Archaea Energy Inc. LFG is one of the largest renewable natural gas (RNG) companies in the U.S. Its RNG facilities capture waste emissions and convert them into low-carbon fuel.
For investors focused on companies with high environmental, social, and governance (ESG) scores, turning to Houston-based Archaea could be a solid choice, as it is one of the few energy companies focused on producing low-carbon fuel.
In fact, if you invested in Archaea on July 6, you would now be up roughly 43%, depending on when you purchased the stock.
Wells Fargo & Co. WFC initiated coverage of Archaea with an Overweight rating and a price target of $25 per share.
Archaea plans to increase the percentage of contracted renewable natural gas from 50% to 70% over time to improve the stability of its cash flows, the analysts explained.
The firm currently has 88 renewable natural gas facilities in its backlog, and in the second quarter, Archaea won three competitive request-for-proposal (RFP) processes to develop new RNG facilities at government-owned landfills, which will bring its backlog to 91 developmental projects.
The Bull Case
Due to decarbonization goals and the need for energy products in the U.S. economy, the renewable natural gas market is expected to grow rapidly, as the Wells Fargo analysts are forecasting a 5-year EBITDA compound annual growth rate of 47%.
The Archaea Energy analysts also mentioned that the firm is well positioned to capture a meaningful share of the (RNG) market, as the company is a leader in the industry, has first mover advantage, and better gas processing expertise compared to its peers.
In the Wells Fargo analysts' base case, Archaea could only take six years to reach its long-term renewable natural gas production guidance of 50 MMBtu per year, compared to Archaea’s guidance of six to eight years.
While forecasting Archaea Energy to generate $700 million of RNG/Power EBITDA by the end of the analysts forecasted period.
Lastly, the analysts are forecasting 2031 adjusted EBITDA of $900 million in its base case scenario.
Risk To The Downside
Risks to the downside for Archaea Energy include cost overruns, slower-than-expected ramp of (RNG) production, higher interest rates, heightened competition, and an economic downturn.
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