December 1, 2021

Fears over the omicron variant and inflation have markets on edge. That has Greentech pulling back a bit from its recent bull move. We need to be a bit more cautious in the near term as a result, but the outlook for the sector remains excellent – and there remain attractive Greentech stocks to buy even in these conditions.

This issue we add a new stock to our Real Money Portfolio – a company resulting from two mergers less than three months ago. It’s already quite profitable and on a strong growth trajectory. Its shares are at an attractive price today.

Archaea Energy Inc. (LFG)

Overview
Renewable natural gas (RNG) is increasingly seen as a largely untapped, profitable way to produce carbon-neutral or carbon-negative natural gas. RNG is almost all methane, a type of natural gas that is 28- to 36-times as potent a greenhouse gas as carbon dioxide. Practically – for power generation – it is no different from natural gas. Capturing RNG means displacing fossil fuels that would be extracted from the ground while also redirecting gas that otherwise would be released into the atmosphere – the end result is less greenhouse gases. RNG is generated in two broad ways, one is anaerobic digestion, of food waste, wastewater solids, animal manure and landfills, the other is thermal gasification, which is the burning of biomass like leftover crops and woodmass from harvests and crops grown specifically for energy production. A March study by the investment bank Stifel estimates that there are enough dairy and pig farms to increase RNG production 80-fold, and enough landfills to increase production six-fold. According to the EPA, 30% of U.S. human-caused greenhouse gas emissions came from organic waste at farms, landfills and water treatment facilities. Right now, RNG accounts for 0.3% of global energy supply. In North America, that needs to increase eight-fold to achieve net zero, under energy mix scenarios plotted out by the International Energy Agency. The Real Money Portfolio already owns an RNG stock, Aemetis (AMTX), which primarily is focused on California dairy methane capture, in addition to other business lines (being ethanol and planned renewable jet fuel and carbon sequestration businesses).

Business Model
Archaea Energy (LFG) primarily focuses on another supply of RNG, mainly landfill gas (LFG, inspiring the company’s ticker symbol). The company gathers methane from landfills and sells it as RNG and also, at some projects, uses the methane onsite to generate electricity it sells to utilities.

Archaea is the recent combination of three entities: Aria Energy, a long-operating LFG company that was one of the largest in North America, with projects generating 207 megawatts (MW) of electricity and 24,880 MMBTU per day, with an MMBTU unit being the energy equal to about one-sixth of a barrel of oil. Aria was combined with a pre-merger Archaea entity, founded in 2018 to pursue landfill RNG by Daniel Rice. Rice was a BlackRock asset manager turned natural gas entrepreneur last decade. Rice’s special purpose acquisition company, Rice Acquisition, is the third entity. It bought Aria and Archaea together to bring the combined entities public on September 15. The new Archaea has 35 projects across the U.S. in landfill gas-to-electricity and RNG gathering of methane.

RNG projects industry-wide are generally profitable today, given the low cost of acquiring feedstock and the sales price into the market. A large part of the business model is capturing national and state incentives for the environmental benefits, primarily tax credits. For that reason, it’s important to recognize that RNG companies are judged not just on the price of natural gas, but on the changes in the tax credit structure. As it stands, the business is a good one, and is expected to only see improving economics under the current administration and EPA. Archaea seeks to lock in 70% of production pricing in long-term (10- to 20-year) contracts to dampen the effect of market price fluctuations.

In the latest quarter, Q3, ended September 30, Archaea made $46 million in revenue from 1.43 million MMBTU and 175,230 MW hours (MWh) produced by the combined businesses. The business lost $21.9 million, of which $19.2 million is a non-recurring expense from going public and various SPAC accounting measures. For the nine months of 2021, the business generated $136.4 million in sales and $52.8 million in net income. The company has $133 million in debt and $400 million in cash.

Business Outlook
For full-year 2021, Archaea should generate $200 million in sales and $72.5 million in earnings before interest, taxes depreciation and amortization (ebitda).

Management says Archaea’s projects in development will raise ebitda over time to $300 to $400 million annually (about three to four times the run rate now). Management projections during the SPAC merger process say the $300 million ebitda mark will be hit in 2024, when sales should be over $600 million. The projections assume an average RNG price of $1.50 a gallon, which is conservative to current prices over $2. The $1.50 price equates to $30 MMBTU, compared to spot prices around $50 this year. Project costs, beside royalties, typically cost about $1 per MMBTU. Royalties to the landowners are the largest expense, at 10% to 20% of revenue.

In the near future, Project Assai, the world’s largest LFG project, outside Wilkes-Barre, Pennsylvania, is due to come online in early 2022. In its first year, it should generate $43 million in ebitda, with 80% of the production under long-term contracts with the University of California system, Energir and FortisBC. All the company’s debt is related to Assai. The debt is at 4% and owned by Paclife, Barings and Nuveen as part of their green-debt investments.

Longer term, Archaea has a streamlined RNG plant it says will lower its capital expenditures by 40% to bring new facilities online starting next year and expects to start producing green hydrogen (that is, hydrogen made from carbon-neutral sources) from them in addition to power production and RNG sales. The lower capital costs aren’t part of management’s current projections.

The company believes there are 300-500 U.S. landfills that can be economically positive now in the country, and another 100 that will eventually be so, as municipal waste continues to pile up. That provides a pathway in the domestic U.S. market to $1 billion ebitda in the long term.

Archaea also has some projects to capture dairy gas in California, which has an attractive carbon credit structure, and is also exploring carbon sequestration and co-locating solar on landfills as well. Neither is expected to play a major part in company economics in the next year or so although between tax credits and additional revenue, they could be material down the line. For now, this is a landfill gas play.

Issues to Consider:

• Do not buy Archaea warrants. They are in the midst of being redeemed by the company.
• There are 52.7 million shares outstanding. That means shares are trading at about 14 times estimated 2021 ebitda (management’s preferred metric), which will roughly equal net income after adjusting for Q3 2021’s one-time costs.
• The acquisition of the Rice-owned Archaea entity by the Rice-led SPAC could trigger a regulatory review. We don’t know of any investigation or any reason for there to be one, but the optics of self-dealing by SPAC sponsors is believed to be an area of great interest to the SEC.
• Archaea is highly reliant on federal and state tax credit and decarbonization incentives. It is possible U.S. political winds could change in coming years to reflect a previous executive-arm bias against renewables.
• Management, the Rice family and the Saltonstalls, an environmentally minded family in Massachusetts, own 40% of the company.
• Rice has previous created a profitable natural gas business, Rice Energy, which was sold to EQT in 2017 for $6.7 billion, about a 250% shareholder gain over three years from its 2014 IPO.

Technical Analysis
The LFG ticker has the history of the Rice SPAC from its 2020 IPO. The combined Archaea began trading on September 15, opening that day at 18.01. Shares advanced to a high of 21.59 two weeks ago, backing off to support around 19 this week. The 200-day average is at 16, data that includes pre-merger price action. If we look only at prices that cover the period where the Archaea merger was announced and in process, shares today are about a dollar beneath their mean. That matches with price internals that suggest LFG is in a near-term retracement that is due to turn higher. Shares have a good uptrend line that should pull in support if shares ease back to the 18.50 area.

What to Do Now
The market is volatile, but we believe profitable companies at good prices with fine technicals are less risky. We will add it to our Real Money Portfolio with a sell-stop below 16. That’s under the 200-day moving average and about 50 cents beyond three times Average True Range, a measure of “normal” volatility based on prices of recent sessions. BUY

Archaea Energy Inc. (LFG)
Revenue (trailing nine months): $136.4 million
Earnings per share (trailing nine months): $1.00
All-time high (intraday): 22.01
Market cap: $1.01 billion
Recommendation: Buy
Intended Portfolio: Real Money

The ESG Three

The ESG Three are three technically strong stocks selected from the 200 most-held stocks in environmental, social and governance focused mutual funds and ETFs. ESG fund holdings tend to be weighted toward blue-chip companies drawn from every industry which are rated highly in social and governance aspects. We screen top performers further to eliminate widely held companies we believe have clear environmental, social and/or governance problems. These aren’t formal stock picks but suggestions for those looking to explore additional stocks beyond the Greentech portfolio.

Advanced Micro Devices Inc. (AMD)
What is it?
A maker of semiconductors (processors, graphics cards, accelerators) for PCs and servers.

Why is it ESG?
Low employee attrition and development programs considered ahead of peers. ESG funds own $229 million of shares.

Why now?
A new generation of higher-margin chips and the purchase of rival chip maker Xilinx on the way.

Etsy Inc. (ETSY)
What is it?
An internet retailer.

Why is it ESG?
The company is considered to be a leader among web retailers in environmental metrics. ESG funds own $279 million of shares.

Why now?
Excellent momentum in adding active customers, little impact from more active physical store competitors and purchases of two companies last quarter, including the “Etsy of Brazil,” Elo7.

Intuit Inc. (INTU)
What is it?
A software and services provider with a large focus on personal finance.

Why is it ESG?
Generally strong ESG programs, although marred by a federal investigation that the company misled taxpayers away from free tax preparation options available under a software industry deal with the IRS. Otherwise, business ethics programs are considered very good. ESG funds hold $1.4 billion of shares.

Why now?
Shares rallied on better-than-expected earnings in November. While they have pulled back to support, it’s likely they’ll hold at these levels and start to move higher again.

Greentech Timer & Current Portfolio

Greentech sits right on support at the 40-day moving average, and under the 20-day and 200-day averages. That’s a mixed, mainly bearish, picture, and one clearly being generated by market-wide defensive moves away from growth stocks in recent sessions.

Stepping back to a longer-term view, Greentech finished November holding most of the gains of October, and is up 10% the past two months. If action continues normally, we’ll see a golden cross, in which the 40-day moving average crosses over the 200-day, in the next few sessions. While moving averages tell us only historical action, a golden cross remains a fairly reliable predictor of improving sentiment ahead.

Sub-sector-wise, water and rare earth metals remain bullish, though water is testing near-term support. Solar and nuclear are mixed, being below the shorter moving averages while showing long-term support. Wind stocks are bearish.

Our Greentech Timer is bullish when the index is above the 20-day and 40-day moving averages and those averages are upward trending (ideally, the index is also above an upward trending 200-day moving average too, but not essential).

Right now, the Timer is bearish, but not convincingly so. That means we want to be careful investing in more speculative stocks and have sell-stops set to cut losses and preserve capital, but not being too cautious to avoid investable opportunities.

Current Portfolio

Real Money Portfolio

Excelsior Portfolio

Real Money Portfolio
Our primary portfolio is the Greentech Real Money Portfolio – we invest alongside subscribers in the picks we make. That portfolio is designed to be fully invested at 12 stocks of equally sized initial investments. When the sector is bullish, we keep our cash in the ETF based on our benchmark index – the Wilderhill Clean Energy ETF (PBW). When the sector is bearish, we keep our cash in U.S. Treasury bills. The approach of this portfolio relies heavily on sell-stops, based on portfolio and gambling risk-of-ruin theory. This approach absorbs small losses, preserving capital for big winners we let run, and defending as much as possible against the statistical risk of a string of losses washing us out of the market. We prefer to execute sell-stops on daily closes at or below our sell-stop mark, rather than intraday lows.

Aemetis (AMTX)
Aemetis is sitting in a zone of support, with 15 seeming like a technical firewall to the downside. Shares look to be turning higher in a period of consolidation, suggesting we’re more likely to see gains than declines immediately ahead. The company signed a memorandum of understanding with eight airlines to deliver 50 million gallons of sustainable aviation fuel annually for seven years (350 million gallons total) to San Francisco International Airport starting in 2024. This is offtake for an Aemteis plant under construction now. Our sell-stop is “under 15.” BUY

Aptiv (APTV)
Aptiv is in some choppy waters, with some resistance immediately above the current price, but what we judge as stronger support below. Price technicals suggest they’re turning higher again in rangebound action. There’s little news. Our initial sell-stop is “near 151.” We’re shifting our rating to Hold from Buy based on Tuesday’s sizeable drop. HOLD

Array Technologies (ARRY)
Array is selling up to $100 million of shares and $325 million in convertible notes to finance acquisition of Spain’s STI, a deal that will make Array the largest solar tracker company in the world. Shares fell Tuesday on the filing to raise the cash. We’re lowering our sell-stop from “under 20” to “under 18” to give ourselves more leeway to weather what should be a temporary move on the dilutive effects of the fund. We’re shifting our rating from Buy to Hold. HOLD

Aspen Aerogels (ASPN)
The maker of EV battery aerogels – microstructures that prevent runaway fires and provide cushioning and insulation – continues to look very good. Shares look like they’re pulling back to support at 53 in the near term, but nothing out of the ordinary. The company reports earnings on December 14. Our sell-stop is “under 48” which would be a notable break of mid-term support. BUY

Centrus Energy (LEU)
No news for the refiner of uranium and HALEU, the next-generation nuclear plant fuel. Shares have found support at the 40-day moving average, 58.30. That’s a stronger pullback from the latest leg higher than we prefer to see, but technically not too worrisome. Our sell-stop is “near 51.” We sold half our position in mid-November at 68.70, a 105% profit on that portion. HOLD

Enphase Energy (ENPH)
ENPH is consolidating around 250 after the recent quick leg up. The company issued a release touting recent headway into the Australian market. Our sell-stop is loose, at “around 182” to stay in the long-term trade of U.S. solar demand. BUY

ESS Tech (GWH)
The medium-duration energy storage firm is a recently closed SPAC deal, so GWH is going to be volatile as arbitrage hedge funds do their usual shifting in and out of the stock. For that reason, we also recommend a loose sell-stop here, “near 11.” Shares have held up at support around 15 and look biased to improve. BUY

KraneShares China Green Energy (KGRN)
The story remains the same for the mostly China-listed Greentech stock fund. Shares continue to be rangebound, with a ceiling of 49-50 and action that has us suspecting a better entry will present itself than today’s price in the 48 area. We’re waiting for either a breakout over 49, or a dip down two or three points here. WATCH

Onsemi (ON)
ON looks strong, finding support at the 20-day moving average and advancing close to the all-time high of 63.46. Our sell-stop remains “under 50” (avoid a sell-stop right on this price). BUY

Wolfspeed (WOLF)
WOLF got well ahead of the moving averages and has made a needed step back after hitting an all-time high at 141.87 early in November. We remain right around our buy price here. Our sell-stop is “under 107.” Little news this past week. BUY

Excelsior Portfolio
Our special opportunities portfolio is Excelsior, which is managed without consideration to the Real Money Portfolio. Not every position will have a sell-stop. Currently, all holdings are warrants from original SPAC entities.

European Sustainable Growth SPAC / ADS-Tec Energy (EUSGW)
ADS-Tec Energy announced a deal with an undisclosed company in Spain to buy and deploy an undisclosed number of ultra-fast chargers in the country. Warrants of the SPAC merging with ADS-Tec Energy to bring it public, EUSG, remain positive, though have eased off the past week by about 40 cents. The SPAC deal has yet to close, so the warrants are likely still a good way to trade this company’s debut, with the risk the merger may not happen. BUY

Li-Cycle (LICY.WS)
Li-Cycle struck a deal with EV maker Arrival around EV battery research and recycling. No terms were disclosed. Warrants are around 4 this week, off the 4.61 high of mid-month but a sign of positive sentiment. The company has the option to initiate a cashless redemption if shares trade at $10 or greater for 20 of 30 days, which shares have. For that reason, we don’t recommend buying the warrants any longer. HOLD

Navitas Semiconductor (NVTSW)
The gallium nitride (GaN) semiconductor maker continues to tout its relationship with China’s Xiaomi, with a press release after trading Monday quoting a Xiaomi executive that new chargers for the company’s mobile phones use double the GaN content. The company also gained another $30 million cash from a complex forward purchase deal with a shareholder struck during the SPAC closing phase. There are redemption clauses if shares trade above either the prices of 18 or 10 for 20 of 30 days. We sold three-quarters of the position in mid-November to take profits with warrants above their theoretical maximum value of 6.50, booking 160% profit on that portion. Warrants are at 7 recently. HOLD

Origin Materials (ORGNW)
Much of the challenge for companies public by SPAC is investor awareness, so we’re pleased to see yesterday Origin got new coverage from HSBC. We’re still underwater on the warrants but they’re holding in the 1.80 area. Shares are in the 6-7 range. Origin does not have a warrant redemption clause for when shares are trading above 10 for a period of time, unlike our other holdings. HOLD

Ree Automotive (REEAW)
Little news for Ree this week. The EV chassis maker warrants have strengthened by about 10 cents this week as shares gained 20%. Both share and warrant prices display weakness and a need for a news catalyst to spur buyers. HOLD

ReNew Energy Global (RNWWW)
ReNew is weaker of late, probably due to India’s demand that coal retain a place in global energy commitments during the recent global environmental summit. As India’s largest renewable asset owner and operator, ReNew benefits greatly from Indian solar and wind demand. The company trades for three times trailing 12-month revenue of $741 million. Shares are in the 7-8 area. Warrants at 1.70 recently are still profitable for us. We’re adjusting our rating from Hold to Buy on what we believe is near-term, temporary weakness. BUY

Volta Inc (VLTA.WS)
Volta remains below the high-water mark of 4.50 that came with passage of the infrastructure bill. We’re still up about 35%. Little news this past week. Volta now has the option to redeem warrants when shares trade at 10 or higher for 20 out of 30 days. For that reason, we’re no longer recommend buying the warrants. HOLD

Thank you for being a subscriber. Our next SX Greentech Advisor issue is published Wednesday, December 14. Our regular weekly update comes next Wednesday, December 8. We will send a special bulletin with any interim recommendations. Contact me anytime with questions or comments at brendan@cabot.net.

The next Sector Xpress Greentech Advisor issue will be published on December 15, 2021.