Accelerating Global Decarbonization Will Expand RNG In Clean Transportation

Key Takeaways

• Strong policy tailwinds and operational scale position the company for substantial revenue and cash flow growth as demand for renewable natural gas rises.
  
• Vertically integrated model, credit monetization, and expanding fuel station network enhance margins while robust liquidity supports project growth and potential shareholder returns.
  
• Regulatory and market headwinds, including policy uncertainty, shifting customer preferences, and high capital demands, threaten OPAL Fuels’ revenue stability, profitability, and long-term growth prospects.

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.

• OPAL Fuels is positioned to benefit significantly from strong anticipated growth in demand for renewable natural gas as government decarbonization policy accelerates, especially in transportation and heavy-duty trucking. Pending regulatory clarity around U.S. fuel and biogas policy, including finalization of 45Z tax credits and EPA rules, could unlock a step-change in both revenues and EBITDA if incentives turn out to be as generous as bipartisan support and industry lobbying efforts suggest.
  
• The company’s vertically integrated model, controlling production through to dispensing and services, enables it to capture more margin as it expands its RNG project portfolio and fuel station network. The operational leverage from bringing newly constructed RNG facilities and fuel stations online (with production expected to rise at a 37% growth rate this year) should drive EBITDA and free cash flow meaningfully higher as fixed costs are spread over greater volumes.
  
• OPAL is insulated from near-term pricing volatility due to its ability to monetize renewable fuel credits—and if pricing for D3 RINs or LCFS credits remains strong or improves with tightened decarbonization mandates, its high margin exposure could provide upside to earnings and support bullish projections for cash flow generation.
  
• The accelerating adoption of RNG engines in the heavy-duty fleet market, driven by the launch of new engine platforms from major truck OEMs and policy recognition of the challenges of zero-emission vehicles, is a powerful long-term catalyst. As more fleets adopt low-carbon RNG solutions, OPAL’s service and dispensing station business is set to capture higher utilization, fueling robust revenue and margin expansion.
  
• OPAL’s robust liquidity position and growing operating cash flow enable the company to both fund a pipeline of new project development and, over time, consider shareholder capital return options such as dividends or buybacks. This financial flexibility, combined with increasing secular and corporate demand for lower-carbon solutions, supports the most bullish scenarios for long-term growth in earnings and equity value.

OPAL Fuels Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on OPAL Fuels compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming OPAL Fuels's revenue will grow by 21.2% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 0.2% today to 3.6% in 3 years time.
• The bullish analysts expect earnings to reach $20.8 million (and earnings per share of $0.73) by about July 2028, up from $642.0 thousand today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 87.1x on those 2028 earnings, down from 114.6x today. This future PE is greater than the current PE for the US Oil and Gas industry at 12.3x.
• Analysts expect the number of shares outstanding to grow by 1.93% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.31%, as per the Simply Wall St company report.

OPAL Fuels Future Earnings Per Share Growth

Risks

• There is ongoing regulatory uncertainty around key policy drivers such as the EPA’s renewable fuel standard and the 45Z tax credit, which creates unpredictability in the long-term revenue stream and could limit investment in RNG, ultimately impacting both revenue and net margins as subsidies or incentives are reduced or delayed.
  
• The company is heavily reliant on a concentrated group of customers in sectors like heavy-duty trucking and logistics, where uptake of new RNG-compatible engines has been slower than anticipated; loss, renegotiation, or slowing adoption by these customers poses a significant risk to revenue stability and long-term earnings growth.
  
• Long-term shifts in government policy, customer preferences, and capital allocation increasingly favor electrification and green hydrogen technologies over RNG, potentially leading to a secular decline in core demand for renewable natural gas and pressuring both top-line revenue and asset utilization rates.
  
• Project-based capital intensity and prolonged development timelines for both fuel stations and RNG facilities require sustained high levels of upfront investment, which elevates risk around return on invested capital and could hinder the company’s ability to scale efficiently, thus suppressing future earnings growth and cash flow generation.
  
• Heightened scrutiny of methane leakage, stricter carbon accounting standards, and possible price declines in RIN credits or RNG itself due to oversupply or competition from larger players put persistent downward pressure on realized selling prices and operating margins, threatening the company’s profitability and long-term market share.

Valuation

• The assumed bullish price target for OPAL Fuels is $8.0, which is the highest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of OPAL Fuels's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $8.0, and the most bearish reporting a price target of just $2.0.
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be $570.2 million, earnings will come to $20.8 million, and it would be trading on a PE ratio of 87.1x, assuming you use a discount rate of 7.3%.
• Given the current share price of $2.54, the bullish analyst price target of $8.0 is 68.2% 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.