Renergen’s ambitious earnings estimates raise questions

Renergen released ambitious earnings estimates, but its output targets and historical commodity prices suggest this will be difficult to achieve.

Renergen was founded in September 2014 and listed on the Johannesburg Stock Exchange (JSE) in June 2015 as a special-purpose acquisition company (SPAC).

Its principal asset is its 100% shareholding in Tetra4, which holds petroleum production rights in South Africa.

Its Virginia Gas Project (VGP) is located in the Free State, approximately 250 km southwest of Johannesburg.

Its main revenue source is liquid helium (LHe) and liquefied natural gas (LNG), with existing production and sales of compressed natural gas (CNG).

Renergen said its expansion plans will be executed in two phases.

  • Phase 1 started on 5 September 2022 and began operating 24-hour shifts on 19 September 2022. It aims to produce 2,700GJ of LNG and 300kg of LHe by the end of the 2024 financial year.
  • Phase 2 will be constructed as a standalone expansion of the VGP with a commercial operation date of 2026. It aims to produce a maximum of around 34,400GJ of LNG and 4,200kg of LHe per day.

These numbers do not mean much to investors, which is why Renergen shared financial guidance on its Phase 2 expansion.

Renergen said its EBITDA is estimated to be between R5.7 billion and R6.2 billion by the 2027 financial year.

This was with the assumption that liquid helium would have a long-term spot price of $600 per thousand cubic foot (MCF) of helium.

Over the past few years, global helium demand has passed the global helium supply, causing prices to increase.

2022 was an especially difficult year for helium users as one of the world’s largest producers, the US Cliffside helium plant, experienced an unexpected shutdown.

Gazprom, a Russian natural gas extractor and helium producer, also experienced an explosion and a fire at its Helium extraction facilities. It halted its helium operations.

These simultaneous events created a significant helium shortage in 2022, causing helium prices to boom.

According to an annual United States Government Survey report, helium prices have hovered around $200 to $210 per MCF since 2016.

In 2022, the sudden supply shortages saw helium prices surge to $310 per MCF. This was the highest price in a decade.

Even at these elevated levels, it is still significantly lower than the $600 per MCF of helium that Renergen based its estimates on.

It is interesting to note that 2022 was not supposed to be a year of helium shortages.

Following eight years of helium shortages since 2006, Gazprom planned to bring three massive helium processing plants online in 2022.

These plants would collectively be able to supply almost half of the global helium demand, thereby ensuring global helium demand is met.

However, the unexpected fire and explosion at the Gazprom helium plant halted its entire helium production in 2022.

Russia’s helium production in H1 2023 has already increased by 17%, and it plans to have its helium plants in full production in 2024.

When Russia’s helium production reaches full capacity, helium’s price will likely drop back to normal levels – around $210 per MCF. It may even be far less.

Daily Investor used publicly available data to make revenue estimates for Renergen, assuming it could meet its ambitious capacity levels.

Based on Renergen’s phase 1 and phase 2 helium production capacities, it would generate 300kg of LHe and 2700 GJ of LNG by 2024. It would also generate an additional 4,200 kg of LHe and 34,400 GJ of LNG by 2027.

Using the average US spot price of LNG over the past ten years of $3.36 per MCF and the 2022 high helium price of $310 per MCF, it showed revenue of R2.59 billion in 2027.

If helium prices were, however, to fall back to $210 per MCF with Gazprom’s added supply, Renergen’s annual revenue would be around R2 billion in 2027.

This is a far cry from Renergen’s estimated EBITDA of between R5.7 billion and R6.2 billion in 2027.

It is also important to note that Renergen reported revenue of R12.7 million in its latest annual report with an EBITDA figure of -R32 million.

It would, therefore, need to significantly improve its efficiency and increase its output by orders of magnitude to come close to its EBITDA targets.

Daily Investor asked Renergen about its ambitious and seemingly impossible earnings targets, but it referred us to its guidance statement.

The table below shows Daily Investor’s revenue targets for Renergen based on historical prices and the company’s reported output targets.

Renergen Revenue EstimatesTotal Revenue (LNG + LHe)
2024 Revenue TargetR148 million to R190 million
2027 Revenue TargetR2 billion to R2.6 billion