RNG Expansion And Decarbonization Policies Will Drive Future Opportunities In Heavy-Duty Trucking

Key Takeaways

• Expansion through new and existing RNG projects increases production capacity, driving future revenue and cash flow growth.
  
• Strengthening downstream services and potential decarbonization policy support can enhance margins and demand, leading to higher earnings.
  
• Regulatory changes, market volatility, competition, and M&A challenges pose risks to OPAL Fuels' revenue stability and growth prospects.

Catalysts

Engages in the production and distribution of renewable natural gas for use as a vehicle fuel for heavy and medium-duty trucking fleets.

• The recent commissioning of the Sapphire and Polk RNG projects, combined with earlier operational projects such as Prince William, significantly increased OPAL Fuels' operational design capacity by 3.6 million MMBtus. This expansion is expected to drive future revenue growth through increased production.
  
• The monetization of ITC credits, which contributed $8.6 million in cash proceeds in the third quarter, is expected to continue with more credits from projects recently put into operation and those in construction. This will positively impact future net income and cash flow.
  
• Six projects currently in construction, representing 2.6 million MMBtu of OPAL's share of annual design capacity, are expected to further boost revenue and adjusted EBITDA when they become operational.
  
• The strengthening and expansion of downstream fuel station services, including higher throughput of RNG and improvement in the construction and services segment, can support higher net margins and contribute to increased earnings.
  
• Potential policy support and market focus on decarbonizing sectors like heavy-duty trucking, including the ongoing rollout of new natural gas engines, could boost demand for RNG and translate into sustained revenue growth for OPAL Fuels.

OPAL Fuels Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming OPAL Fuels's revenue will grow by 26.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.6% today to 5.2% in 3 years time.
• Analysts expect earnings to reach $32.8 million (and earnings per share of $1.22) by about January 2028, up from $4.9 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 6.9x on those 2028 earnings, down from 17.9x today. This future PE is lower than the current PE for the US Oil and Gas industry at 11.9x.
• Analysts expect the number of shares outstanding to decline by 46.24% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.1%, as per the Simply Wall St company report.

OPAL Fuels Future Earnings Per Share Growth

Risks

• The regulatory and policy changes in the European RNG markets signal potential export disruptions, which could impact future revenue streams.
  
• Tightening in dispensing capacity may increase RNG marketing fees, raising costs and affecting net margins.
  
• The shift of the LCFS (Low Carbon Fuel Standard) market could cause volatility that affects revenue streams, particularly for landfill projects that don't capitalize on LCFS credits.
  
• Competition in the RNG market from larger CAPEX projects may lead to pricing pressure, potentially impacting OPAL Fuels' earnings stability.
  
• M&A market fragmentation and failure to close transactions could mean lost opportunities for growth, affecting revenue and earnings projections.

Valuation

• The analysts have a consensus price target of $6.92 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 $10.0, and the most bearish reporting a price target of just $3.4.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $626.7 million, earnings will come to $32.8 million, and it would be trading on a PE ratio of 6.9x, assuming you use a discount rate of 8.1%.
• Given the current share price of $3.07, the analyst's price target of $6.92 is 55.7% 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.