A company with both short- and long-term potential
With its recent full-year results, Alkane Energy describes the period as having been transformational as the company has leveraged its skills into new business areas.
The company's evolving strategy seems to be developing a coherence that promises good short, medium and long-term potential.
Cash from methane
Cash flow from the roll out of Alkane's coalmine methane business has been building for several years. These results show overall operating cash up 26% to £4.4m. Here the company captures methane from abandoned coalmines and uses it to power engines that drive electricity generators. The electricity produced is then sold to the grid.
After seven consecutive years of growth, Alkane ended 2011 with 27MW of installed CMM capacity. Although a good cash-producing business line, coalmine methane depletes relatively quickly and Alkane needs either to continually open new CMM sites, or reinvest the cash into new lines of business, if it is to continue growing. It's clear that the company has been doing both.
In the short term, Alkane expects to add 4MW of CMM capacity in the first half of 2012. Meanwhile, two acquisitions have enhanced its growth prospects, one completed during the year, and one expected to complete before the end of April 2012 after which it expects to have 70MW of installed generating capacity.
As methane reserves deplete, Alkane plans to develop medium-term cash flow by using the generating engines and national grid connections in place to serve the power response market. Here, mains gas is used to run the engines, which then produce electricity at times of high demand or when the grid needs balancing. Alkane operates 8MW in this way, expected to rise to 24MW post acquisitions.
For the longer term, one opportunity is that Alkane's licences have 500 sq km of coal bed methane (CBM) potential, and it signed a partnership agreement with a drilling management company during the year to explore some of that potential. Alkane also applies its expertise to processing gas from organic waste and sees potential there. During the year, it achieved revenue of £1.1m selling a power facility for a biogas plant in Scotland.
Investors have become used to good results from Alkane recently, and these are no exception with revenue up 44% to £9.5m and adjusted pre-tax profit up 45% to £2m. At the recent share price of 21p you can pick the shares up on a forward multiple of about 6.5, according to consensus earnings estimates for 2013.
The question with Alkane has always been 'what will happen when the methane runs out?' I think recent developments start to answer that question, and there is a clear strategy emerging for short, medium and long-term growth.
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