JSE-listed Montauk Energy has struck a deal with a dairy farm in California where it will for the first time transform cow manure into natural gas.

The company mainly extracts and converts methane gas from waste landfills across the US where it benefits from subsidies through the Renewable Fuel Standard (RFS), a federal programme.

In its report for the year to March 31, Montauk said it entered into a joint venture agreement with the dairy farm in July and would own and operate a manure digester and build, own and operate a renewable natural gas (RNG) facility for 20 years.

The Pittsburgh-based company, which has been engaged in commercial-scale development of renewable energy facilities for more than 30 years, was unbundled from South African black empowerment investment company Hosken Consolidated Investments in 2014 but remains listed on the JSE.

The Montauk share price of R95 is up 95% from when it first listed at R5 in December 2014, and 86% higher over the past year. The share price appears expensive with the firm having a price to earnings ratio of 43.11.

Move to manure

Montauk moved into manure after finding a dearth of waste sites suitable for development in the US, said Steph Erasmus, analyst at Avior Capital Markets.

Producing biogas from manure is not a new concept — a manure-powered BMW plant was launched in Bronkhorstspruit in 2015.

But in the US natural gas endeavours like Montauk’s are highly profitable, thanks to government incentives. "Incentives in the US mean renewable gas producers are making generous margins," said Erasmus.

Under the RFS, a federal programme administered by the Environmental Protection Agency, transportation fuel sold in the US must contain a minimum volume of renewable fuels. Fuel refiners and importers are legally required to blend a specified volume of biofuel, such as ethanol or biodiesel, with their product. That is precisely where Montauk’s manure RNG is headed. It will also benefit under California’s low-carbon fuel standard, which sets carbon volumes (as opposed to fuel volumes) and applies to road transportation in the country.

Upon the election of Donald Trump as president in 2016, there were fears the RFS programme would be scrapped. However US maize farmers, a key constituency for the incumbent president, have expanded their production to take advantage of the profit.

"Trump walked away from the Paris Accord, but the president can’t change the RFS," Erasmus said.

The RFS is secure until at least 2022, when the programme’s mandated volumes expire. Proposed amendments to the low-carbon fuel standard will extend the programme to 2030. "Really, the only thing that can go wrong is the regulatory environment," said Erasmus.

He, however, noted the scheme had bipartisan support: "Democrats like it because of the green aspect, Republicans like it because of the subsidies [in the form of a tax credit] they are getting for their maize ethanol."

Montauk holds an 80% interest in the dairy joint venture.