ENGlobal (NASDAQ:ENG) is a provider of engineering, fabrication, and automation services ranging from complete project design to delivery and installation of turnkey modular systems to upgrading existing plants. This article is an update to a previous article published in May 2020 which was the final in a series of articles on ENG from when I first spotted a turnaround in the making in an August 2019 article. The stock price is up over 70% since the last article and at one point had run up over 500% before selling off.
ENG’s success is dependent on the need for infrastructure to support the emergence of renewable fuels. The company experienced postponement of new projects due to the pandemic and is now regaining its traction as revenues have increased sequentially over the last three quarters. The company added new flare gas technology to its tool kit with a recent acquisition, it is seeing renewed interest in its core operations and there is a tailwind from just passed legislation.
Flare gas opportunity
Fischer-Tropsch, the process for capturing and converting gas into a liquid (“GTL”) was invented in Germany during WWII. GLT was practically abandoned about ten years ago due to massive cost overruns as large pockets of natural gas were emptied resulting in natural gas found only in small deposits called flared or stranded gas. New technology has made GTL economically feasible and reduced environmental concerns.
ENG acquired Calvert Group of Belgium in May, bringing on board Calvert’s patented GTL technology for converting stranded or flared gas into synthetic oil and diesel in liquid forms. ENG is combining the Calvert technology with its modular assembly capabilities to build GTL units in 50 and 100-barrel sizes capable of holding up to half a million and a million standard cubic feet of flare gas per day.
The company is currently in the design face of the GTL units and expects to deliver its first unit by early 2023 and deliver one unit per week by mid-year 2023. The smaller units will sell for $4 million and the larger units at $8 million per unit. Last month, ENG granted exclusive sales rights to OilSERV covering Iraq, Libya, and the UAE, four of the ten largest gas flaring countries in the world. ENG has similar agreements in Oman and India and expects to ink additional agreements for other territories in the near future. The Gas Processing and LN&G website feature an excellent interview with ENG CEO Mark Hess about the company’s new GTL offering.
Developing revenue streams
The company is building on its past accomplishments after completing its first hydrogen plant utilizing the licensed Haldor Topsoe technology known as “HydroFlex” or “Hydrogen Bridge” which is a production process with low environmental impact and less energy requirement. The company will use the same technology combined with its modular construction ability to build a sustainable jet fuel station in North Dakota on a minimum of $100 million contract over two years. More opportunities should occur being driven by the 2030 Renewable Fuel initiative’s guidelines for renewable fuel for jet airplanes.
The recent Inflation Reduction Act specifically mentions sustainable aviation fuel as an area the government intends to support. The legislation also pledges the reduction of greenhouse gas emissions, including methane, which are capabilities of the company’s new GTL technology.
I had the pleasure of a recent conversation with CEO Mark Hess and asked him if I was missing any key revenue drivers that I haven’t mentioned in previous articles and are beyond GTL and the upcoming new jet fuel station. He replied that he is disappointed with not being able to move quickly enough. For example, he cited the Permian Basin where ENG has one crew providing well maintenance and construction services. Mr. Hess wants several crews there to meet the demand and the company is hiring for the Permian and across all of its divisions. A great problem to have.
Insiders own about 26% of the 36 million shares outstanding. The market cap is $62 million. The company last reported about $14 million in cash and $6 million in debt resulting in an EV of $56 million. The company has sufficient liquidity to fund its current operations.
Outlook for ENG
Next year is shaping up to offer a revenue boom for ENG as well as an improvement in margins and should result in profitability. The new jet fuel plant could bring in $50 million. I’m thinking $20 million from GTL for next year growing to hundreds of millions going forward if the launch is successful. The reported backlog is $19 million which is expected to be converted to revenue within 12 months. The company is one of only three eligible companies to bid on the $124 million U.S. govt. Alternative Fuel Handling budget and expects to win 60% of this work based on prior history. It all leads to at least a double of the expected almost $50 million in revenue for this year.
Reported gross margins are about 12%. The new work requires more engineering than construction and should propel margins higher and closer to management’s target of 20-25%.
Estimating a very modest $100 million in revenue for next year results in a P/E of 9 with an EPS of about .19. These estimates are modest and are not based on a best case scenario.
GTL has not had a positive history and it remains to be proven if the new technology can deliver environmental and economic benefits to satisfy demands.
The full commercial rollout of the GTL target of one unit per week is dependent on solving supply chain issues to acquire sufficient materials needed.
The new Inflation Reduction Act adds a tax burden to large corporations that include ENG customers, possibly reducing their purchasing power.
ENG has a history of cyclical performance based on energy commodity prices.
Environmental issues are driving demand for ENG’s core competency. The company has developed a potentially huge new revenue source in GTL. The company has a major project coming up in building its second large hydrogen plant. More work of this type should develop as the conversion to renewable fuel for jets continues to evolve. The company is experiencing growth across all of its divisions which should translate to strong revenue growth over the next year. Forward projections point to a value and growth investment opportunity.