By: Zimele Mbanjwa
Renergen's principal asset is its 100% shareholding in Tetra4, which holds the first and only onshore petroleum production right (issued by the Department of Mineral Resources and Energy (DMRE)) in South Africa, which is valid until 2042. Its Virginia Gas Project (VGP) is in the Free State and comprises exploration and production rights of 1 870 km² of gas fields. Through its Virginia Gas project, Renergen plans to produce and commercialise natural gas and helium, thus creating separate revenue streams. The expansion of the Virginia Gas Project is being undertaken in two phases.
Renergen's project progress
Renergen completed the development of Phase 1 of the Virginia gas project, which it expects to produce 310 kg/day of helium and 50 tonnes/day of liquified natural gas by the first half of 2024 (at full capacity). Phase 2 is targeted to commence commercial production in 2027 and aims to produce about 4.2 tonnes/day of helium (~10% of global demand) and an estimated 688 tonnes/ day of liquid natural gas (LNG). It is expected that the LNG will be sold locally, while the liquid helium will be exported internationally.
Phase 1 costs ~$60 million to build. The group secured ~$40 million in debt funding from the United States International Development Finance Corporation (US DFC), AU$10 million was raised in a listing on the ASX, and R160 million in debt was funded by the South African government through the Industrial Development Corporation (IDC).
For Phase 2, Renergen has secured $750 million in senior debt funding. It has received $500 million in senior debt funding from the US DFC, and a further US$250 million debt facility from Standard Bank in South Africa. Other funding includes the issuance of a $7 million unsecured convertible debenture to AIRSOL, an Italian wholly-owned subsidiary of SOL S.p.A., an anticipated 10% sale of Tetra4 to the Central Energy Fund for R1 billion, and the most recently announced investment of R550 million by Mahlako Gas Energy Proprietary Limited (MGE) for a 5.5% stake in Tetra4. More equity funding is expected by way of a Nasdaq IPO, with Renergen aiming to raise about R2.6 billion ($150 million). The group plans to draw down on the approved debt facilities from the DFC and SBSA upon the completion of the proposed Nasdaq IPO. Full capital expenditure of the project is estimated at $1.2 billion. It is still anticipated that additional equity capital will be needed prior to completion of the construction.
Natural gas
Virginia produces natural gas - a mixture of odourless hydrocarbons that are mainly made up of methane. Renergen's natural gas is considered very pure with an average of over 90% methane, and almost zero higher alkanes, which reduces the complexity of liquefication. The gas is also attractive for extracting helium as it does not contain common impurities such as hydrogen and hydrogen sulphide (H2S) and contains low levels of carbon dioxide (CO2).
The natural gas value chain is often divided into upstream, midstream, and downstream operations. Exploration, production, liquefication, and refrigeration are included in downstream operations. Midstream consists of the shipping and transport of LNG and upstream includes storage and regasification.
Liquefication is the process of converting natural gas into LNG. It involves super-cooling purified natural gas to temperatures typically below -130 °C to turn it into liquid. Liquification and refrigeration are the costliest processes in the value chain as they require the use of sizable and expensive insulated cryogen tanks that can maintain temperatures below -160 °C. However, the benefit is that liquification can decrease storage volumes by approximately 600 times, allowing for easier and faster transportation, and cheaper storage.
Renergen will become the first downstream commercial supplier of LNG in South Africa, providing what it terms to be a secure independent energy supply, with significantly reduced carbon emissions compared to diesel in the same applications. The business is planning to distribute LNG via modular mobile refuelling facilities, located on vacant land to be leased on established trucking routes.
When natural gas is burned to generate energy, less CO2 and almost all other air pollutants are released into the atmosphere than when coal or traditional petroleum products are burned to generate the same amount of energy. By switching from diesel to LNG, transporters can save about 25% on a tank and reduce carbon emissions by around 30%. Additionally, compared to diesel powered vehicles, LNG can reduce engine noise up to 50% and increase autonomy up to about 1500 km. Typically, medium- and heavy- duty vehicles use LNG as an alternative fuel source.
Currently, Renergen's LNG supply is dedicated domestically to target large industrial manufacturers and large, heavy logistics operators who service the transport industry. The group also has Consol and Italtile as multi-year clients for its Phase 1 production - with more deals in the pipeline for Phase 2. Renergen's LNG is also set to be used by Ivanhoe at its platinum mine to produce low- carbon platinum. An offtake agreement was secured with logistics operator, Timelink Cargo for Phase 1, with supply anticipated to commence in 4Q24. In all, Renergen expects to contract a majority of the Phase 2 LNG on five- to eight-year take-or-pay agreements, servicing the industrial, logistics and gas to power industries. It is expected that the LNG offtake agreements in Phase 2 will be finalised closer to the Phase 2 plant coming into operation.
Supply - Demand dynamics
Global gas and LNG markets have evolved as the world looks to transition to a carbon neutral future. The factors that have driven the significant changes in supply and demand dynamics in the sector include economic growth, technology advancements, and prevailing renewable energy policies.
The demand for natural gas in advanced economies recovered briefly in 2021 but fell again in 2022 to lower levels than before the pandemic and remained low in 2023. This drop in demand was due to a transition to renewable energy sources for electricity production, the adoption of heat pumps, and the fast reduction of gas use in Europe (-13%) after a sharp reduction in pipeline supply from Russia. Forecasts suggest further moderation in prices globally post-2022 all the way to 2050 as the energy transmission hastens towards cleaner sources, while more LNG producers come online around 2030, which will further result in supply outpacing demand.
In its World Energy Outlook, the International Energy Agency (IEA) explores three different scenarios that reflect current real-world conditions and starting points to project global energy usage:
In all scenarios, the demand for natural gas drops in advanced economies with declines estimated at ~40% in the STEPS scenario, ~76% in the APS scenario, and ~85% in the NZE scenario by 2050 relative to the current levels. That said, the developing and emerging economies demand scenarios vary significantly, although the former makes up the bulk of demand.
On average, per the above table, across all scenarios, the average long-term decline in natural gas prices across the major economies is around 3.5% per annum. For LNG pricing, in its Annual Report for FY23, Renergen estimates a long-term base methane price of approximately R250/MBtu (~$13 at current exchange rates), which seems ambitious relative to global projections.
Helium
Helium is a colourless, odourless, tasteless, non-toxic, monatomic, inert gas (noble gas) which can be liquified by exposing it to temperatures below -269 °C. At these temperatures, Helium becomes what is known as a superfluid. In a superfluid state, helium becomes non-viscous meaning that it flows over surfaces without any friction. This makes it a very flexible compound as it is non- corrosive to most materials and has good thermal conductivity. Due to its advantageous chemical properties, helium is used in a variety of applications.
From natural gas to helium
Renergen's natural gas resource contains one of the richest helium concentrations recorded globally with reported average concentration of 3%, with over 32.3 billion cubic feet (bcf) of Helium reserves and 968.7 bcf of methane at Virginia due to the unique geology of being situated in an asteroid crater. Most natural gas reservoirs around the world contain low helium content (<0.05%). Natural gas is considered helium rich if helium content is above 0.1%. The higher the helium concentration in natural gas, the lower the cost to extract it. Renergen has previously recorded up to 12% helium concentrations in well tests.
The process of extracting crude helium from natural gas requires three sequential steps. First, impurities are removed from the gas through various extractions and absorption methods. Second, the gas is passed through a surface of activated carbon which acts to affix high-molecular hydrocarbons that are separated from the gas. Lastly, cryogenic distillation will be used to remove the remaining methane leaving a gas mixture with up to 70% helium. Cooling the helium further through cryogenic adsorption processing acts to increase helium purity to between 90% and 99%.
Supply - Demand dynamics
Renergen is looking to become a major global producer and supplier of liquid helium and will place South Africa among only eight other helium-producing countries.
Demand for helium has continuously grown over the years, which has resulted in a net shortage in the market, driven by increased demand from Asia. The long-term global helium market is forecast to grow at an estimated constant rate of 7% per annum from 2027 onward. Some drivers of growth and opportunities in the market include increased MRI usage in emerging markets, and growth in electronics, LCD, semiconductors, and fibre optics in Southeast Asia.
The scarcity of the gas suggests Renergen's entry into the market comes at an opportune time. First liquid helium production took place in January 2023. However, Renergen has since reported a leak in the helium cold box, which has since delayed commencement of commercial production. LHe is still on track to commence production before the end of the 2024 calendar year. For Phase 1, at capacity, Renergen is expected to produce 310kg of helium per day. The group is said to have already contracted multiple 10- to 15-year take-or-pay offtake agreements for more than 50% of the plant's capacity of 4.2 tonnes/d of helium to mainly large industrial gas companies. The balance of the liquid helium is earmarked for sales in the international spot market.
Liquid helium spot pricing has been recorded at US$1,000/mcf before, however, the short- to medium-term spot price is $237/ mcf and the long-term spot price is approximately US$600/mcf. Low supply may see upward price support going forward. Renergen's spot tender in 2022 saw prices bid up to US$875/mcf.
Renergen's management team
Stefano Marani (CEO) - Marani's background is in structured finance and advisory where he previously worked at Deutsche Bank and Morgan Stanley. Marani was part of the team that acquired the Tetra Gas Fields from Molopo Energy Limited in April 2013 and has been with the company through its formative years.
Brian Harvey (CFO) - Harvey has over 15 years' experience in senior finance roles after having initially qualified and worked as a mechanical engineer for De Beers. He has worked for multinational, foreign-listed and JSE-listed companies, principally in the resources sector, including Weir Minerals Africa and Middle East, Royal Bafokeng Holdings Pty Ltd and Anglo-American plc.
Nick Mitchell (COO) - Mitchell is an experienced director with a history of working in the energy industry, particularly in early- stage company development. Mitchell was also part of the group that acquired the Tetra Gas Fields in 2013. He currently serves as the chairman of the Onshore Petroleum Association of South Africa (ONPASA) and has done so since March 2017.
Approximately 87.7% of Renergen's outstanding shares are owned by public shareholders, with the balance owned by Renergen's directors and management team. South African shareholders hold 69.7% of the company's outstanding shares in issue, with 17.2% held in Australia. Individuals hold 34.0% of Renergen's shares.
Financials
What we like about this company
What we like about this company
Outlook and valuation
Renergen's short-term business focus lies in proving the reliability of Phase 1 plant's production output to ramp it up to full production by the end of the year and commencing the expansion of the Virginia Gas Project through the development of Phase 2. Long term, the group looks to build a large-scale alternative energy company with diversified revenue streams as it establishes itself as a leading supplier of LNG and Helium to both local and international markets, respectively. Upon completion of Phase 2, Renergen expects to deliver an estimated EBITDA of between R5.7bn and R6.2bn per annum, once the plants are in full production. This is expected to occur in the financial year after construction is completed (FY27).
We employed multiple valuation models to arrive at our fair value for Renergen, using conservative estimates to better account for the execution risks attached to Phase 2. Our discounted cash flow valuation offered the most upside followed by a price-to-book valuation, while our residual income valuation offered a downside rating.
Currently, the stock is trading around R12.00, ~29% lower than the calculated average fair value of R15.53.
