November 04, 2019 - 4:06pm EST by
2019 2020
Price: 2.08 EPS 0.06 0.11
Shares Out. (in M): 89 P/E 34.7 0
Market Cap (in $M): 140 P/FCF -40 -10
Net Debt (in $M): -7 EBIT 4 9
TEV (in $M): 133 TEV/EBIT 31.7 14.8

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Xebec Adsorption Inc. (XBC CN) literally turns garbage into fuel.  It is a 52-year old Quebec-based leader in the design, engineering and manufacturing of equipment to produce renewable gases (namely renewable natural gas, or RNG) from waste.  Using its proprietary adsorption technology, it removes carbon dioxide and heavier-molecular-weight hydrocarbons to upgrade biogas to natural gas grade to allow seamless mixing and transportation in natural gas pipelines and vessels.  In addition, the company designs, develops, builds, sells and services products for industrial air and gas generation, purification, dehydration, separation and filtration applications. Given the company’s strong position in biogas upgrading and the lack of pure publicly traded comps, Xebec is a rare way for investors to gain exposure to the rapidly emerging biogas upgrading/RNG sector. Xebec has grown sales from C$10M in 2016 to C$45M in 2019 and we believe they'll double again in the next 2 years. At 15X '21E EBITDA the stock would trade at C$3.10 for about 50% upside.

Why RNG?

RNG, also known as biomethane, is a hot growth area fueled by greenhouse gas reduction efforts around the globe, as well as increasing demand for pipeline- and vehicle-grade renewable energy from gas utilities and other businesses with large truck fleets, including UPS and Waste Management, amid concerns about climate change.  The total addressable market for system sales in Xebec’s target markets is estimated at more than C$6B, and while Xebec is a leader, its targeted C$45M in sales in 2019 is a drop in the bucket. 

Some U.S. states, including California, are passing laws requiring the development of RNG.  Utilities across the country are starting to support these new initiatives, as evidenced by a new partnership between Dominion Energy and Smithfield Farms – the world’s largest pork producer – to develop new hog waste biogas projects.  The ultimate goal is to replace a significant portion of the fossil-derived natural gas streaming through U.S. pipelines with pure methane generated by human garbage and animal and agricultural waste. Per a 2014 Biogas Opportunities Roadmap report produced by the EPA, Department of Agriculture and the Department of Energy, the U.S. could support at least 13,000 biogas facilities, fed by manure, landfill gas, and biosolids from sewage treatment plants.  SoCal Gas, the nation’s largest natural gas distribution utility, commissioned a study by Navigant Consulting that found replacing 16% of California’s natural gas supply with RNG would cut greenhouse gas emissions as much as converting all buildings to electric-only energy. It is 3X more cost-effective than an electrification pathway. RNG has 1,000,000X the storage capacity of lithium ion batteries, storage capabilities of up to 1 year vs half a day, and costs 20-30X less to transport and store.

In Canada, 66% of all electricity is from renewables, 10% of which is from wind and solar and 0.02% is from RNG.  Canada has a 5% RNG target for 2025, which requires volume to increase 250X in the next 6 yrs. British Columbia’s FortisBC launched its RNG program in 2011 in response to customers who were seeking a carbon-neutral fuel option.  Customers can choose to have 5%, 10%, 25%, 50% or 100% of their natural gas as RNG. Customers receive a credit on the BC carbon tax on their bill. Choosing a 5% blend is estimated to cost residential customers a modest C$2.50/month extra, while at the other extreme, choosing 100% RNG would add C$50/month extra.  This would still be cheaper than using hydroelectric. 



How does it work?

Xebec uses a proprietary technology based on pressure swing adsorption (PSA) which separates carbon dioxide using pressure differences.  It is based on the principle that different gas components are attracted differently to surfaces (adsorbed). Gas separation via PSA involves the following steps: 1) biogas is compressed and carbon dioxide molecules accumulate on the surfaces or in the pores of the adsorbing material; 2) opening a valve allows methane to exit the adsorption column; 3) the valve is closed, pressure is released and carbon dioxide dissolves from the surfaces, returns into the gas phase and can be blown off; and 4) the column can be filled with biogas again.


Competitive Landscape:

Pressure swing adsorption (PSA) is not the only biogas upgrading technology that exists – there is also water wash, membrane separation, chemical adsorption and cryogenic separation.  All upgrading technologies seek to maximize purity and minimize methane losses, with low energy consumption. Each have their pros and cons. PSA is flexible and reliable as it can tolerate more impurities in the feed gas, making it the best option for complex feedstock.  One area in particular where PSA is believed to outperform other technologies is for landfill projects as it can remove the large amounts of oxygen and nitrogen found in landfill gas, leading to better purity. While initial capex for a small PSA system is greater than for an equivalent scrubber or membrane system, PSA’s low energy consumption results in a reduction in operating costs (about 30%), driving significant total cost savings over the 20 year life of the asset.  Xebec’s proprietary rotary valve technology replaces the intricate and large network of piping and valves used in conventional PSA systems with fewer, compact, integrated valves. Xebec thus has a compelling value proposition for customers looking to reduce greenhouse emissions efficiently. 


Growing Backlog:

Xebec has grown its backlog from C$14M in early 2018 to C$72M in September 2019, the bulk of which is expected to be realized over the next 2 years.  The quote log is now close to C$700M. The backlog will be lumpy due to the large size of potential biogas upgrader orders and a number of variables affecting timing (technical specifications, project funding and permitting, offtake and feedstock agreements).  Xebec is in discussions for several potential landfill gas projects and expects that up to 160 landfill sites in the U.S. would be suitable for Xebec equipment sales. At C$15-30M each, that C$700M quote log may prove to be just the tip of the iceberg. 


M&A, Greenfield Opps:

Xebec is pursuing accretive acquisitions of profitable compressed air and gas service businesses (C$5M – C$10M in revenue) in Canada and the U.S. at attractive multiples of 4-6X EBITDA.  The goal is for the acquired businesses to become the local service, maintenance, and operational support providers for Xebec’s growing industrial and clean tech/RNG installed base. The recurring nature of service revenue should smooth out some of the inherent quarterly volatility of equipment sales.  Xebec started with the acquisition of Compressed Air International (CAI) in January 2019 for C$2.2M. CAI is a distributor and full-service supplier of industrial compressed air and gas products in Ontario. Prior to the acquisition, CAI was generating annual revenue of C$4M and EBITDA of C$0.5M, so the trailing multiple was 4.4X.  CAI is targeting revenue of C$5M in 2019 (+20% y/y) per mgmt. Management is building a pipeline of such candidates, looking not just in Canada but also in the West Coast and Midwest in the U.S.

Xebec is also looking to expand into RNG infrastructure, where it will collaborate with partners to finance, build, own and operate (BOO) mid-market RNG assets.  It is aiming for an announcement on its first BOO project before the end of 2019. A typical greenfield project costs C$15-30M with an IRR of 12-15%. Smaller projects, such as upgrades to existing infrastructure cost C$4-6M with IRRs over 20%. 


Xebec’s revenue has increased from C$10M in 2016 to C$45M as forecast in 2019, a 65% CAGR, while its backlog has grown from about C$6M to C$72M over that time period.  While revenues will be lumpy, we think that by 2021 revenues will double again to roughly C$90M driven by a mix of organic growth and acquisitions (ie a continuation of the roll-up strategy).  If this seems a stretch, remember that management is targeting the U.S. landfill market where there are an estimated 160 landfill sites that would be suitable for Xebec equipment sales, at C$15M and up per site.  An incremental C$45M in revenue in 2 years equates to just 3 of these projects. And note the operating leverage. In 2019, revenues are expected to increase by C$25M and cash costs are expected to ramp by C$18M, with EBITDA swinging from –C$1M to over C$6M.  The next C$45M in revenue should, at a similar fixed/variable cost structure, equate to C$18.5M in EBITDA in 2021. The company has virtually no net debt and has 89M fully diluted shares out. At just 15X EBITDA in 2021, the stock would be about C$3.10 for about 50% upside. 

Comps below use consensus estimates and a fully diluted share count of 88.7M for XBC CN.  We believe estimates are far too conservative for ‘20 and ‘21.  



Acquisition risk: Xebec has a newly established roll-up strategy.  There is no assurance that the company will pay a reasonable price, minimize disruptions to its ongoing business, and effectively integrate such acquisitions.

Technology, competition: Xebec competes with a number of private and public gas purification companies using different technologies.  There is no assurance that a better mousetrap won’t come along and disrupt the whole industry.

Regulation: There is a risk that government support for renewable energy diminishes.  Note the incremental cost of seeking a carbon-neutral fuel option is quite high, so there is heavy reliance on carbon credits.

Customer concentration: Nearly half of revenue is from 5 customers.  Of the C$72M backlog, C$51M is from Sapio Group in Italy.   

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.



  • Earnings: reports on 11/12/19, could see a large contract win or two in the landfill gas market.  Also could announce first BOO project.  

  • Accretive acquisition: company has a number of small tuck-ins in the pipeline, could announce any day.

  • Regulation: could see U.S. states follow California’s lead pushing for RNG as a way to reduce greenhouse emissions.  In Europe, Italy and France are leading the way, but we will probably see other countries jump on the bandwagon.  

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