High Capital Intensity And Policy Shifts Will Undermine RNG Viability

Key Takeaways

• Shift toward electrification and competing technologies threatens OPAL Fuels’ core market, compressing revenue growth and long-term profitability.
  
• Regulatory uncertainty and ESG pressures may restrict access to capital, increasing financial strain and hindering investment in future projects.
  
• Robust project pipeline, vertical integration, policy incentives, and emerging export markets position the company for sustained growth, margin expansion, and long-term earnings resilience.

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.

• Accelerating electrification in the transportation sector and increasing market adoption of battery electric vehicles, driven by stringent global emissions policies, are likely to erode OPAL Fuels' long-term addressable market for RNG as a vehicle fuel, which would constrain future topline revenue and slow growth in their core segments.
  
• The high capital intensity and long development cycles required for new RNG projects, combined with potential project delays and cost overruns, may result in persistent underutilization and rising operating costs, placing sustained pressure on free cash flow and shrinking net earnings over time.
  
• Advances in alternative renewable energy technologies, including green hydrogen and next-generation biofuels, are likely to outcompete RNG on both cost and emissions grounds, reducing OPAL Fuels' pricing power, compressing margins, and undermining its long-term profitability.
  
• Ongoing uncertainty regarding the future of key regulatory incentives—such as the renewal or phase-out of Low Carbon Fuel Standard credits, Renewable Identification Numbers, and new tax incentives—creates significant downside risk; any adverse regulatory policy changes or delayed implementation would have an immediate negative impact on revenue streams and gross margins.
  
• Growing ESG investor scrutiny and increasing public perception that renewable natural gas is a transitional rather than definitive solution to decarbonization may further limit OPAL Fuels' access to low-cost capital, depress valuation multiples, and ultimately reduce investment in growth initiatives, leaving the company structurally disadvantaged compared to other clean energy providers.

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 17.5% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 0.2% today to 3.6% in 3 years time.
• The bearish analysts expect earnings to reach $18.6 million (and earnings per share of $0.65) 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 bearish analyst cohort, the company would need to trade at a PE ratio of 24.3x on those 2028 earnings, down from 112.8x 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

• Strong bipartisan and regulatory support for biofuels and RNG, plus growing international interest in biogenic methane abatement, may increase future demand for OPAL Fuels' products, potentially driving up long-term revenues and supporting share price strength.
  
• The company has a robust pipeline of new RNG projects with increasing production capacity and secured gas rights, which lays the foundation for sustained volume and revenue growth far into the future, positively impacting EBITDA and topline performance.
  
• Vertical integration and downstream expansion are enhancing profitability and reducing exposure to commodity price volatility, with the Fuel Station Services segment providing predictable and growing cash flow, thus potentially supporting expansion in net margins and steady earnings.
  
• OPAL Fuels possesses ample liquidity and access to federal incentives such as investment tax credits (ITC) and Section 45Z credits, which support capital expenditure plans and could provide a financial cushion to fund growth projects and mitigate cyclicality in earnings.
  
• Emerging opportunities to monetize RNG in international export markets and diversify into renewable power offtake for new sectors (such as data centers) could broaden the company's end-market exposure, increasing revenue streams and supporting long-term earnings resilience.

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 $8.0, 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 $520.2 million, earnings will come to $18.6 million, and it would be trading on a PE ratio of 24.3x, assuming you use a discount rate of 7.3%.
• Given the current share price of $2.5, the bearish analyst price target of $2.0 is 25.0% 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.