Earlier this month, I wrote about Zefiro Methane Corp. (ZEFIF) (ZEFI.NE) for the first time. The investment is already looking positive as the company announced that its subsidiary Plants & Goodwin received a slate of Government of Ohio-Funded Environmental Remediation Projects. The agreement calls for 50 wells in Ohio to be plugged. P&G already plugged 20% of these wells and has deployed four rigs to plug the rest. This is work that will be completed and revenue received well within 2025 and possibly all within calendar Q1. The market reacted positively as one would expect with a 17% rise to $0.70 last Wednesday and settling around that level since. But I think the reaction the market has had so far underestimates the impact of this news.
As part of the news release, the company noted that in all of 2023 it remediated 200 methane well sources. With one set of contracts from one state that is likely to be completed in one quarter, ZEFI has already captured 25% of the business it did for all of 2023. Assuming an average of $180,000 U.S. per well cleanup, this contract will lead to $9 million in revenue. A government contract of this size is a rarity for a company trading at a $50 million market cap. Revenue for the quarter ended September 2024 was $10 million, which so far is the company's highest ever revenue for a quarter. ZEFI would need to remediate just a handful of wells from active operations outside of Ohio to surpass that mark. I think that is pretty much a given since its "home" states are Pennsylvania and New York.
As part of this initiative run by the Ohio Department of Natural Resources (ONDR), these 50 wells represent just 0.3% of the 19,000 that have been identified across the state. Zefiro has secured revenue growth by barely tapping its total addressable market. The ONDR estimates that it will have $634 million in funding to plug these wells through 2035. As long as Zefiro shows that it has the capacity to do timely and quality work, the company should have an inside track to a lot of that money.
The company has kept the news flow coming with the announcement that the company’s Senior Vice President Luke Plants was featured in the U.S. Department of the Interior’s report on plugging orphaned wells. While this news release doesn’t directly refer to future revenue opportunities for ZEFI, it shows that Plants is someone in the industry who can speak with authority. This is a rarity for penny stocks and small caps, which often operate in their own little bubble where news is only of interest to traders. Any company can produce a website or corporate presentation and claim that they are or plan to be an industry leader in some niche market without any proof. Hiding behind the safe harbour clause relating to forward-looking statements. Being involved in a government report gives Zefiro instant credibility as an industry and thought leader in methane abatement.
Zefiro was also smart to mention that it increased its
workforce by 40% to 135 people in the release. With the U.S. Presidential regime change, a shifting
focus from being purely an environmental company to a “Made in America” environmental company
that is hiring U.S. workers is likely to be well-received at all levels of
government. The company would be wise to continue to portray itself as both an environmental company and one that creates good jobs in the United States to cast a wide net when appealing to certain investors and political decision makers.
My previous $2.40 target was predicated on the idea that existing revenues and operations justify about a 3x multiple, leading to over a 3x upside. While I am not nearly ready to adjust my target a little over a week after setting it, it's clear to me that a re-rate will eventually be necessary upon analysis of the next several sets of financials should the company continue on its current trajectory.
Microcap stocks are inherently risky. But considering the relative cheap valuation, low burn rate with a chance to become profitable in 2025, massive TAM, the main source of revenue being from the government (i.e. they can and will pay) and quick cash conversion cycle, ZEFI offers a unique risk to reward opportunity. That doesn't even account for the potential of the carbon credits and the social goodwill it creates. Thereby possibly making it a preferred investment of ESG investors who not just talk the talk but walk the walk. As long as ZEFI can execute the services that it promises in a competent and timely fashion, shareholders should be rewarded.
Disclosure: I am long on ZEFI and have been compensated to
write about it.
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