I recently wrote an article about biodiesel margins where I predicted that Q4 2013 earnings for biodiesel companies would likely exceed expectations. I use Renewable Energy Group (NASDAQ:REGI) as a proxy for the industry.
REGI is almost certain to report strong earnings for Q4 2013, and with the markets and analysts expecting losses in the biodiesel industry I expect REGI to beat expectations for both Q4 2013 and Q1 2014. The yet to be scheduled Q4 2013 conference call may discuss the margins REGI is witnessing in Q1 2014. If they do, and the margins are positive, I would expect his to be a nice surprise to the market.
I wrote an earlier article making the same prediction.
6) REGI is almost certain to have solid earnings for Q4 2013. I'm showing that their margins for all feedstocks except soybean oil were effectively in line with Q3 or even better. Production was also likely greater than Q3, and with the expiration of the tax credit pending I would imagine they would have reduced inventory as much as possible as well. For those reasons, I expect REGI to beat Q4 earnings estimates of $0.75, as well as REGIs guidance of 65-75 million gallons sold and Adj EBITDA of $25-$40 million.
To bolster this argument I wrote an article on the EPA's biodiesel production for Q4 2013, highlighting how it greatly exceeded the EPA's annual RVO by 40%.
The Biomass Based Diesel production reached 140% of its 2013 RVO...2013 Q4 Biomass Based Diesel production exceeded Q3 2013 by 8%. Because REGI's 257 million gallon capacity represents 1/5th of the 2013 RVO for Biodiesel, I would imagine part of that 8% increase came from REGI's Q4 production exceeding its Q3 production. With the increased production and solid margins for the biodiesel industry in Q4 2013, combined with REGI's sizable inventory entering Q4 2013, I would imagine that REGI will exceed its "outlook" of 65-75 million gallons sold and an adj EBITDA of $25-$40 million...I speculate that REGI will exceed even the upper range of its "outlook." I would expect them to at least meet the $49 million adj EBITDA reached in Q3 2013.
The purpose of those three above linked articles was to communicate to the readers that in my opinion it is highly likely that biodiesel companies will be reporting very strong earnings for Q4 2013. Because of the unusual and unpredictable circumstances of the "Blenders' Tax Credit" expiration, I speculated that the analysts would likely underestimate biodiesel earnings. If the analysts are wrong, then the stocks should rally on the earnings news.
Well, that was theory, how did it work?
Well, the first signs of this theory comes from overseas. Neste (OTC:NTOIF), a renewable diesel company just released earnings. Yes, renewable diesel is different from biodiesel and Neste is a foreign company, but Neste should still be a nice proxy for the domestic biodiesel industry. It isn't perfect, but because they participate in the EPA's RFS2 program, they may give clues into the future of domestic biodiesel earnings.
If Neste is a sign of what is to come for the domestic biodiesel industry, my theory will be dead on. Here are the talking points from the Neste earnings release:
Neste profit rises as renewable fuels investment pays off
Q4 operating profit 164 mln euros vs forecast 136 million
Shares jump nearly 15 pct in early trade
Finnish oil refiner Neste Oil reported a stronger-than-expected rise in quarterly profit on Tuesday
The business made a full-year comparable operating profit of 273 million euros compared with a loss of 56 million in 2012. The company's overall comparable operating profit for 2013 was 604 million.
Investors have been wary about Neste's outlook due to pending U.S. government decisions on renewable fuel subsidies, sending its shares down 8 percent over the past month.
The one part of the release that makes my blood boil is this comment:
Neste, a state controlled entity, has been embroiled in a patent lawsuit with Syntroleum (NASDAQ:SYNM) that undoubtedly played into some of SYNM's misfortunes. It strikes me that we need patent reform in the US to protect our infant industries from lawsuits by state owned companies. If anything, it should be US vs. Finland, not essentially Finland vs. SYNM. It is simply unreasonable to expect our companies in developing industries to have the resources to fight entire Nations. Finland can simply tie up our companies with lawsuits while they expand into the US market. The EPA's RFS2 was to develop the domestic biodiesel industry, not Finland's. That, however, is just my patriotic opinion, and not a key point of this article:
As a listed State-owned company, Neste Oil observes the recommendation contained in the above position paper in respect of its Nomination Committee.
In conclusion, Neste may provide some clues as to what investors can expect from the upcoming earnings of biodiesel companies. Neste exceeded expectations and I expect that trend to continue. The key, however, isn't Q4 2013, the key is what the companies say about margins for Q1 2014 and beyond. The Q4 2013 earnings may provide a short-term pop, but it will be the Q1 2014 margins that will provide the longer-term support for higher prices. Upcoming decisions on the EPA's biomass based diesel RVO and the fate of the "blenders' tax credit" will play a much larger role determining the direction of the biodiesel industry than past earnings reports. People interested in the biodiesel industry should be aware of those pending issues.
Disclaimer: This article is not an investment recommendation or solicitation. 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. Full Disclaimer and Disclosure Click Here.
Additional disclosure: I have calls on REGI, additionally, REGI is buying SYNM