Snam, the Italian energy infrastructure giant, recently released their Q1 2024 earnings transcript, and while the headlines focus on an upgraded full-year guidance and strong overall performance, a deeper look reveals a potentially concerning trend – the company's biomethane ambitions might be facing challenges.

Hidden within the positive regulatory updates and international associate successes is the admission of a significant €186 million write-down on the biomethane waste business in 2023. This, combined with a slightly lower contribution from biomethane in Q1 2024 despite adding 8 megawatts of new plants, suggests an underlying issue for Snam's green gas goals.

Snam's CEO, Stefano Venier, addresses this problem, attributing the write-down to a combination of feedstock-related difficulties specifically impacting waste biomethane plants. He points out a significant geographical disparity in the accessibility of FORSU, the organic waste used to power these plants. While Southern Italy struggles with a shortage, Northern Italy faces an oversupply, resulting in fierce competition and downward pressure on feedstock prices.

This raises a crucial question: could this geographical imbalance substantially affect the financial feasibility of Snam's ambitious biomethane expansion plans? The company's current strategy heavily depends on converting existing biogas plants to biomethane, particularly agri-plants, which they believe have more favorable market conditions. However, with a considerable portion of their waste biomethane portfolio situated in the North, they might be overly vulnerable to this emerging price war.

Beyond volume limitations, Venier identifies two additional obstacles – waste quality and disposal expenses. The quality of organic waste in some plants falls short of expectations, leading to a higher amount of waste scraps that need to be disposed of. This presents another difficulty as Italy contends with limited disposal capacity, pushing up costs for Snam.

Analyzing the Numbers

Let's examine some figures. Assuming a conservative average EBITDA margin of 20% for waste biomethane plants, the €186 million write-down suggests a potential revenue loss of approximately €930 million. If this trend persists, it could significantly hinder Snam's ability to achieve its targeted 60 megawatts of biomethane capacity by 2026.

Furthermore, the company's 2024 adjusted EBITDA guidance of over €2.75 billion, a €50 million increase from the initial €2.7 billion, mainly results from higher output-based incentives, not from internal growth within the biomethane sector. This dependence on external factors rather than internal achievements reinforces the worry that biomethane might not be the reliable growth driver Snam anticipates.

International Associates Performance

Snam holds stakes in various international gas infrastructure projects. The table below shows the performance of these associates in FY 2023:

A Biomethane Bubble?

It's crucial to acknowledge that Snam maintains a positive outlook on biomethane, particularly in the agri-plant segment. They highlight their network optimization endeavors for plant interconnections, with over 320 requests pending. Nevertheless, the recent write-down and Q1 performance indicate potential fragility within their waste biomethane holdings. Investors and analysts should carefully observe Snam's future biomethane performance, specifically in the waste segment. While the company presents an appealing growth story and enticing dividends, the biomethane path might be filled with obstacles that could influence Snam's long-term financial success. Is this merely a temporary setback on the road to green gas leadership? Or are we witnessing the initial indicators of a biomethane bubble bursting? Time will reveal the answer.

"Fun Fact: Snam's natural gas transportation network, stretching over 38,000 kilometers across Italy, is longer than the Earth's circumference!"