The I(X) Net Zero share price has more than doubled from 14p to 29p today. Behind the rise is the news of a significant investment from an oil major in one of the portfolio companies. Now, Net Zero is an investment company that is ‘Investing for a carbon neutral future’. It has equity stakes in a number of companies involved in energy transition like WasteFuel, which got the investment from the oil major, Carbon Engineering, Enphys Acquisition, and Context Labs.
Summary of Net Zero’s investments in energy transition companies:
- WasteFuel
- Converting municipal and agricultural waste into biofuels
- Biofuels might have a significant role in decarbonising the shipping industry
- Carbon Engineering
- Direct capture and storage of carbon dioxide from the air for industrial use
- Plans to licence the technology
- Enphys Acquisition
- A SPAC that listed on the NYSE which is targeting renewables investments in Latin America
- Context Labs
- All the buzzwords: AI, machine learning, blockchain, ESG, a ‘Palantir for climate change’
- Seems to be a proprietary ESG index producer, and helps businesses track their carbon emissions and compliance with regulatory frameworks
There are also investments in companies that are involved in building sustainable and affordable housing in the portfolio. But, the standout company overall is WasteFuel. That’s the one Net Zero owns the biggest stake in and the one that got BP’s attention.
BP has invested $10m in WasteFuel
Today, Net Zero told investors that BP had made a $10m investment in WasteFuel. But it was revealed that that investment lead the Series B investment round, so, there were probably other amounts coming in as well. That’s what sparked the 109% rise in the Net Zero share price.
WasteFuel is getting funds to help develop the first in a global network of plants to convert municipal and agricultural waste into biofuel, which is expected to be in Dubai. BP is also on hand to help optimise and improve the yields and economics of the biofuel production, and has tentatively agreed to buy the biofuel produced. How much BP will take is unclear.
WasteFuel has already entered into a commercial-scale biofuel partnership with a global container logistics company, AP Moeller-Maersk, and has partnered up with a waste management company in the Middle East to produced biofuel from municipal waste there. Whether this and that first part of the global network in Dubai are one and the same is unclear. Although its not mentioned in the RNS update, the website does mention a partnership in the Philippines.
Net Zero NAV
Net Zero has only been listed on the London Stock Exchange since late February 2022. Its shares traded at 77p back then. So even after todays rise, early investors are still down 63%. But looking back to the last NAV calculation I can find, which was 75p at the end of December 2022, there is the suggestion that the stock is trading at a massive 40% discount to NAV.
But, that discount ignores the BP investment, and half a year of operations. Now, buried in the BP investment announcement, there is a mention that the value of Net Zero’s equity interest in WasteFuel increased from $47m at 31 December, 2022 to $132m now. At the same time the portfolio NAV, meaning all the investments and assets owned by Net Zero, has increased from $64m to $149m.
| End of December 2022 | Now | |
| Portfolio NAV | $64m | $149m |
| WasteFuel Investment NAV | $47m | $132m |
| Percentage of Portfolio NAV attributable to WasteFuel investment | 73% | 89% |
So for a quick and dirty estimate of the current discount, let’s convert that $149m to pounds, which comes out at £118m. Using the current share price and the last available share count of 77m, the market cap for Net Zero is £23m right now. So, that’s an 80% discount on the portfolio NAV. So, for an investor with faith in the portfolio companies, and the valuations, that is a mouthwatering discount even after that 109% rise in the Net Zero share price.
Concentration risk
But, that investment in WasteFuel is responsible for 89% of the NAV. The fact that much of the reported value of stock in Net Zero is dependant on a single portfolio companies success needs to be borne in mind. An investor really has to believe in the underlying value of this one company when considering buying stock in Net Zero. And indeed if they do have such faith, then it is worth asking whether all the added complexity and fees from a complicated ownership structure could be removed if only WasteFuel could be easily invested in, which as a private US based company it is not.
And finally, the $10m investment doesn’t explain the $47m to $132m increase in the investment NAV in WasteFuel. As said previously, there might have been other amounts that came in during the fundraise. But, these, if equity stakes, would likely have diluted Net Zero’s ownership stake. Even assuming that it had safeguards in place to stop this happening, the scale of the growth is remarkable. So what’s likely happened is that the value has been marked up because it has de-risked. It has a home for any biofuel it produces. That first part of the global network getting operational has become more likely. It has more certainty about what it can produce and sell when operational.
DISCLAIMER: James J. McCombie owns shares in London Stock Exchange. The Storied Investor has no beneficial ownership position in any of the stocks or securities mentioned. No comment in this article should be construed as a recommendation of, or opinion regarding the future performance of, any stock or security or collection of them mentioned herein. Opinions expressed are the author’s and do not represent the views of The Storied Investor.
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