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renewable natural gas website changes +4

22:26 11-Jun-20


It's taken six months, but I'm adding Xebec to the website under its native XBC symbol on the Toronto exchange.  Most American investors will want the XEBEF OTC symbol.  After today's drop shares are 18% below the recent highs associated with the financing JV, almost a third below the pre-COVID and placement prices of $3.47 and $3.60, respectively.  $2.70 is still very pricey for projected earnings of 8 cents per share in the year to come, but the transition to profitability is always tricky from a valuation standpoint.

I'm still more interested in the landfill to RNG and smaller hydrogen projects referenced on Fed day.  That adds a projected $11.9M in revenue for next year.  The earlier Covanta warning was well-timed and I should also note that Xebec's approach represents competition that is potentially more attractive for unconstrained geographies as shown by its expansion into Alberta.  Though metal prices have continued to rebound in Covanta's favor, I still wouldn't be a CVA buyer until shares dropped below $8 and hopefully closer to $5, especially while I think the U.K. is set to either cede major Brexit ground or descend further into chaos.

Ultimately, the global balkanization that I've long feared is the best reason to look at investing renewable natural gas because it means that Canada and European nations will be looking to source ever more of their energy locally.  The collapse of American shale and the pressure on its livestock industry mean that the U.S. is ripe to follow suit, though of course, the election could be pivotal.  My concerns about quality of information also remain, along with the usual GRoDT warnings about low liquidity and rising debt.  That said, Xebec has plenty of cash on hand, so it seems time to pull the trigger.

As ever with startup companies, the real risk is government delay of the sort that drove CUI into non-compliance.  CUI did receive an order for two Biomethane (RNG) Grid Entry Units valued at $1.1M for this year, and is completing other work in the country.  It also changed its name and symbol to Orbital Energy Group (OEG), and I have adjusted the website accordingly.

That said, the 1Q20 loss of 24 cents per share from $5.7M in revenue leaves the company with $6.7M in cash equivalents.  However the majority of startup costs are now in the rear-view and cash costs should decline back toward $3-4M per quarter.  Reach is still expected to be cash flow positive for this year, and additional cash could come from sale of CUI Canada and Japan.  $1.9M of forgivable debt from PPP is also likely to help.  That said, many projects are delayed indefinitely and most servicing, which is about 11% of the business, has been almost completely suspended due to COVID-19.  In this environment, OMIBs from the new CEO didn't manage to move shares any closer to the $1 mark:

Date
 Price
 Shares
22-May
 $0.73
 25,000
26-May
 $0.72
 20,000
29-May
 $0.71
 8,000
2-June
 $0.72
 10,000

and I note that the executives have been issued Stock Appreciation Rights (essentially warrants) for almost 1M shares in lieu of bonus in order to preserve company capital.  These vest monthly over the next two years but that is accelerated on a change of control.  Restrictions on the shares also mean that there continues to be no meaningful dilution to common shareholders, which has always impressed me with this company. 

The second quarter is going to be very tough for everybody and this is a terrible environment for operations, which makes me inclined to discount eMagin's $5.5M award for the time being.  The second quarter does represent a possible low point, though.  Orbital deserves continued attention for its shareholder friendly policies and shift toward RNG and utility scale solar.  Xebec's growth to date has been impressive and the changing energy markets give XBC/XEBEF every chance at continuing past the $4.58 strike needed by funding partner over the next two years, if its greenfield projects can succeed.  Either of these could be explosive investments in either the good or bad ways, but this quarter is when those willing to take on high risk/reward propositions are likely to get the most bang for the buck.