I was chatting with
@Axed briefly last night, and we played out the bear / bull thesis. The main bull thesis I think is covered well here (Bioenergy sector will grow, Delorean is well positioned particularly with it's pipeline, partnerships in place, recent capital raise provides cash). The bear thesis perhaps may be worthwhile to dwell on just to understand why the market is hammering the share price.
First up, retail. When the energy prices skyrocketed in the UK, so many retailers went bust. The problem was they were buying wholesale energy on the spot market as prices were going up, while their customers had locked in rates. The Australian scenario is not much different. My mate at Origin is noting they are getting huge numbers of customers inflows, while small energy retailers are asking their clients to leave. Put simply, they penned contracts without thinking about this black swan event where gas prices 5x from $8 to $40/KJ on the wholesale market.
Unfortunately for Delorean, ~58% of their operating EBITDA in FY21 was coming from their retail business. For those less familiar, the energy they are selling is predominantly NOT produced from Delorean assets, but rather is bought on the wholesale spot market. We saw in 1H22 the results in retail were poor, and we can expect this to probably be negative going forward. In 1H22 they *increased* their retail contract volume by 35% with new contracts with Hawaiian and Enviro Pipes. While in 1H21 they generated $1m EBITDA from retail on $10m of revs, in 1H22 they generated around $0.5m on $16m of revs - that's the margin compression they are feeling. Delorean note they have elongated their supply contracts to reduce the risk, but the market is essentially saying "Noway".
@emptytrolly may be able to add more detail here. This is the excerpt from the 1H22 report:
Second, the financing arrangement with Planum has still not been announced. With a full development pipeline but a lack of financing, the main risk to shareholders is further dilution through capital raises. In 1H22 despite positive operating earnings, the company burned through around $7m of cash. They had $4m on hand and have since raised $6m, so that's $10m. But they have also signed up new developments such as YarraValley - my guess is they have around $80m of CAPEX in or near construction right now. Meanwhile, the cost of financing has gone up with interest rates.
To my mind, without capital behind it, this is becoming a massively leveraged bet. *If* Delorean gets through this crunch, the business model is extremely sound and I am very confident in its performance. I would not be surprised to see a 10x on the market cap in the medium term because they are so leveraged.
But, if they dilute the heck out of us in the meantime because Planum simply has failed to raise debt, well this could be another Genex (bagholder). The potential for a takeover is now quite real - international competitors may simply want to buy the pipeline. The potential for joint ventures with a capital partner (not Brookfield, but of that ilk) is also on the table - it would dilute shareholders but provide certainty. Or they need to change their business model like Genex did with Energy Australia and Kidston where they essentially sold the upside potential to access the capital financing they needed.
Until I see an improvement in the capital markets and the retail segment, this is a hold for me. GLTAH.
(20min delay)