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Xebec 3-year plan and analyst day ?3

There was some interesting color from Xebec's extended presentation yesterday, but nothing that changes my overall outlook.  Most important is that the company is allocating 3 construction bays for CCS if the order comes through, and 4-6 bays for Biostream, out of 13 total available in Denver.  The on-site management seemed very certain that there will be no difficulty at all in ramping up to 100+ Biostreams per year over the course of 2022.  Integrating carbon capture in Biostream should also be available this year, with the technology already proven.

For the separate CCS business, I had asked the following question based on my political concerns:
Would Xebec anticipate being able to complete manufacture and/or delivery 51 carbon dioxide reciprocating compression packages by the end of 3Q23 even if approval for the end project is only given around the end of this year?
Annoyingly, management prioritized even duplicate questions above that.  My guess from the rest of the manufacturing detail given is that it won't be a problem, but I was holding this note until at least the pre-market for an offline response.  As covered, carbon capture is potentially big business and so is non-fuel gases but I think both will depend on the pace of domestic manufacturing.  Xebec plans to expand the gas business by 50%, and can provide lower cost nitrogen for semiconductors and metal fabrication.  For those still interested in hydrogen as a fuel, research done for 30 European distribution hubs, with 1 underway in the U.K. in addition to the 1 pilot site operating in Norway.

Importantly, XBC Flow Services will work with non-Xebec equipment, which provides a sales avenue.  It also does air audits which analyze production facilities and recommends changes that can produce significant operational savings.  There will probably still be some acquisitions in this segment, but most growth for the company is organic from here on out.  Xebec also has college training programs which can more than double current 62 technician work force by 2024.

All of this has the potential to really take off, but it may be a bit of an uphill battle in a rising rate environment.  It helps that each Biostream unit can generate $30-50K revenue per day at current natural gas prices, meaning the unit can almost pay for itself in the first year.  However, customers will have to learn that the improved technology is now competitive with even the initial performance of membrane systems, which have the advantage of not requiring electricity, and unlike them can operate without degradation over 10-15 years.  Management sees the potential for 9K upgrades with about 25% market share.  I see the backlog, which stood at $123.8M as of March 16th as a primary indicator of progress, along with revenue, of course.  Another factor which may or may not be trackable is that service proposals were not available for first 18 units sold, but are now in negotiation.

In conclusion, Xebec remains ideally positioned for the energy transition from a technological standpoint and its stocks are still undervalued in my view.  However, education is often a slow process in both the investor and real worlds.  Economic growth in the latter will be the key factor over the long term, but short term performance of the stock is likely to be dominated by market dynamics.  It remains to be seen whether or not new management will now take any trading action or wait for a more pronounced revenue ramp.

On 3/29/22 10:37, Esekla wrote:
I quick follow-up before the analyst day begins to bracket the possibilities here.  Using Price to Sales for the FY24 goals, with the same forward discount and a multiple of 7 gives a current fair value of $8.50 for XEBEF.  The stock was already there a little over a year ago, but I issued warnings then in conjunction with the short squeeze.  I documented last night how that could happen again, but also want to note that today's market is very different.  XEBEF touched $1.55 this morning and is currently holding around just below that.  I see that as still undervalued and think an acquisition of Xebec in the neighborhood of the P/S price as possible.  I also think that's what it would probably take for such pricing to be sustainable now.

On 3/29/22 09:27, Esekla wrote:
Xebec has published its three year plan to accompany analyst day.  In addition to what we already knew, it puts numbers on the addressable markets:
  • RNG: $42b estimated by Xebec
  • CCS (carbon capture & sequestration): $27b based on the 2020 IEA report
  • Hydrogen: $2.5 trillion based on a Nov-2017 study by the Hydrogen Council

and sets FY24 financial goals for the company of CAD325+/-25M of revenue with 9+/-1% adjusted EBITDA margin.  By my calculations, that would put Xebec on track for an operating profit of 15 American cents per year, using the 0.80 CAD/USD exchange rate.  With a 10% annual discount, this would mean a $2.20 current fair value at a price to EBITDA ratio of 20.  On one hand, I think these goals are reasonable, but on the other, I'm not sure the market will be impressed by them.  Even so, I think the reaction could be markedly different for larger energy players, as detailed below.  We'll see about the first soon, and the second in the coming months or years.

Just to document for the future, the Cleantech Services segment will be branded XBC Flow Services and target at least CAD150M in global revenues by 2024.  The Hydrogen business is expected to have 20-25 decentralized production hubs by then as well in order to support targeted industrial customers.

That last is clearly where public excitement is, and I keep getting questions on hydrogen from subscribers.  I remain of the opinion that RNG should be the near term driver for Xebec, but will be interested to see what sort of traction CCS gets over the next year.  That said, I do think hydrogen will eventually be big business and that fuel cells will become the dominant means of transportation, just not during this decade.  To quote last week's note on the energy transition:

I think it's worth recalling most projections for switching away from fossil fuels target 2050 for completion and even the most optimistic don't see a tipping point until the middle of the next decade. 
In the meantime, I echo Xebec management in pointing out that, at current energy prices, electrolysis is vastly unprofitable, whereas hydrogen can be a natural byproduct of using natural gas in the combined cycle power plants that are arguably the cleanest and definitely most efficient means of generating electricity from fossil fuels.  Thus supplementing fossil fuels as much as possible with RNG, especially from agriculture waste that would otherwise emit methane, seems the best energy and climate strategy available.

The analyst day begins at 1pm and I will write more if appropriate.  However, I remain of the opinion that much of Xebec's plans rely on government policy.  Canada is clearly supportive, and many U.S. states and corporations are also beginning to see reason.  Getting D.C. to fall in line would still be quite helpful, though.