Renergen: exciting but not for the faint hearted
Renergen is known as a company that owns a potentially large gas project near Virginia in the Free State.
This gas project is claimed to contain the highest concentration of helium worldwide. Renergen owns an onshore petroleum production right to the “Virginia Gas Project” that is rich in methane (LNG) and helium, and the Group is developing in a two-phased approach.
Renergen is in a formidable position to move up the value-curve as Phase One nears first-production.
Importantly, the Virginia’s Phase Two could be multiples the size of Phase One and unlock staggering value in the Group. However, this will require substantial capital which the company to date have been unable to secure.
There have been huge expectations from the company. Notwithstanding the massive, stated reserves and various deals announced the share price keeps on sliding.
There have been many accusations made and denied and it has become increasingly difficult to get a clear picture.
We previously covered this company in a report in 2022 and there we stated.
“Blue Gem Research include the following disclosures to their research: “Disclosures*
A. The analyst is an officer, board member, or director of Blue Gem Research (Pty) Ltd.
B. The Company is a client of Blue Gem Research (Pty) Ltd (i.e., this is a Commissioned Report) and Blue Gem Research (Pty) Ltd has received money in exchange to produce this report.
Analyst holds long or short personal positions in a class of common equity securities of this company.”
The JSE should have a closer look at this.
The research of this Group and their write up of Renergen reminds one all too much of the Viceroy reports into Steinhoff and thereafter Capitec.
The Financial Sector Conduct Authority (FSCA) has imposed an administrative penalty of R50 million on Viceroy Research – a short-seller that sent South Africa’s markets into a spin in 2018 by targeting Capitec bank in its reports.
The following is an extract from research material produced by Blue Gem Research (Pty) Ltd. (Renergen – Update – 28 March 2022) “Valuation and Implied Return: CEF price tag implies 6946cps Share code: REN – Market Cap.: R5.1bn – PE: -114x – DY: 0.0%
- Given the proximity to our last note, we have not updated our fair value for Renergen and maintain it at 5821cps (previously: 5821cps) with a 12m TP of 6867cps (previously: 6867cps).
- The R1bn price attached to 10% of Tetra4 implies a valuation of R9bn for the remaining 90% held by Renergen, or c.6946cps per issued REN share (=R9bn / c.129.5m issued shares).
- While this implied valuation is only indicative (the CEF likely has different criteria for making/valuing investments than stock market minorities, the investment further derisks the project, & shareholding in a subsidiary does not consider other Group assets nor Holdco costs), it certainly highlights how undervalued Renergen’s shares potentially are.”
- Should the investment realise at the market Cap rate suggested that would have implied a Price/Equity ratio well more than 200x. Things seldom get more ridiculous than this.
Any investor should keep a keen interest in the Free Cash Flow of a company as this indicator looks past announcements and hype and gets to the point.
What is happening with the cash generation from activities at Renergen.
The picture below is not healthy at all.
In response to an article published by shareholder activist Albie Cilliers, one commentor to his article stated.
“This looks all too much like a pump and dump action – referring to Renergen founders selling their shares. A similar phrase that is often used is “Tip and sell”.
Where speculators flourish it is often a good strategy to buy on rumour and sell on fact.
The last phrase demonstrate how hype is created to lure buyers and the insiders use the opportunity to sell into this demand.
Unfortunately, the hype created by the Blue Gem research group and the simultaneous announcements of investment by the Central Energy Fund, created the distinct impression that the company is worth R10 billion.
According to Blue Gem Research Group “The Virginia Gas Project was awarded ‘Strategic Integrated Project’ status by the South African Government.“
According to the CEO the following announcements were made over the past few years.
Deals announced:
- Renergen signs $500m debt retainer for Virginia Gas Project.
- Renergen seals R1bn investment from state-owned Central Energy Fund.
- CEF completes due diligence on R1bn Renergen Virginia Gas Project investment.
- Renergen switches on its Virginia Gas Project.
- Renergen starts delivering SA’s first locally produced commercial LNG.
Our own publication (Independent News Group) reported on 22 November 2024
“DOMESTIC natural gas and helium producer Renergen has completed a forward sale agreement for 100 000 units of helium to Argonon Helium US, a helium trading company. The agreement is for 19 years. Each unit represents a thousand cubic feet (mcf) of liquid helium. It does not seem that the market is overly impressed with this announcement. Independent News Group also reported ‘Renergen’s application to have construction suspended on a solar plant being built on disputed land at its onshore gas facility has been rejected by the Department of Mineral and Petroleum Resources (DMRE), according to the solar facility developer SOLA Group, but Renergen says the matter is not yet finalised.”
News is coming through thick and fast from Renergen.
In another transaction that raised eyebrows the Central Energy Fund announced it will invest R1bn in Renergen.
This must be seen in the light of the following statement in the financial statements by the Board.
“Management acknowledges that material uncertainties remain over group’s ability to continue operate as a going concern due to liquidity constraints.”
It was claimed that the Central Energy Fund conducted a due diligence process and was satisfied with the results. This statement was made public.
Obviously, minority shareholders would have taken cognisance of this development and have relied on the positive news to their detriment.
The result was that the approval for the investment did not materialise.
From an outsider’s view things just do not add up.
What went on?
Once again, the timing of the proposed investment is questionable. The Investment was contemplated at a time that the share price was more than R34 per share.
If such things are going on in a listed company investors should ask themselves if the JSE offers any real protection via all their surveillance efforts.
One would expect to have seen these swings and statements to be brought into the JSE and FSCA radar for further investigation.
At the time the share price was trading at R34 per share, it has now fallen to R9.
This would have implied a loss of R900m for the Fund.
The fact that the deal was not consummated does not dispel the concern that a deal on these terms were contemplated and announced.
How do they warrant investigating Renergen and allow statements to be known in public linking them in an overpriced investment.
The Central Energy Fund has just come out of a court case to overturn a previous deal relating to the sale of South Africa’s strategic reserves.
Once again, they are linked to a deal that does not make sense. This harms their reputation as a South African SOE.
The following graph show an alarming unbalanced renumeration policy that is clearly not in line with the company performance.
The Financial Statements of Renergen ending 2023 did not reflect the investment by the Central Energy Fund.
We wrote to Renergen and received the courteous reply from them stating; - “The CEF transaction did not materialise within the timeframes prescribed in the agreement, so we concluded the transaction with Mahlako Gas Energy for 5.5% or R550 million—the same valuation metrics as contemplated in the original CEF transaction, albeit a reduced ownership level.
The announcement read; - “Renergen is pleased to announce the conclusion of an investment in Tetra4 Proprietary Limited (“Tetra4”), the Company’s primary asset (the Virginia Gas Project), by Mahlako Gas Energy Proprietary Limited (“MGE”). The investment will provide an injection of R550 million into the Company and its subsidiaries. Part of the proceeds will see the repayment of the Standard Bank bridge loan and marks the beginning of the equity transactions relating to Phase 2.”
At this stage it is not clear if the cash was paid over.
Headline loss per share increased by 53.1% from a headline loss of ZAR 0,2987 per share in the prior reporting period, to a headline loss of ZAR of 0.4573 per share for the current reporting period. (for the six months ending 30 August 2024)
Corrie Kruger is an Independent Analyst.
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