$RICE: Landfill gas to fuel play

Rice Brothers Act II

$RICE:  The second act for the Rice Brothers!

Renewable fuels are not only in massive demand as far as the eye can see, it is being pushed by governments around the world with incredible incentives.  Why?  The world is finally taking carbon output seriously ranging from requirements for jet fuel to be based on renewables, to steel companies having carbon mandates, to requirements by oil companies to sequester their carbon from drilling.  Renewable natural gas (RNG) is the lowest carbon intensity fuel source in the markets today.  Some actually are carbon negative including cow dung (dairy RNG) and in California the LCFS offers tax credits of up to $200 per metric ton.  Equally, the federal government offers IRS 45Q credits of up to $50 per metric ton for sequestering carbon.  So what about Landfill Gas?  LFG has been an issue literally for the past 75 years and we finally have companies addressing this nasty carbon output that grows and grows annually.  Rice Acquisition Corp, run by the infamous Rice Brother Danny Rice (industry pioneers in shale drilling for nat gas) are combining two LFG companies Aria and Archaea to form a national footprint for turning landfill gas into RNG.  The technology works, it reduces carbon output and turns those gases into valuable low carbon fuel sources.  

The company has commercial off take agreements on 60-70% of their output in order to reduce the volatility of the credits known as RINs (renewable ID numbers) and also the LCFS and IRS45Q credits.  If you review their investor deck they do a terrific job laying out the MMBtu mix of fixed and variable with the net result the company receives $20 MMBtu compared to regular nat gas prices $2-5 depending on the season, with FCF of $12 per MMBtu, a truly fat 60% EBITDA/FCF margin.  These are 25+ year agreements with utilities and customers and if anything the company is being conservative.  The current spot rates are over $50 MMBtu and the company assumes only 2/3 of the LCFS benefit to their projections.  They are also clearly going to be rolling up other smaller players and doing new projects across the country over the coming decade.  This will be a very large company in the next 5 years.

So what are we paying for this growth story?  Well, EBITDA is already projected to be $140m in 2022 versus a proforma mkt cap of $1.85 billion or around 13x EBITDA, not too demanding.  It will grow another 70% in 2023 and reach $400m in 2025.  Importantly, these numbers are not only likely conservative as stated above, but they should be highly visible and recurring revenues in nature.  This is not your run of the mill SPAC.  These are pros in the field with a project backlog that should support acquisition growth to make this a $1 billion cash flow machine in the next 5 years, in our view.  We think once the sellside picks up coverage post de-spac in mid September, the price targets, trading volume and interest level will rise significantly.

What could go wrong?  Please read their investor deck.  It is perhaps the best SPAC deck with credible projections I have seen and a measure of conservativism.  Timing of projects is probably the biggest risk on projections as permits and the like are a big part of the equation when converting LFG to RNG.  Could this be like $AMTX which has been a round trip shit show?  We think not.  $AMTX is in a terrible ethanol business and building new business for renewable fuels with first production of meaningful import in 2022 late of 2023.  That story is much more execution and believability of their ramp.  The RICE Brothers and $RICE have already EBITDA profitable $40m in 2020 with clear locked in off take agreements and project visibility.  We think you buy this one, put it away and see it possible 10x the size down the road using $1 billion of cash flow and 20x multiple.  

Rob’s Educated Guesses