges of electric and hydrogen alternatives, are pushing major fleets toward proven RNG solutions, likely underpinning OPAL's long-term offtake agreements, providing revenue stability, and supporting margin growth.
  
• Ramp-up of newly commissioned RNG projects and a robust pipeline of in-construction and development-stage facilities (set to add over 2 million MMBtu annually in the next two years), positions OPAL for sustained double-digit revenue and earnings growth as these projects come online.
  
• The integrated model combining upstream RNG production and downstream fueling station ownership allows OPAL to capture greater recurring economics per unit of fuel, generate high-margin revenues less correlated to environmental credit pricing, and deliver consistent improvement in net margins.
  
• Targeted investments in operational platform (systems, internal controls, technology, and advocacy) are expected to enhance scalability, lower long-term operating costs, and unlock future free cash flow, all supportive of higher long-term earnings and net margin improvement.

OPAL Fuels Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming OPAL Fuels's revenue will grow by 18.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 0.5% today to 3.5% in 3 years time.
• Analysts expect earnings to reach $19.3 million (and earnings per share of $0.68) by about August 2028, up from $1.6 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 40.5x on those 2028 earnings, down from 43.4x today. This future PE is greater than the current PE for the US Oil and Gas industry at 13.0x.
• Analysts expect the number of shares outstanding to grow by 2.02% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.03%, as per the Simply Wall St company report.

OPAL Fuels Future Earnings Per Share Growth

Risks

• Persistent declines or ongoing volatility in RIN (Renewable Identification Number) pricing, compounded by the recent loss of ISCC carbon credits in the Renewable Power segment, may continue to pressure revenue growth and reduce EBITDA, particularly if policy-driven price supports weaken further.
  
• Project execution risk remains high due to long construction timelines and permitting delays (e.g., the Kirby project in California was pushed out due to regulatory and complexity issues), which could result in delayed revenue recognition and increased capital expenditures, impacting free cash flow and earnings visibility.
  
• Heavy dependence on favorable public policy and tax incentives-such as the 45Z production tax credit extension and investment tax credits-introduces significant regulatory risk; any changes, delays in Treasury or EPA guidance, or adverse modifications to renewable fuel standards could negatively affect margins and earnings.
  
• The slow "pull-through" adoption rate by logistics and trucking firms, despite policy clarity for heavy-duty transport, may indicate slower realized demand growth for RNG compared to expectations, exposing the company to risk of lower-than-anticipated revenue and utilization of new infrastructure.
  
• Rising industry competition and sector consolidation, including from larger peers or new entrants, could compress contract values and decrease market share, pressuring long-term net income, return on capital, and the ability to sustain above-market growth in both upstream and downstream segments.

Valuation

• The analysts have a consensus price target of $3.375 for OPAL Fuels 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 $5.0, and the most bearish reporting a price target of just $2.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $553.3 million, earnings will come to $19.3 million, and it would be trading on a PE ratio of 40.5x, assuming you use a discount rate of 8.0%.
  
• Given the current share price of $2.39, the analyst price target of $3.38 is 29.2% 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.