Would you like to add a little “green” renewable energy to your microcap portfolio?
Well, we’ve found a $45 million market cap company that is at the forefront of the newly emerging and rapidly expanding renewable natural gas (RNG) market and believe it warrants a closer look. Just consider the following details about the RNG market as a whole and this company’s current position in it:
- RNG demand being driven in large part by government mandates on waste emissions and natural gas usage.
- Governmental “green” mandates increasingly call for more “upgraded” biogas to meet natural gas purity standards.
- RNG industry projects five-year compound annual growth of 30% in biogas upgrading sales in North America and Europe.
- Company ranked number one in installed capacity, with more than 100 deliveries of biogas upgrading installations in 18 countries.
- First to market in 11 of the 18 countries in which its systems operate.
- Supplier to the largest RNG production facilities in North America and Europe.
- Launched a build, own, operate (BOO) model that enhances revenue stream for each installation.
- Offer clients multiple technology options, whereas main competitors rely on just one.
- Manufacturing outsourced to a network of global partners, allowing the company to provide installations just about everywhere without having to worry about supply chain issues.
- Value-added product as not only does it help waste producers meet government mandates, but also provides them revenues from RNG sales.
- Huge increase in sales backlog, marked most recently (June) by a California-based contract that represents 185% increase in 2019 revenues alone.
- Just signed contract with Brazilian sugar cane processor for the country’s first commercial-scale pipeline injection RNG project in its vast sugar industry.
- Currently more than $700 million in total bids in the sales pipeline.
- Expected quadrupling of revenues between fiscal year 2019 ($11.2 million) and 2021 (analyst consensus forecast of $40 million).
- Company went public in June 2019.
Greenlane Renewables Inc.—Finding Green in More Ways Than One in Nascent Renewable Natural Gas Sector
The chances of mankind coming up with a perpetual motion machine are remote, to say the least, so we’re just going to have to continue to rely primarily on fossil fuels to meet our extensive energy demands. In the meantime, though, we can explore efficient applicability of renewable sources of energy, while expanding the use of those renewables that are proving to be reliable and cost efficient.
One growing renewable energy source we are intrigued by is renewable natural gas (RNG), which is created by upgrading biogas from decomposing organic material in the absence of oxygen. The biogas is captured from the emissions created by bacterial breakdown of manure, crop waste, food waste, wastewater processing, and solid waste landfilling. The breakdown creates roughly equal parts carbon dioxide and biomethane, along with such trace compounds such as hydrogen sulfide, volatile organic compounds, and siloxanes. Technological upgrades of biogas processing systems allow them to separate the carbon dioxide and biomethane, while cleansing them of the impurities to create the end RNG (biomethane) product, which is a high-value, low-carbon energy source that can be used as a drop-in replacement for traditional natural gas. In short, 100 percent of RNG is constituted from renewable sources and can be safely added to the natural gas utility grid and/or power natural gas operated vehicles.
Biogas, it should be noted, has been captured from landfills, sewage treatment plants, dairy farms, and other sources in the U.S. and Europe for the past few decades. Primarily on the smaller scale, these biogas facilities burned methane emissions to generate electricity on and for the operational site, with any surplus electricity sold to the local utility. RNG represents an upgrade of this process through its reduction of carbon in the biogas and the ability to add this upgraded fuel into the existing natural gas grid network is helping further boost demand (the first injection of RNG into the U.S. natural gas grid only occurred two years ago). As is the fact that RNG production helps reduce methane emissions from a variety of sources and creates a nutrient-rich fertilizer as a byproduct. Meanwhile, more natural gas – RNG in particular – in the grid potentially helps lower the use of other higher carbon-emitting fuels. All in all, a win-win!
Government Initiatives Helping Boost RNG Demand
A win-win that’s being increasingly recognized by European, U.S., and state governments. Consider first that Denmark saw RNG usage approach 20 percent of all gas usage in the country last summer and that Danish bioenergy firms believe they could fully replace its natural gas grid with renewable natural gas within 20 years. The U.S. EPA and Department of Energy released a study several years ago suggesting the country could easily power three million homes with RNG produced by upgrading manure, landfill, and wastewater treatment plant biogas facilities.
RNG usage throughout Europe is expanding rapidly in part due to governments driving increased RNG percentage content in the relative natural gas grids. The U.S. has mandated increases of RNG content on the national level but several states have started further mandating increased RNG usage and/or offering incentives such as the Renewable Fuel Standard (RFS) or Renewable Identification Numbers (RINS) credits to encourage its production. Biogas industry observers note that a U.S. carbon bill or comprehensive climate change legislation would serve as a national catalyst to “supercharge” the growth of RNG and the biogas industry. While this is highly unlikely under the current administration, a potential carbon-game-changing election fast approaches.
Enter Greenlane Renewables
Now that you know what you’re potentially investing in, which publicly traded microcap company seems best poised to capitalize on the upward trajectory of this emerging renewable energy sector?
Well, Vancouver-based Greenlane Renewables Inc. (TSX-V: GRN) (FRA:52G) certainly caught our attention late last month when the company announced a $20.6 million contract to upgrade the biogas facilities of a multi-location California dairy farm. The amount of this contract equals almost half of the company’s current $45 million market cap and represents more than 185% of the company’s 2019 revenues. The new contract—$17.1 million inked and ready to go and another for $3.5 million awaiting final financing approval—brings the company’s order backlog to about $42 million. Based on project scope, GRN’s management expects to realize revenues from this contract in about 12 months.
Meanwhile, the company is currently sitting on another potential $700 million in outstanding bids. Assuming a conservative 3% bid-to-contract conversion ratio brings in an additional $21 million—do the math and you’ll see that the numbers grow significantly should such projections prove too conservative. And, lo and behold, the company last week followed up its California contract win with a $2.4 million biogas upgrade contract for a Brazilian sugar cane processing plant.
New Contracts Boost Company Exposure, Reputation
The importance of these new contracts goes beyond the monetary, as they will also serve to further GRN’s name recognition and status as one of the sector’s thought leaders. Consider that the company’s contract with Grupo Cocal represents Brazil’s first commercial-scale pipeline injection renewable natural gas project in the Brazilian sugarcane industry. Brazil’s 350 or so sugar refining mills have been producing ethanol biofuels as part of their sugar cane refining for decades. The byproducts of both provide excellent “feedstock” for RNG production and the successful production of revenue producing RNG for Grupo Cocal will likely help spur interest from other sugar processors in upgrading their ethanol biofuel facilities to produce RNG, too.
The California dairy farm contract certainly provides GRN excellent exposure. Not only is the contract its fourth in the state and largest, but the state leads the country in mandated RNG usage and greenhouse gas emission standards, Plus GRN is well positioned to court the other 1,750 or so potential dairy farm customers, along with plenty of wastewater treatment plants, landfills, and other potential customers. And yes, GRN has plenty of competition in California, as well, but in some ways the company has an edge.
Greenlane Only Biogas Upgrading Firm Offering Three Different Systems
While most companies in the biogas upgrading business only offer one technological upgrade system, Greenlane offers customers the choice between all three primary upgrade technologies in use today: “water wash,” (the aforementioned) “PSA,” and membrane separation. This allows GRN to offer its upgrade technology to the full range of applications, whether landfills, wastewater treatment plants, organic crop waste, livestock waste, or any other processor of biogas. The range of technologies also allows GRN to propose biogas upgrade solutions that perfectly scale with a company’s existing biogas facility and processing capability; and/or tailor solutions designed to meet any growth or projected changes with a company’s future biogas production.
In short, GRN offers its clients modularity to build and operate whatever is needed to most efficiently convert biogas into RNG. The company can also operate under a build, own, operate (BOO) model which helps eliminate any pain points a client might have if the technology used in the upgrade was under their own control. This means that the company can focus on the core of its business—say, like milking cows—and not have to worry about operating and maintaining the new technology. In return for handling potential headaches, GRN receives ongoing revenues for the service.
GRN a Lean Company Poised to Turn a Profit
With more than 30 years of experience in the biogas and natural gas industry, Greenlane went public in June 2019 in lockstep with its increased focus on RNG and the development of its RNG BOO model. The company is lean with only about 45 employees but powered by its intellectual property—14 patents and 28 device titles—and extensive RNG engineering expertise. GRN can easily scale to meet increased demand as their manufacturing is outsourced to a network of global partners that allows them to establish their BOO model just about everywhere. This form of scaling adds to the company’s bottom line due to a limited need for capital and human resource overhead.
As previously suggested, company revenues are growing rapidly. The company becomes breakeven when annual revenues breach the $30 million mark, which appears likely for 2021.
Partnerships Provide Further Growth Catalysts
Early this year Greenlane signed an agreement in principle with Paris-based SWEN Capital Partners to create a joint venture company to accelerate European country deployment of GRN’s biogas upgrading systems under its BOO model. Under the agreement, SWEN will offer European companies financing to help reduce capital expenditures with biogas upgrades, while allowing them autonomy to sell RNG into the natural gas grid. As a minority equity partner, GRN will be responsible for construction, operation, and maintenance of new biogas upgrade units. A win-win for all parties, the agreement adds another incentive to biogas upgrading beyond current and future governmental incentives and mandates. GRN is also currently in negotiations with project finance partners for the North American market. The inking of a deal would mark another catalyst for future growth, as will any additional North American governmental mandates or incentives in support of increased RNG usage.
Highly Experienced Management Team
Greenlane’s leadership team provides combined 60-plus years of energy-related experience. GRN President, CEO and Director Brad Douville joined the company in 2017 after a 25-year career in the natural gas commercial vehicle industry, a stint in which he was a founding member of Westport Innovations and Cummins Westport. CFO Lynda Freeman joined the company in 2019, bringing with her 22 years of financial experience, including the CFO position for TSX-listed Alterra Power, a global renewable energy company. Senior Vice President Brent Jaklin has been with GRN since 2009 and has 20 years of alternative energy, natural gas, and RNG sector experience.
Company Could Easily Break Out
For all of the above reasons, and because we believe the nascent RNG sector is poised for rapidly expanding growth, we believe this microcap is undervalued and a strong buy. The two most recent contract wins alone suggest “strong buy” and we would not be at all surprised if more quickly follow. The company is rapidly expanding its recurring revenue stream and improving its profitability along the way. Breakeven for this company is a stone’s throw away. All indications also suggest that RNG is not some flash-in-the-pan green energy hype but is a true high-value renewable source of energy that will see increased demand as countries around the world seek out ever more carbon-free energy sources.
Not only will every new contract and partnership serve as further catalysts for growth, but so will every governmental mandate and incentive—whether on the state or federal level—in support of RNG usage. Furthermore, the natural gas grid must become more environmentally friendly to compete with the likes of electricity’s wind/solar and RNG is the only way to realistically accomplish this goal. Note also that some companies are getting ahead of any such government mandates or incentives. Consider that SoCalGas last year announced that it plans to be the “cleanest natural gas utility in North America,” a commitment it plans to reach by replacing 20% of its fossil natural gas supply with RNG by 2030. Or take UPS, which announced last October that it plans to purchase 6,000 natural gas-powered trucks by 2022 and committed to purchasing 20 million-gallon equivalents of RNG over the next seven years.
