Share Code: REN – Market Cap: R2.2bn – PE: -50.5x – DY: 0.0
News: Helium and LNG offtakes lining up nicely
- Phase 1: Renergen has signed a 5-year LNG offtake with a major glass manufacturer, Consul Glass. The supply of LNG is to begin in January 2022 and ramp-up to 14tons/day. The LNG will be priced off the floating South African LPG price.
- Phase 2: A raft of supply agreements for a total of c.65% of the expected helium production of Phase 2 has been signed with a range of major players (Linde Inc., Messer LLC, Helium24 LLC) for between 10 to 15 years. The helium will be priced in US Dollars with annual escalations linked to the US CPI.
Spot Prices: Moving in Renergen’s favour
- Most spot prices and currencies have gone in Renergen’s favour, thus leading to a strong uplift in the Group’s implied Sum-of-the-Parts (SOTP):
- South African Diesel Whole Price (A1) has risen +7%, leading to a higher value for the Group’s LNG reserve that is priced at a 25% discount to this price,
- Rand has weakened nearly 9% versus the US Dollar, both helping lift up the above-noted diesel price and boosting the USD-denominated helium price, &
- The South African 10-year bond rate has dropped from 9.26% to 8.96%, lowering our WACC & boosting our NPV.
Valuation and Implied Return: Contrary to share price weakness…
- Reflecting the above-changed input variables (amongst several other minor ones), we see REN’s fair value as 5603cps (previously: 4535cps) and its 12m TP as 6567cps (previously: 5330cps).
- We find it strange that the share price has moved contrary to the positive movements in the variables driving up the implied fair value of Renergen.
Refer to our Initiation of Coverage for more background.
Share Code: REN – Market Cap: R2.4bn – PE: -55.6x – DY: 0.0%
Discovery of Helium at Evander & Other Wells; Pipeline Update
- Renergen has found world-class helium concentrations at the MDR1 (3.15%) and P007 (4.38%) wells along with intersecting gas at R2D2. These wells all either point towards a better/larger resource and/or higher well density potential (i.e. lower capex/well) that incrementally adds upside to the Group’s existing Phase I and II of its Virginia Gas Project.
- Helium has now also been found at the Group’s Evander Exploration Right prospect at 1.1% concentrations. While this is lower than Virginia, 1.1% is still a world-class concentration and adds a further 52,000 hectares of exploration rights to the Group’s already exciting gas resource.
- Finally, the Virginia Gas Project’s pipeline has been completed and performance tested with very pleasing results (+7% higher than planned flow rate; 30% less power consumption) that should have positive operational and valuation impact.
Incremental Capital Raise Strongly Supported
- Renergen has placed c.5.6m shares (c.4.8% dilution to c.117.5m shares in issue) at c.1910cps (c.9.5% discount to the 30-day VWAP) with two key considerations to this placement:
- It was quickly and fully subscribed, adding 3 South African and 9 Australian institutional investors, and, somewhat, derisking the likely Phase II capital raise through the process, &
- Funds will debottleneck the Group’s exploration of the Virginia Project, Feasibility Studies for Phase II & offer some working capital runway for existing operations.
Forecast, Valuation and Implied Return: Updated for Spot Changes
- Leaving our model unchanged and only updating it to reflect current spot prices (ZAR, Diesel, & lower share price), we see REN’s fair value as 4535cps (previously: 4978cps) and its 12m TP as 5330cps (previously: 5850cps).
Share Code: REN – Market Cap: R2.7 – PE: -65.2x – DY: 0.0%
FY 21 Results: Smaller than Expected Preproduction Loss
- Renergen’s operating loss was smaller than expected despite a small revenue miss as lost production (due to the lockdown) was offset costs.
- The Group spent R125.7m on assets under construction, capitalized R21.5m intangible assets and made a second draw down on its US International Development Finance Corporation (DCF) loan to the tune of $12.5m. The Group’s short-term unencumbered cash reserves sit at R130m.
Progress Updates: Almost Entire Positive
- The Group has concluded a partnership with Total SA as LNG distribution is set up down the key N1 route.
- Drilling of P007 & MDR1 both reflect strong resource, flow & helium concentration data, highlighting potentially better-quality resources and/or lower capex intensity of Phase Two.
- The Group has concluded its first helium sales agreement with a global tier-one automotive supplier for Phase Two.
- Finally, The Group’s innovative cold chain storage solution (Cryo-Vacc™) made its first sale, moving post-revenue.
Forecast, Valuation and Implied Return: Appears Undervalued
- Since our Initiation, our major assumptions remain the same, albeit we have updated our model for the latest spot prices that, in general, have moved in Renergen’s favour.
- Our DCF-driven sum-of-the-parts (SOTP) valuation for Renergen implies Phase One & Two—offset by central costs, debt and (potential) dilution—are worth 4149cps (previously 3539cps). After options for Evander and Cryo-Vacc are added, we see Renergen’s share as potentially worth 4978cps (previously 4247cps).
- Rolled-forward by CoE, our 12m TP is 5850cps (previously 4977cps) or over double what the current share price is.
Refer to our Initiation of Coverage for more background on this stock.
Share Code: REN – Market Cap: R2.3bn – PE: -34.9x – DY: 0.0%
Business Overview: Near-term Helium & LNG Producer
- Renergen owns an onshore petroleum production right to the “Virginia Gas Project” that is rich in methane (LNG) and helium and the Group is developing in a two-phased approach.
- Renergen is in a formidable position to move up the value-curve as Phase One nears first-production.
- Importantly, the Virginia’s Phase Two could be multiples the size of Phase One and unlock staggering value in the Group.
LNG & Helium Markets: Attractive Prospects
- South Africa is an energy-scarce economic region with both a good potential LNG demand and a potential supply deficit of the gas in its near-future as some existing assets come offline.
- The global helium market is opaquer, but the recent drop-off in USA supply and uncertainty around Russia’s planned supply growth combine to imply tight(er) helium supplies post-pandemic. Finally, the major consumers of helium (aerospace, semiconductors & MRIs) are all above-average growth vectors and cannot substitute helium for anything else.
Forecast, Valuation and Implied Return: Upside Apparent
- Our DCF-driven sum-of-the-parts (SOTP) valuation for Renergen implies Phase One & Two—offset by central costs, debt and (potential) dilution—are worth 3539cps. After options for Evander and Cryo-Vacc are added, we see Renergen’s share as potentially worth c.4247cps.
- Rolled-forward by CoE, our 12m TP is 4977cps.
Key Up- & Downside Risks: Lots of Moving Parts
- Running a sensitivity analysis on our model highlights that Renergen’s valuation is more sensitive to helium than LNG, but both prices are ultimately sensitive to the USD/ZAR rate.
- Inflation, production, and resource risks also exist here.