Anaergia Inc T.ANRG

TD

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Q2/22 Preview

Expecting a Relatively Quiet Second Quarter

TD Investment Conclusion

Q2/22 Preview: Our coverage universe typically releases updates throughout the year and we do not expect that Q2/22 disclosures will feature meaningfully new or incremental operational information. Our focus this quarter will be on assessing how a wide range of near-term headwinds (energy security, inflation, supply chain, and interest rates) affects the pace of energy transition. Where appropriate, we have updated our estimates to reflect these themes. Company-specific updates are presented on page 2 and our sector-specific outlook is as follows:

• Hydrogen: New order disclosures have slowed recently and our coverage universe continues to execute on longer-dated partnerships and demonstration projects. As a result, we do not expect larger order-flow in the near term and we have revised commercialization timelines in our long-term NAV assumptions to reflect what we believe is a more realistic commercialization scenario.

• Renewable Natural Gas (RNG): California LCFS pricing has declined meaningfully year-to-date, which we believe has slowed investment in projects with low carbon-intensity scores and high cost structures (small-volume animal manure-based projects). Conversely, we believe that demand from North American gas utilities under fixed, lower-priced long-term offtakes has remained strong, which has prioritized projects with the lowest cost structures (landfill gas). Looking ahead, we expect that California regulations intended to divert organics from landfills (SB1383/SB1440) will provide another near-term pathway for industry growth. In Europe, realized pricing in several jurisdictions (fixed credit price plus spot natural-gas pricing) remains strong due to extremely high natural- gas prices. In light of the discussion above, we have reduced our estimates and long-term NAV assumptions for companies with exposure to North American animal-manure-based projects.

• Voluntary Carbon Market (VCM): Public companies with exposure to VCM are currently trading near cash-value, with Base Carbon (BCBN-NEO, not covered) recently instituting an NCIB. To this end, investors do not appear to be giving much of any credit to future cash-flow generation from existing streams/royalties. As a result, we have updated terminal multiples in our NAV to reflect the reduction in sentiment. Although this early-stage industry features significant operational risks and regulatory uncertainties, we believe that there is meaningful upside potential from current valuation levels as demand for high-quality offsets increases as corporations implement strategies to achieve highly publicized net-zero targets and announced royalty/streams generate IRRs in line with expectations.

  Our Sector Stance: OVERWEIGHT

  Despite the near-term challenges noted above, we continue to see attractive long- term value across our coverage and believe that both industry momentum and valuations will return when recessionary fears and geopolitical/energy security risks subside. We continue to prefer companies with differentiated, difficult- to-replicate products and services, with ready-to-commercialize business models and a well-articulated, plausible path to growth and profitability. Our best idea in the Clean Technology space continues to be Anaergia (ANRG-T, SPECULATIVE BUY, $30.00 target price).