Renewable natural gas is a nascent but growing market — how to play it

Published Sun, Aug 15 20217:43 AM EDT

When thinking about a greener future renewable natural gas (RNG) may not be the first thing that comes to mind, but the fuel is part of a nascent but growing market as investors look for cleaner alternatives. Renewable natural gas is made from organic waste materials like landfills and dairy farms. As the material decomposes it creates a mixture of gases including methane. The methane is then cleaned and conditioned, at which point it can be transported through pipelines. After the fuel is processed it's interchangeable with natural gas, meaning it can be used for a variety of functions including heating homes and powering the electrical grid. "We continue to believe negative carbon RNG will have a big role to play in the future as the market will place a premium on fuels that help companies meet their carbon neutrality targets," Credit Suisse wrote in a recent note to clients. It is more expensive than conventional natural gas and supply is limited, but it's a way to utilize existing infrastructure to transport a lower-emissions fuel. It's not without its own environmental impact, however. The Natural Resources Defense Council recently said that burning methane still creates harmful air pollutants. "We must be strategic about how we deploy them and keep our focus on ramping up scalable truly renewable and clean energy resources," the group said. Still, it's an attractive bet for corporations looking to reduce their carbon footprint. Amazon and UPS are among the companies that have entered long-term contracts for RNG. Adam Karpf, portfolio manager at CIBC Private Wealth Management's Energy Infrastructure strategy, said the industry is flying under many peoples' radars. Unlike some cleantech start-ups, this is not a bet on technological advancements. "Importantly, it's proven technology with existing equipment that has been done for many years, just in very small quantities," he said. "This is something where I'm not taking a bet on technology. ... It is a method to utilize a cleaner source of energy supplies with existing technologies, existing equipment." Clean Energy Fuels is the largest provider of renewable natural gas for the transportation industry in North America, and is one of the few pure-play names in the industry. In April the company announced a partnership with Amazon, where it will provide low and negative carbon renewable natural gas at 27 existing fuel stations and another 19 non-exclusive new or upgraded stations owned by the company across 15 states. As part of the partnership, the tech giant also took a stake in Clean Energy Fuels. "We believe CLNE's partnerships with industry heavyweights positions the company to create a vertically integrated Renewable Natural Gas (RNG) value chain that is difficult to replicate," analysts at Needham, which has a buy rating on the stock, wrote in a recent note to clients. The firm also pointed to Clean Energy Fuels' partnerships with BP and Total as upside catalysts. Needham sees the company's renewable natural gas volumes increasing 9% on a compound annual growth rate basis through 2025, and sees 100% of sales coming from company-owned stations in 2026 and beyond. In June Clean Energy Fuels attracted the attention of retail investors who piled into the stock, sending shares surging. The stock has since drifted lower, and is currently flat for 2021. The company went public in 2007, and shares hit an all-time high in March of 2012. Since then, the stock has dropped 67%. Raymond James doesn't share Needham's optimism for the stock. The firm, which downgraded the company to an underperform rating in April, said the stock has seen "sentiment-drive multiple expansion." Analysts led by Pavel Molchanov also said the company is highly sensitive to policy incentives. There's also Rice Acquisition Corp. , which is a special purpose acquisition company that in April announced plans to merge with RNG companies Aria Energy and Archaea Energy. The deal is expected to close during the third quarter of 2021. CIBC's Karpf is an advisor for the SPAC. Other ways to gain exposure to the growing RNG market is through utilities that use it, and pipeline companies that transport it. JPMorgan recently said that CenterPoint Energy , Dominion Energy and Sempra Energy stand out among utilities incorporating RNG. "Multiple midstream companies maintain interconnections between their gas pipeline systems and RNG production facilities," the firm wrote in a note to clients. "While RNG currently represents a small portion of the gas transported, existing pipeline networks should capture growing RNG volumes and interconnections over time." When it comes to midstream players the firm favors Enbridge , Kinder Morgan and Williams Companies. Energy services company Ameresco is another name that provides investors with exposure to RNG. The company designs, develops and constructs clean energy and energy efficiency projects with the goal of cutting emissions and saving on energy bills. "We believe AMRC's competitive advantage is that the company acts as a one stop shop for renewable energy and energy efficiency projects," Piper Sandler said when initiating coverage on the stock with an overweight rating in July. Shares of the company are up 30% for 2021, and 112% over the last year. In light of shares' recent appreciation, Bank of America recently cut the stock to a neutral rating. "While we see strong performance as partially explained by Ameresco's exposure to robust RNG pricing and federal energy efficiency prospects, we find it increasingly challenging to justify valuation with growth rate forecasts largely unchanged," the firm said in a note to clients. - CNBC's Michael Bloom contributed reporting.

Clean Energy

Source: Clean Energy