AMSYF - LanzaTech Global: Carbon Capture Recycling Opportunity Faces A Cash Burn Headwind

2023-08-23 09:18:09 ET

Summary

• LanzaTech reported Q2 results highlighted by solid growth but a widening loss.
• Several carbon capture utilization projects coming online support a positive outlook.
• A pricey valuation alongside recurring negative cash flows may limit the upside in LNZA stock.

LanzaTech Global ( LNZA ) develops carbon capture utilization technology that converts carbon waste from industrial sources like factories into bio-refined fuels and synthetic chemicals. The idea here is to help companies reduce greenhouse emissions, supporting efforts at sustainability. The good news is that the company's proprietary process works with several commercial projects up and running and growth accelerating in recent quarters.

That being said, the challenge for the stock is that profitability remains elusive with the latest quarterly results highlighted by soft guidance. While LanzaTech maintains a pipeline of opportunities including partnerships with major corporations, we believe recurring negative cash flow will keep shares volatile with risks tilted to the downside.

LNZA Q2 Earnings Recap

LanzaTech reported a Q2 GAAP EPS of -$0.14 representing a net loss of $-26.8 million, which widened from -$15.9 million in the period last year. Revenue of $12.9 million climbed by 31% year-over-year with the momentum based on several engineering projects moving forward.

For context, the bulk of the business currently is based on carbon capture transformation ((CCT)) plants where Lanza essentially licenses the core technology to operators like a steel mill, factory, or power plant.

The proprietary process is based on gas fermentation where bacteria is used to convert carbon-rich waste into a primary ethanol product. From there, further renewable refinement can generate other chemicals like butanol, succinic acid, isoprene, and acetone.

During the quarter , there were advancements in three key projects toward commercial scale including an ArcelorMittal ( MT ) steel facility in Belgium expected to begin operation by Q4. Beyond the development phase fees, LanzaTech's business model also includes recurring royalties as the project enters operation.

The efforts here flow into revenue guidance for the company to reach between $80 and $100 million in revenue this year, representing an increase of 140% from the result in 2022. This considers the recent startup of the "Shougang Steel" joint venture and "Indian Oil" project set to come online still this quarter.

On the other hand, that same revenue target range was narrowed lower from a previous estimate between $80 and $120 million with management citing a shift in the timing of the project.

The company is also revising its adjusted EBITDA guidance down to a midpoint loss estimate of -$70 million compared to a prior -$60 million midpoint target. A forecast to reach positive adjusted EBITDA by 2024 remains in place, although we believe there is room to be skeptical on that point.

What's Next For LNZA?

The attraction of LanzaTech is based on its proven implementation and the strong outlook for more widespread adoption of carbon capture storage/ utilization ((CCS)) / ((CCU)) technology. The company believes the opportunity represents a $1 trillion addressable market for renewed products enabled by the LanzaTech Platform.

Naturally, just capturing a small portion of that demand highlights the positive long-term potential. Beyond fuel ethanol, materials produced via ethanol such as plastics and textiles are seen as a growth area where the technology has an immediate commercialization.

Another area that has shown promise is the conversion of LanzaTech ethanol into sustainable aviation fuel ((SAF)) covered within the company's "LanzaJet" subsidiary where it maintains a 25% minority interest. Various airlines have committed to incorporating a portion of SAF within their fleet over the decade.

With data from 2022, the independent " Global Carbon CCS Institute " notes that there are more than 196 CCS projects either in operation or development worldwide. These figures suggest a favorable tailwind for LanzaTech but also reflect that there are other players in the segment, each with various types of systems and alternative technologies.

Peers here include Aker Carbon Capture ASA ( OTCPK:AKCCF ) and Switzerland-based "Climeworks AG" specializing in direct air capture to filter out carbon. Siemens Energy AG ( OTCPK:SMEGF ) is also moving forward with CCU technologies. The point here is to simply say, LanzaTech is not the only game in town and it remains to be seen which platform stands out.

Favorably, LanzaTech's near-term outlook is for a significant growth runway as the new projects ramp up to capacity. According to the consensus estimates, the outlook here is for LanzaTech to grow revenues by 106% in 2024 to $175 million and approach $284 million by 2025.

While this top-line trajectory is impressive, keep in mind that the stock is currently trading at a forward price-to-sales multiple of 15x given its market cap of $1.3 billion. This is for a company that is expected to remain unprofitable through at least 2025.

The concern here comes down to the recurring cash burn with a run rate approaching $100 million this year. So while LanzaTech ended the quarter with $161.1 million in cash and equivalents, against effectively zero financial debt, we believe some form of capital raise or additional financing will be likely sooner rather than later.

Recognizing a capital raise would not always necessarily be negative for LNZA equity investors if the cash is directed at the growth opportunity; the question becomes when and if the company will be able to reach sustainably positive underlying cash flows.

LNZA Stock Price Analysis

The bearish case for LNZA is that the growth estimates for the company are too optimistic, with disappointing results forcing a reassessment of the long-term earnings outlook. The way we see it, a capital raise into 2024 is just one of many headwinds the stock will face incremental to other challenges.

First, the macro environment considering record-high interest rates globally isn't stellar for major industrial capital investments. A scenario where global growth sputters could push back the appetite for companies to implement LanzaTech's carbon utilization technology.

We mentioned the stock's valuation premium sales multiple. The result here adds to volatility in shares which will face headline risk for any further operational or financial setbacks even if the timetable for projects is simply delayed.

Without making a hero buy or sell call, the prudent position here is simply to avoid LNZA which remains highly speculative with significant uncertainties. Balancing the near-term growth momentum against what we believe to be a poor earnings outlook, we rate shares as a hold but lean on the bearish side.

Simply assigning a fair value market cap for the stock at $1 billion means there is a 20% downside from the current level. Expectations are very high for 2024 which will be difficult to surpass.

On the upside, we'd like to see stronger guidance and more momentum in operating conditions which would work as a catalyst for shares to rally higher. Monitoring points here over the next few quarters include the evolution in the gross margin, cash flow trends, and new business development. Balancing the top-line momentum against what we believe to be significant uncertainties over the long run.

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