Just recently, Renewable Energy Group (REGI) reported solid profits for Q1 2013. Deciphering the earnings is a bit difficult, but the main point is that REGI is turning a profit in the alternative energy space. This is a highly regulated industry, with two main regulatory programs. The EPA has a program that sets a quota for renewable fuels production, and implements it using a tradeable Renewable Identification Number or RIN. The US Congress also has a program called the blender's tax credit in the amount of $1/gallon. The problem is these two programs overlap, and the blender's tax credit is up for renewable each year. That creates confusion in the market while the passage of the bill is debated, and last year, it contributed to an economic environment that resulted in negative margins for many firms in the biodiesel industry. Firms faced a situation of either shutting down and waiting for the economics to return to a profitable level, or gamble on the bill's passage, and accept a short-term loss hoping to recapture the loss when and if the bill passes. The RIN market was also hit with RIN fraud last year, so many of the smaller firms were having trouble selling their RINs for a fair price, and were already in financial difficulty as the tax battle and negative margins developed. The bottom line is that 2012 was a very tough year for smaller biodiesel firms that don't have access to large pools of capital to weather the political, regulatory and economic storms that plague this industry.
Renewable Energy Group® is a leading North American biodiesel producer with a nationwide distribution and logistics system. Utilizing an integrated value chain model, Renewable Energy Group is focused on converting natural fats, oils and greases into advanced biofuels. With more than 225 million gallons of owned/operated annual production capacity at biorefineries across the country, REG is a proven biodiesel partner in the distillate marketplace.
REGI has a well-suited business model for this kind of industry. It has the financial wherewithal to capitalize on the market downturns, and to benefit from a market where many of the players are smaller standalone biodiesel plants. The company also has the technology and management skills to run its plants efficiently and use the lowest cost feedstocks. In this industry size does matter, and REGI is the biggest dog on the block.
A case study of REGI's approach is its recent acquisition of the Soy Energy Biorefinery. REGI just bought a 30 million gallon/yr biodiesel plant for $16.6 million.
Pursuant to the agreement, REG will acquire the Mason City, Iowa biorefinery for $11 million in cash and the issuance of a $5.6 million promissory note to Soy Energy.
That works out to be roughly $16.6m/30m gallons = $0.55/gallon. Under the current market conditions, REGI makes more than that per gallon. In its most recent conference call presentation it showed a gross margin of $29m/38.9m gallons = $0.75/gallon .
REGI also purchased a 15 million gallon per year plant for $2.6 million, or $2.6m/15m gallons = $0.17/gallon.
The multi-feedstock facility, which will operate as REG Atlanta, LLC, is located in Ellenwood, Georgia, 11 miles southeast of Atlanta with easy access to major Southeast transportation routes. REG acquired the former BullDog Biodiesel operation for cash and in-kind consideration of approximately $2.6 million. No stock was issued related to the deal.
Just prior to that purchase it acquired another 15 gallon per year plant for $300,000 plus 900,000 shares. At the time REGI traded around $5.00/share, so the total cost was approximately $300k plus $4.5 million = $4.8 million or $4.8m/15m gallons= $0.32/gallon.
With the acquisition of a 15 million gallon per year biorefinery located in New Boston, Texas, REG's nameplate biodiesel production capacity is expected to increase to more than 225 million gallons annually. REG paid $300,000 in cash and issued 900,000 shares of its common stock to North Texas Bio Energy for the multi-feedstock biorefinery located about 22 miles west of Texarkana. It is REG's second Texas biodiesel production facility, following its 2008 acquisition of its Houston-area plant.
In conclusion, REGI is well suited to capitalize on the chaos that wreaked havoc in the biofuels industry during 2012. REGI has been on an aggressive buying spree buying up struggling biodiesel firms for what appear to be bargain basement prices. REGI has the capital and expertise to upgrade and run these plants, and is expanding capacity during a time when the economics of the biofuels industry are extremely favorable. This should all bode well for REGI going forward.
Disclaimer: This article is not an investment recommendation. Any analysis presented in this article is illustrative in nature, is based on an incomplete set of information and has limitations to its accuracy, and is not meant to be relied upon for investment decisions. Please 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.