March 10, 2022
Tidewater Renewables Ltd
Pulling the right levers
Our view: We continue to view Tidewater Renewables as pulling the right levers as it executes on its renewable diesel and renewable hydrogen project. Namely, it has taken steps to de-risk its net capital cost through BC LCFS credit sales and manage its feedstock exposure through a mix of vertical integration (i.e., the used cooking oil supplier acquisition), exploring long-term partnerships (we expect more news on this front in 2022), and hedging. Despite the recent pullback in valuation, we believe the company is relatively well positioned as an early mover in renewable fuels in Canada and reiterate our Outperform rating.
Key points:
Well positioned to manage inflationary pressures. Management disclosed that it expects gross capital costs for the renewable diesel and renewable hydrogen complex to "trend at the higher-end" of the $215-235 million range it had previously estimated, driven by "ongoing global supply chain and inflation factors". However, management also noted that following orders for medium- and long-lead items made in H2/21, roughly 90% of material costs are now locked in, as well as 50% of labour costs.
Favourable BC LCFS credit sales take the sting out of modest capital cost creep. Following the company's March 9 announcement that it had sold an additional 10,000 BC LCFS credits to a new investment-grade counterparty, Tidewater Renewables has now sold roughly 58% of the credits it expects to receive under its Part 3 Agreement with the BC government. For the 158,000 credits covered under the three sale agreements announced to date, an average sale price of roughly $437 per credit means approximately $10 million of funding tailwinds versus the $375 per credit the company had initially budgeted (i.e., this approximately offsets a move from the midpoint of the $215-235 million capital guidance range to the high end).
Q4/21 results were close to our estimate and consensus. Tidewater Renewables reported Q4/21 Adjusted EBITDA of $10.6 million, which compared to our forecast of $10.8 million and consensus of $10.4 million (eight estimates; range of $9.8-11.0 million). DCF/share was $0.23 compared to our estimate of $0.20, primarily driven by maintenance capex in the quarter that was approximately $1.3 million below our estimate.
Increasing our Adjusted EBITDA estimates. We have increased our Adjusted EBITDA estimates for 2022 and 2023 to $48.6 million and $140.2 million, respectively (up from $46.3 million and $126.2 million, respectively), reflecting stronger BC LCFS credit pricing (excluding sale agreements, we now expect average credit pricing of $400 in 2022 and 2023 compared to our previous estimate of $375), as well as increased refined product pricing, partially offset by increased feedstock costs.
Our price target is unchanged. Our price target assigns a 6.0x multiple (down from 6.5x) to our 2023 EBITDA estimate, reflecting a modest discount to the trading multiples of the company’s peer group of refiners with renewable diesel exposure given Tidewater Renewables' small size and asset concentration; please see Exhibit 5.