MNTK - Montauk Renewables Contends With Natural Gas Price Pressure

2023-03-17 18:41:24 ET

Summary

• Montauk Renewables reported its Q4 2022 financial results on March 16, 2023.
• The firm primarily produces natural gas products from renewable energy sources.
• With the price of natural gas dropping and the company's tepid 2023 production estimate, I'm on Hold for MNTK in the near term.

A Quick Take On Montauk Renewables

Montauk Renewables (MNTK) reported its Q4 2022 financial results on March 16, 2022, missing revenue and EPS consensus estimates.

The firm operates U.S. biogas utilities using a variety of feedstock sources.

Given management's tepid RNG production estimate for 2023 as well as the strong drop in natural gas prices as global supply chains have adjusted to the effects of the Russia-Ukraine war and other inflationary impacts, I'm not optimistic on the stock.

I'm on Hold for MNTK in the near term.

Montauk Renewables Overview

Pittsburgh, Pennsylvania-based Montauk was founded to develop and operate renewable natural gas (biogas) projects such as waste methane from landfills, livestock feed and other non-fossil fuel sources to provide energy for electricity.

Management is headed by President and CEO Sean McClain, who has been with the firm since 2014 and previously held management positions at BPL Global Limited, Bayer and Dick's Sporting Goods.

The firm's customers include landfill and livestock farm operators, local utilities, large refiners and commercial RIN off-take companies.

Electricity customers include electricity utilities that buy electricity according to fixed-price contracts.

Montauk's Market & Competition

According to a 2019 market research report by Global Market Insights, the global market for biogas was an estimated $72 billion in 2018 and is expected to reach $110 billion by 2025.

This represents a forecast CAGR of 7.1% from 2018 to 2025.

The main drivers for this expected growth are increasing environmental concern over fossil-fuel emissions as well as a desire to achieve energy diversity across the portfolio of sources.

Also, the growing use of renewable energy technologies coupled with increasingly stringent environmental regulations will contribute to the industry's growth trajectory.

Major competitive or other industry participants include:

• Aria Energy

• Morrow Renewables

• DTE (DTE)

• Ameresco (AMRC)

• Waste Management (WMI)

Montauk's Recent Financial Results

• Total revenue by quarter has risen sharply in the most recent quarter:

• Operating income by quarter has also grown markedly in recent quarters:

• Earnings per share (Diluted) have followed a similar trajectory to that of operating income:

(All data in the above charts is GAAP)

In the past 12 months, MNTK's stock price has dropped 31.1% vs. that of the Nasdaq 100 Index's fall of 11.8%, as the chart indicates below:

As to its Q4 2022 financial results, total revenue soared as did operating income.

Earnings per share also jumped markedly to its best result as a public company.

For the balance sheet, the firm ended the quarter with $105.2 million in cash and equivalents and $71.4 million in total debt.

Over the trailing twelve months, operating cash flow was $81.4 million.

Valuation And Other Metrics For Montauk Renewables

Below is a table of relevant capitalization and valuation figures for the company:

(Source - Seeking Alpha)

Future Prospects For Montauk Renewables

In its last earnings call (Source - Seeking Alpha), covering Q4 2022's results, management highlighted the profitability of the firm as being 'highly dependent on the market price…including the market price for RINs.'

RINs are Renewable Identification Numbers for each batch of renewable fuel created that is in compliance in the U.S. EPA's renewable fuel standard program.

RINs become released and tradeable once the renewable fuel batch is blended with gas or diesel fuel.

Due to recent volatility in RIN pricing as a result of the 'EPA's release of the 2023 RVO in December 2022', management decided not to transfer or sell the company's available RINs.

The company's electricity generation increased during calendar year 2022, but the segment's operating loss increased from $3.1 million in 2021 to $7 million in 2022.

Looking ahead, management guided to only 7% growth in renewable natural gas production in 2023, and it expects a further production boost in 2024 when its second RNG processing facility at the Apex landfill location.

However, given management's tepid RNG production estimate for 2023 as well as the strong drop in natural gas prices as global supply chains have adjusted to the effects of the Russia-Ukraine war and other inflationary impacts, I'm not optimistic on the stock.

The market has punished the stock since the earnings announcement, with MNTK down approximately 16%.

The current market dynamics coupled with the volatility in RIN pricing and EPA policy changes mean that MNTK may be a stock to watch but not touch for the time being.

I'm on Hold for MNTK in the near term.

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