The most important thing Renergen must show – and has failed to do

To date, Renergen has failed to show that it can profitably produce and sell liquefied natural gas (LNG) and helium.

Investors should look for this, as it is the most important measure of whether Renergen can deliver on its promises to shareholders.

It is important to revisit Renergen’s history to understand why it is important for the company to show profits.

Renergen’s primary asset is its Virginia Gas Project (VGP) in the Free State. The assets of the VGP plant previously belonged to Molopo Energy, an Australian-based energy company.

Molopo Energy sold 100% of the VGP to Windfall Energy, owned by Renergen CEO Stefano Marani, for $1.

Molopo Energy said in its December 2013 annual report that it recorded an impairment charge of $6.9 million related to its South Africa biogenic gas play.

It was granted a ‘production right’ in November 2012, which required $15.0 million in expenditures over the next three years.

However, Molopo Energy determined that the project was uneconomic for development. Simply put, it thought it could not make money from the Virginia Gas Project.

To take an impairment charge of $6.9 million and essentially give the project away for free means Molopo Energy was convinced it was not economically viable.

However, Marani said that following the transaction, a new geological exploration was conducted, which proved Molopo Energy wrong.

He said the exploration revealed that the VGP had 80 BCF of methane reserves – much higher than the initial 17 BCF estimate.

They also discovered that the gas contained helium. The helium concentration was apparently so high that “many experts put the phone down on Marani in disbelief”.

“A concentration of just 0.1% helium is considered commercially viable, while 0.3% is considered world-class,” he said.

Molopo Energy has reportedly completely missed this valuable resource. This is now Renergen’s biggest play.

Linde tanker at Renergen’s Virginia site. Source: Renergen

Marani said the updated reserves data means the net present value of the VGP was between R4 billion and R10 billion.

With this new information, Marani’s Windfall Energy sold 90% of the Virginia Gas Project to Renergen for R655 million.

The whole situation raised concerns among some analysts, who questioned whether the project indeed holds the promise Marani and Renergen claim it does.

Renergen can easily prove the sceptics wrong by showing it can profitably produce commercial LNG and liquid helium (LHe). To date, this has not happened.

Renergen’s latest results showed that the more liquid natural gas (LNG) it produced and sold, the bigger its losses. It has also failed to produce commercial helium.

What was striking was that Renergen’s cost of selling liquid natural gas was rising much faster than its revenue from sales. The more it sells, the more money it loses.

As a result, the company reported an operating loss of R135 million. For every R1 of additional revenue Renergen generated, it extended its operating loss by R6.10.

Renergen has, at least to date, failed to show that Molopo Energy was wrong when it said the Virginia Gas Project was uneconomic for development.

All eyes will be on Renergen’s future results to see whether it can, as it promised, profitably produce and sell LNG and LHe.