Tidewater Renewables Ltd T.LCFS

RBC Initiate Coverage

[retiredcf]

Their upside scenario target is $28.00. GLTA

September 7, 2021

Tidewater Renewables Ltd
Green Gas & High Tides; Initiating at Outperform

Our view: We initiate coverage of Tidewater Renewables' shares with an Outperform, Speculative Risk rating, and a price target of $20.00/share. We think the company is well-positioned to deliver strong growth and project economics through leveraging Tidewater Midstream's (TWM) existing assets and management team to develop renewable fuels production and other energy transition projects with reduced capital costs and increased operating efficiencies. Further, while the value provided by incentive programs (e.g. LCFS) may be volatile, we think governments are committed to decarbonisation and will revise programs as necessary to sustain momentum in renewable fuels supply growth.

Key points:

We expect strong value creation associated with the renewable diesel and renewable hydrogen complex. We think the combination of co-locating the facility with TWM's Prince George Refinery (PGR), support from the B.C. government on capital costs, and strong Low Carbon Fuel Standard (LCFS) credit pricing can drive an EBITDA build multiple on net capex that we estimate at only 1.6x. We also favourably view the facility's flexibility on feedstock, which should allow it to source a significant portion of lower cost inputs (e.g., tallow and used cooking oil) from local industries and mitigate any continued increases in the cost of feedstocks such as soybean oil.

We see potential catalysts through 2022 to drive the stock before the renewable diesel and renewable hydrogen complex's completion in early 2023. We believe the stock will benefit from projects (e.g., canola co- processing) that we forecast will help drive roughly 15% EBITDA growth into 2022 above the initial $40 million run-rate, as well as a series of milestones related to the renewable diesel complex including: (1) securing feedstock; (2) improving certainty on capital costs; (3) construction updates; (4) monetizing LCFS credits; and (5) visibility to credit values under the proposed Canadian federal Clean Fuel Standard program.

A robust portfolio of future growth opportunities could drive upside to our valuation. Our valuation for the shares does not include the two RNG production projects (which represent a $70 million capital opportunity) or $1.8 billion of other early-stage projects that the company is evaluating, including sustainable aviation fuel production, carbon capture, use and storage (CCUS) initiatives, and other identified opportunities. We think the company’s ability to leverage existing TWM infrastructure can drive strong economics (i.e., relative advantages on capital and operating costs) for its energy transition-related projects.

We see attractive upside to our $20.00/share price target from successful execution. Our valuation framework applies a 7x multiple to our 2023E EBITDA associated with the initial package of highly contracted assets (roughly a 30% discount to how we value peers' contracted assets), and a 6x multiple to the renewable diesel and hydrogen production (in line with refining peers with renewable fuels exposure but a significant discount to leaders in the renewable fuels space).