Early Signs Mixed For Biodiesel

by: Robert Wagner

2012 and especially 4th Quarter of 2012 was challenging time for the biodiesel industry. Fraud relating to the Renewable Identification Numbers (RINS), early fulfillment of the EPA quota and uncertainty about the reinstatement of the "blenders tax credit" all worked against the industry. All these factors combined to drive the average margin on a gallon of biodiesel into the negative category. Times were so bad that firms like Syntroleum (NASDAQ:SYNM) actually realeased an 8-k stating that they were not going to resume production after installing new processing equipment because of the challenging economic environment. Since the end of 2012, however, economic conditions have dramatically improved. RIN prices are higher, biodiesel prices are higher, feedstock prices have been relatively stable, the "blender" tax credit passed and was reinstated retroactive for 2012 and margins are now in the black. That all bodes well for biodiesel in Q1 2013, but first we have to get through the earnings reports for Q4 2012.

When investing I am always looking for what I call "windows to the future." Competing firms in identical industries provide one such "window to the future." Biox Corporation (OTC:BXIOF) is a biodiesel producer, and they just released their Q4 2012 earnings. The report pretty much confirms that the economic conditions were difficult for biodiesel. Biox had a "temporary suspension of production," produced 10.1 million gallons less than the same period last year and reported a $4.8 million loss vs. a $2.5 million gain in the same period last year. The news however didn't harm the stock price, and the stock actually gapped up on the news. Rallying on bad news is often a very good sign. So whereas the economic conditions may have been extremely difficult in Q4 2012, the bad news may already be fully discounted and the markets may be looking ahead, not back.

The positive response of Biox to what appeared to be bad news may bode well for other biodiesel and alternative fuels companies. Renewable Energy Group (NASDAQ:REGI) is slated to report earnings on March 4, 2013. SYNM has yet to announce when they will be reporting, but due to a unique reporting situation, their Q4 2012 earnings are already pretty much known. SYNM reports their earnings from their Dynamic Fuels plant (a 50/50joint venture with Tyson (NYSE:TSN)) on a three month lag. If you go back and read their Q3 2012 conference call transcript you can pretty much figure out their Q4 2012 earnings. Right now I'm showing it losing $3.7 million from its Dynamic Fuels holding and $800 k for overhead at SYNM, for a total loss of about $4.5 million for Q4 2012. That loss should wipe out all the gains made for 2012, so SYNM should report break even earnings for 2012. That information is already known to the markets. What will be important is what is said during the conference call about production at the Dynamic Fuels plant in Q4 2012, current status of the plant, current margins and their plans going forward. Because the Dynamic Fuels plant was down most of Q4 2012, and some line items in the recently released Tyson financials, it is likely that SYNM will report that Dynamic Fuels lost about $10 million, $5 million of which is applicable to SYNM. SYNM will also likely report that Dynamic Fuels will be getting $23 million or more for the retroactive tax credit, half of which is applicable to SYNM. Combine the tax credit with the Q4 loss adjusted for the 3 month lag, and SYNM should start 2013 with an EPS of about $0.07/share.

In conclusion, while the biodiesel and alternative fuels industry had a rough end to 2012, and Q4 2012 earnings are expected to be awful, recent changes in the economic conditions should bode well going forward. If the recent stock performance of Biox is any clue, the bad news may already be discounted into stocks like REGI and SYNM. If that is the case, I would imagine comments made during their conference calls about their current and future plans will impact the stock price more than the announcement of last quarter's earnings. If Biox does provide a "window to the future," investors may be seeing a bright future.

Disclaimer: Opinions expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisor capacity. This is not an investment research report. The author's opinions expressed herein address only select aspects of potential investment in securities of the companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies' SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author's best judgment as of the date of publication, and are subject to change without notice.

Disclosure: I am long SYNM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.