Accelerating Electrification Will Undercut RNG Amid Tightening Regulations

Key Takeaways

• Reliance on renewable natural gas for fleet fuel, amid rising electrification and alternative fuels, increases vulnerability to shifting demand, policy changes, and margin compression.
  
• Project delays and regulatory hurdles threaten growth in production, while heavy dependence on government incentives exposes earnings to substantial volatility.
  
• Legislative support, vertical integration, and resilient execution across RNG production and distribution position OPAL Fuels for improved profitability, revenue growth, and reduced earnings volatility.

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.

• The accelerating shift toward widespread electrification in transportation, including growing policy support and technological improvements for electric and hydrogen vehicles, is likely to cause a structural decline in long-term demand for renewable natural gas as a fleet fuel, directly impacting OPAL Fuels' core revenue and customer base.
  
• OPAL Fuels remains highly dependent on favorable government incentives and complex renewable fuel credit markets such as the RIN and LCFS programs; any reduction, expiration, or unfavorable restructuring of these subsidies would expose the company to significant declines in earnings and margin volatility with limited recourse.
  
• Delays in project development and execution, especially due to permitting difficulties and lengthy construction timelines in states like California, already evidenced by the Kirby project's slip to 2027, pose persistent risks to achieving forecasted RNG production growth and may defer or diminish revenue realization in future years.
  
• Increasing scrutiny by regulators alongside more stringent lifecycle emissions requirements, coupled with mounting pressure to direct incentives toward zero-emissions solutions, could make RNG economically uncompetitive, driving up compliance costs and compressing OPAL Fuels' net margins sector-wide.
  
• As competitive pressures intensify from emerging alternatives such as green hydrogen, advanced biofuels, and direct electrification, OPAL Fuels' highly concentrated exposure to heavy-duty transport fleets leaves it vulnerable to abrupt shifts in customer preference, threatening both market share and long-term earnings growth.

OPAL Fuels Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on OPAL Fuels compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming OPAL Fuels's revenue will grow by 18.5% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 0.5% today to 3.5% in 3 years time.
• The bearish analysts expect earnings to reach $19.0 million (and earnings per share of $0.67) by about August 2028, up from $1.6 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 24.5x on those 2028 earnings, down from 42.0x today. This future PE is greater than the current PE for the US Oil and Gas industry at 13.1x.
• 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 8.06%, as per the Simply Wall St company report.

OPAL Fuels Future Earnings Per Share Growth

Risks

• Recent legislative action, including the extension of the 45Z production tax credit through 2029 and ongoing bipartisan policy alignment, is set to provide OPAL Fuels with multi-year high-margin tax benefits and visibility for at least four years, which is likely to improve EBITDA and overall profitability.
  
• Strong growth and execution in both the upstream RNG production (with a 33% year-over-year increase in output and clear visibility on project expansions through 2027) and downstream dispensing businesses-highlighted by 30% EBITDA growth in Fuel Station Services-suggest a robust revenue trajectory and operating leverage potential.
  
• Vertical integration across RNG production and distribution, long-term partnerships with major national fleets, and a rigorous capital allocation framework position OPAL Fuels to capture value throughout the supply chain and generate more stable cash flows and higher net margins over time.
  
• The company's ability to maintain financial guidance despite the current low RIN price environment, supported by forward sales contracts, diversification into fuel station operations, and disciplined project management, reduces earnings volatility and supports ongoing revenue and adjusted EBITDA growth.
  
• Increased policy clarity and the recent EPA rollback of rules mandating zero-emission heavy-duty trucks have improved the competitiveness of CNG and RNG for fleet conversions, widening OPAL's customer funnel and fortifying demand, which is poised to strengthen revenues and free cash flow in future periods.

Valuation

• The assumed bearish price target for OPAL Fuels is $2.0, which represents the lowest 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 more bearish end of the spectrum.
  
• 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 bearish analysts, you'd need to believe that by 2028, revenues will be $549.4 million, earnings will come to $19.0 million, and it would be trading on a PE ratio of 24.5x, assuming you use a discount rate of 8.1%.
  
• Given the current share price of $2.31, the bearish analyst price target of $2.0 is 15.5% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• 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.