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Xebec 2Q22 results -3
I've finished reviewing the Xebec conference call, and I think it is fair to describe this as a kitchen sink quarter. The second quarter is typically a low point for service revenue and the pandemic continued to have an impact. The working capital issue appears to be a one-off mostly related to the discontinuation of the less profitable legacy business. That said, I would not expect a real rebound in the business until next year as scaled back better kicks in.
To dive into detail on the business segments, management sees a clear path to profitability on Biostream with margins expanding as expected. Six units have been produced so far, probably to the Brightmark project with Chevron, and 20+ are expected to be sold next year. Xebec is also the latest to report keen interest in hydrogen, and is already quoting a number of key generation projects. CCS revenue from Summit project should be mostly recognized in 2023, but is on schedule.
All of these verticals should see increased traction due to new regulation in American and Canada. Investment tax credits in scaled back better include qualifications for biogas to RNG, which in turn is covered as a feedstock for green hydrogen. CCS is also covered and all of Xebec's hardware can be made in North America. The bill is still subject to change, but its reasonable to expect that this will be every bit as good as the corn to ethanol program was bad for decades to come, even though the draft law only covers the next few years.
As a result, I'm inclined to deploy further investment capital to Xebec at reduced prices even though I don't necessarily expect immediate returns other than collecting on the still triple digit rebate rate. I'm encouraged by the decreasing cash burn and increasing backlog, and note that asset divestiture could help the balance sheet further. I still see the most likely path to profitable return on my investment as buyout or an equity stake by a better funded, related company like Haffner, Opal, or Monolith Materials. Haffner in particular is producing very low cost and low emission hydrogen using a pyrolysis process. My study indicates that this is a much better pairing than traditional digesters, which do not need electricity, whereas Xebec components do. Furthermore, the process can be more efficient than SMR (steam methane reforming, which is the current standard) that is currently seeing demand in America. The green revolution has already taken too long to materialize, but does still appear to be coming, and Xebec still looks ideally positioned.
Xebec has announced its second quarter results:
- a loss of 15 Canadian cents per share misses by 9 cents
- from CAD44.5M of revenue, which misses by CAD0.9M
Most of the miss is from legacy RNG operations, which have been discontinued, and the cost of doing so is included in this quarter's results. The backlog increased modestly on a sequential basis even in the current environment and scaled back better should begin to impact future ones. Cash only decreased by 2% to CAD50.3M and debt decreased 13% to CAD37.8M. However, working capital decreased 56% to CAD35.9M so some form of financing or other transaction is probably still on the table.
The conference call is at 8:30am and I will review it after the Golar call.