EPA Cuts And Oversupply Will Depress RNG Market Outlook

Key Takeaways

• Structural shifts in regulation and policy threaten Montauk's core revenue streams by reducing demand and tightening credit eligibility for renewable natural gas.
  
• Rising competition, elevated costs, and alternative renewables undercut margin growth and strategic relevance, risking sustained declines in profitability and sector positioning.
  
• Expansion into new projects and strategic partnerships, alongside favorable policy trends, position Montauk for improved revenue visibility, margin growth, and scalable profitability.

Catalysts

A renewable energy company, engages in recovery and processing of biogas from landfills and other non-fossil fuel sources.

• The EPA has explicitly reduced cellulosic biofuel (D3 RIN) volume requirements for 2024 and proposed materially lower mandates for 2025 through 2027, specifically citing capped demand for RNG in transportation. As the growth rate of transportation usage for RNG is expected to remain sluggish and RIN generation can easily exceed EPA targets, Montauk faces structurally weaker long-term demand for its core output that will directly weigh on topline revenue and realized RIN pricing.
  
• Widespread advancements in other renewables like solar, wind, and hydrogen are likely to redirect future policy incentives and corporate decarbonization investments away from RNG, further constraining Montauk's addressable market and threatening the company's strategic relevance and access to low-cost capital, which will likely translate to slower revenue growth and potential compression in equity valuations.
  
• Montauk's revenue and earnings remain heavily dependent on regulatory credits and incentives, but policy momentum is building to tighten eligibility, introduce waiver credits, and link RIN generation to actual utilization, creating elevated earnings volatility and likelihood of subsidy erosion, especially as the EPA continues to scrutinize the climate benefits of RNG relative to alternatives, which could materially depress net margins as credit values decline.
  
• The company's high capital expenditure requirements to maintain, expand, and technologically enhance production sites-amid increasing operational complexity of new feedstocks and growing competition from sector consolidation-are likely to exacerbate cost inflation and pressure return on invested capital, undermining future margin expansion and reducing free cash flow generation.
  
• The potential for industry-wide oversupply is rising as new entrants aggressively ramp up biogas projects in agricultural and municipal waste, risking sustained reductions to renewable fuel credit values and commodity prices; this dynamic will likely push Montauk toward structurally lower profitability and limit the company's future revenue and EBITDA growth regardless of its expansion projects or joint ventures.

Montauk Renewables Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Montauk Renewables compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Montauk Renewables's revenue will grow by 16.9% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 1.5% today to 7.1% in 3 years time.
• The bearish analysts expect earnings to reach $20.7 million (and earnings per share of $0.14) by about August 2028, up from $2.6 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 12.6x on those 2028 earnings, down from 107.0x today. This future PE is lower than the current PE for the US Renewable Energy industry at 42.3x.
• Analysts expect the number of shares outstanding to decline by 0.31% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.61%, as per the Simply Wall St company report.

Montauk Renewables Future Earnings Per Share Growth

Risks

• The ongoing global push for decarbonization and net-zero targets is increasing demand for renewable natural gas and environmental credits, which could drive revenue and support long-term equity valuations as more governments and corporations prioritize climate solutions.
  
• Expansion efforts such as Montauk's commissioning of its second Apex RNG facility, major investments in new swine waste-to-electricity projects in North Carolina, and large-scale carbon capture initiatives point to rising production capacity, which may lead to higher revenues and EBITDA as these projects come online.
  
• Strategic partnerships, including the new GreenWave Energy Partners joint venture and the collaboration with Emvolon for green methanol production, are broadening Montauk's access to proprietary markets and technology, potentially increasing earnings visibility and margin stability as these ventures mature.
  
• Favorable policy developments, such as new swine renewable energy credit legislation in North Carolina and enhanced eligibility for investment tax credits under the Inflation Reduction Act, may enable Montauk to capture higher margins and reduce net project costs, which helps improve net margins and supports sustained earnings growth.
  
• Long-term industry trends, including increased integration of RNG into national energy strategies and stable or increasing incentives for biogas and carbon sequestration, are likely to provide Montauk with a growing addressable market and more predictable revenue streams, improving the company's ability to scale profitably.

Valuation

• The assumed bearish price target for Montauk Renewables is $1.5, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Montauk Renewables'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 $4.0, and the most bearish reporting a price target of just $1.5.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $289.9 million, earnings will come to $20.7 million, and it would be trading on a PE ratio of 12.6x, assuming you use a discount rate of 7.6%.
• Given the current share price of $1.99, the bearish analyst price target of $1.5 is 32.7% 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.