IM recently accompanied alternative Renergen CEO Stefano Marani on a site visit to the company’s gas development operations in Welkom in the Free State.
IM last visited the site in April, during the early engineering, procurement and construction phase. Five months later the site was unrecognisable due to the work that had been done.
Since the start of 2021, the share of the liquid natural gas (LNG) and helium producer has undergone a roller-coaster period. It peaked at more than R30, but much of the exuberance surrounding "go-go" stocks evaporated, and within a few months the share price had halved. It bottomed at R15.70 in mid-August and at the time of writing was at R22.45.
A slew of positive updates have informed investors about the company’s progress.
As Renergen nears production at Virginia Phase 1 (VP1), a significant de-risking of the overall project and of Virginia Phase 2 (VP2) has occurred.
IM believes that when VP1 commences, a material percentage of Renegen’s daily LNG and helium production will be in firm hands, as agreed with various parties — providing further confidence in the prospects of the project and the company.
Pre-sale contracts with global gas giants and multinationals such as Linde, Messer and Siemens for 65% of the helium to be produced at VP1 will ramp up production to 350kg of helium a day.
The materially larger VP2 project will eventually produce 5t a day after being commissioned in 2024.
A contract to sell a quarter of initial daily production of LNG at VP1 was also signed with domestic glass business Consol. It involves a LNG off-take of 14t a day from a projected initial VP1 daily production of 55t. The Consol deal, IM estimates, is worth R60m year.
A further partnership with oil giant Total gives Renergen access to Total’s N1 distribution chain, allowing access for the LNG produced to key prospective industrial clients.
On a back-of-a-match-box calculation, IM estimates — based on current pricing per gigajoule of LNG and per kilogram of helium — that VP1 will generate revenue of about R320m, dollar dependent, on this first phase of development.
More importantly, VP1 is progressing in accordance with its engineering and commissioning timeline and is mostly on budget, despite the pandemic having caused global supply chain disruptions. Most of the kit used in the extraction, compression and liquification of LNG and helium is engineered in and imported from China.
In terms of project progress, investors can now physically see where much of the planned capital of R1bn on VP1 has been spent. The construction of platforms and stations to handle the gas are far advanced, as are the commissioning of the central processing and compression sites and the cooling towers.
About 18 wells have been drilled at VP1. Further expansion will take this number to 25 to bring phase 1 to full expected production.
The gas-gathering pipeline for the entire project — about 52km — has been laid, and the collection and production pads have been completed. The taps are due to be turned on at VP1 in December this year or January 2022, and revenue should flow thereafter.
The project aims to have daily production at VP1 in a revenue ratio of 75% LNG to 25% helium. On the larger VP2 site, extraction of the more valuable helium gas will be 5t a day, greater than the expected 350kg a day at VP1. At VP2 the production percentages will be closer to 55% LNG and 45% helium.
At VP1 55t of LNG a day is expected to be produced. The expectation is that VP2 will produce 750t-800t of it a day.
With a plethora of positive JSE Sens announcements, the Renergen share started to perk up in mid August as the market anticipated the next major milestone in the company’s evolution — the latest quantum of gaseous reserves in the ground.
IM understands that Renergen has commissioned an independent review of the gaseous reserves in situ. Its report is due soon, and may even be out already when this IM issue hits the newsstands.
These reserves are key for valuing Renergen in the long term. On release of these results, I foresee that the market will pay far closer attention to Renergen and potentially re-value the company. The numbers could be eye-watering.
Three main reserve categories are defined by the Society of Petroleum Engineers. These are proven (1P), proven and probable (2P), and proven, probable and possible (3P).
There is a 90% certainty of commercial extraction in terms of the proven definition and a 50% extraction in terms the probable description.
Thus, the key numbers, aside from 1P, is the scope and reserve of the project that 2P can give, or the longevity of the prospect.
At a recent investor presentation, Renergen provided the most recently disclosed reserves. These date back to March 2019. They will soon be updated, IM believes.
Renergen said there are proven and probable reserves at 139-billion cubic feet (BCF) of methane and 3.4 BCF of helium. If one factors in the disclosed proven, probable and possible reserves and resource, the amount is 284 BCF of LNG and 6.8 BCF of helium — equivalent to 7-billion litres of diesel equivalent.
IM suggests that these 1P and 2P numbers may be revised sharply higher when the results of the latest independent review are disclosed.
The drilling of sites on the licence ground in the Free State have been far more bullish than expected from early geological tests. Gas has been hit at shallower depths, sometimes as shallow as 350m, and the flow rates and scope of the main gas-bearing fault and its fractures have led to materially better flow of gas recorded.
In some instances the percentage of helium measured in flows has been as high as 12%, whereas the global average for major producers is less than 1%. Renergen’s site, on average, has percentage levels of helium at multiples of the major global producers, at 3% to 4%.
Aside from the expected commercial output and revenue from the Renergen Free State site, there is also a key marketing benefit that should aid the company’s alternative energy credentials.
The three largest helium producers globally are Qatar, Algeria and Russia. The US is the world’s fourth-largest producer of helium. Renergen’s site in SA may pip them all when detailed P3 data is released.
Furthermore, the world is now obsessed with environmental, social, and governance issues as well as social impact investing — especially when it comes to carbon emissions. Renergen’s emissions from its production of methane at the Free State that is condensed into LNG and separated into helium has the lowest carbon footprint of all the major global suppliers.
In comparison, Qatar, at present the world’s largest helium producer, with a 30% market share, releases 335 times more carbon dioxide than Renergen in its extraction and production of helium equivalent.
Renergen, consequently, has the highest concentration of helium at the lowest production carbon footprint.
IM also knows that the company, which is dual listed, undertook a major institutional site visit on with 17 domestic investors October 13. The firm has attracted few institutional investors in SA and Australia and to date is held mainly by fervent private client investors.
If those analysts and portfolio managers get a taste of the opportunity available, change in the institutional ownership of Renergen may be just around the corner.
Most likely 2022 will be the year when the production output of Renergen starts to deliver revenue and, more importantly, the ability to forecast potential revenue and profitability is increased after the 1P and 2P results are released.
However, investors and shareholders should not be under any illusion that to attain the true potential of the Virginia project, significant capex will be needed to extract the tonnage of LNG and helium forecast by the company. That could be estimated to be as high as R10bn.
Part of that funding will come from the novel and unique tradable helium token Renergen is launching in conjunction with a US financial services company. The token will fund the completion of up to 40 exploration and production wells.
The first phase of this will initially be the issuing of helium tokens to raise $25m or R375m. These tokens will give a fungible value to a kilogram of helium and will enable the holder to either trade the token or undertake physical delivery at a certain time.
As Renergen has secured off-take agreements for 65% of its expected helium output, the balance of the output could theoretically be tokenised and raise sizable funds for Renergen. This will be part of a funding scenario for VP2 alongside debt and a future equity raise. Additional funds will come from the sale of LNG.
At R22.45, Renergen has a market capitalisation of R2.75bn. With many solid 2021 developments and announcements now confirming the viability and potential of Renegen’s project in the Free State, and with announcement of the all-important P1 and P2 reserve and resource data ahead, IM maintains its " buy" recommendation on the stock.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.