- Adjusted EBITDA and gallons produced are likely to beat "outlook"; EPS is more cloudy.
- Comments about Q1 2014 and outlook for 2014 are key as to direction PPS will take after the conference call.
- Margins are likely higher than the market expects, possibly providing a positive surprise.
Renewable Energy Group, Inc. (REGI) today announced it will release financial results for the fourth quarter and full year 2013 after the market close on Thursday, February 27, 2014. An investor conference call will follow at 4:30 p.m. EST/3:30 p.m. CST.
In the last conference call it mentioned that it had run at a 90% capacity rate during the quarter, and ended the quarter with 257 million gallons of production capacity.
We've produced 56.8 million gallons in the quarter or near 90% of our nameplate capacity. We were able to achieve this high capacity utilization even as we ramped up Albert Lea after the upgrade and brought New Boston online... We now have eight plants in production with an annual nameplate capacity of 257 million gallons.
REGI gave an "outlook" of 65-75 million gallons sold, and adjusted EBITDA of $25-$40 million for Q4 2013.
If REGI was able to produce at 90% capacity in Q4, it would have production of 57 million gallons, 100% would be 64 million gallons. In Q3 REGI also sold 21.2 million more gallons than it produced, so REGI appears to be well prepared to surpass the high end of the "outlook."
Production of biodiesel in Q4 2013 was also very strong, exceeding Q3 production by 10%. REGI's 56.8 million gallons in Q3 represented 11% of total Q3 biodiesel production. If REGI maintains that rate, it will produce 65 million gallons, once again signaling that REGI will meet or exceed the upper end of its Q4 "outlook."
Analysts typically have difficulty estimating REGI's earning because of the extreme uncertainty that is created by the multiple regulatory issues that impact the earnings, taxes and timing of when certain revenues are recognized. According to Yahoo Finance, in Q4 2012 estimates were off by 50%, Q1 2013 were off by 145.10%, Q2 2013 was dead on, and Q3 was off by a whopping 291.50%. The inability of analysts to accurately understand this industry provides an opportunity for those investors that are willing to dig deeper than just an income statement and balance sheet, and actually take the time to understand this industry.
This quarter analysts have REGI earning $0.75. That appears well within reach, but once again, because of the multiple regulatory factors that can impact earnings I would focus more on the adjusted EBTIDA than EPS. REGI has an outlook of adjusted EBTIDA of $25-$40 million, a number that looks well within reach. REGI had an adjusted EBITDA of $49 million in Q3 2013. While margins were down, I doubt that they will be down enough to reduce adjusted EBITDA by 20% or more if REGI exceeds the production "outlook."
However, the factor most likely to move REGI's PPS won't be the Q4 2013 results, it will be the comments made about the "outlook" for Q1 and full year of 2014. Margins for soybean oil based biodiesel have been awful this year since the "blenders' tax credit" or BTC expired, and are currently negative. The result has been that biodiesel production has been reduced. January production of biodiesel was only 40% of the previous month's production, and well below the rate needed to produce proposed EPA's Renewable Volume Obligation or RVO of 1.28 billion gallons for 2014.
Believe it or not, that is good news for REGI. The low production numbers imply higher D4 RIN (Renewable Identification Numbers) prices going forward, and REGI is mainly a multi-feedstock company that doesn't extensively use soybean oil as a feedstock. My calculations show that REGI most likely had positive margins so far this year for biodiesel produced by yellow grease, and to a lesser extent inedible corn oil. I currently show a positive net margin of $0.31/gal for yellow grease and essentially breakeven margins for inedible corn oil. Because there is a lot of "play" in those margins, REGI may be having a solid quarter and I doubt the markets are aware of that. There is a lot of pessimism built into the biodiesel industry because of the loss of the BTC, but what the markets seem unable to grasp is that the EPA's RFS2 (Renewable Fuels Standard 2) RIN based system is designed to ensure success without a BTC, the BTC is a redundant subsidy. Also, in the past the BTC has been reinstated and made retroactive, so even if REGI is producing at a loss right now, it doesn't mean that loss will remain a loss if the BTC gets reinstated. That is one of the major problems with analyzing this industry. Losses can suddenly become gains with a stroke of a pen in Washington, and it is near impossible to predict what Washington will do. Current margins will hopefully be discussed, and will be a key bit of information released this Thursday.
The other issue that makes me bullish on REGI is that companies in the biofuels industry that have already released have beat estimates and rallied strongly. I expect REGI to do the same. Another reason I'm bullish on REGI is because it has a lot of "play" as to when it recognizes some revenues.
The other possible unwelcome surprise was that REGI liquidated its Renewable Identification Number (RIN) inventory in Q4 2012.
At the end of Q3 2013, REGI had a sizable inventory of RINs.
At the end of Q3 2013, 2013 D4 RINS were collapsing in price and bottomed around $0.25 in Q4 2013. Since that time, however, prices have exploded, and 2013 D4 RINs now trade for $57.50 and 2014 D4 RINS trade for $0.60. If REGI added to its RIN inventory during Q4 2013 in expectation of losing the BTC, REGI will have plenty of RINs to liquidate and boost Q1 2014 earnings if it wishes. RIN inventory will be a key bit of information released this Thursday.
Comments may also be made about any changes to the expectations regarding the 2014 EPA's proposed biodiesel RVO and prospects for a reinstatement of the BTC, or the Senate's proposed producer tax cut.
Lastly, REGI has recently purchased two companies, LS9 and Syntroleum (NASDAQ:SYNM). Information about how these purchases are proceeding will be important information for investors. Key points to listen for are:
1) How long will it be before these purchases are completed?
2) How long will it be before LS9 will make meaningful contributions to earnings?
3) Once the SYNM purchase is completed, how soon afterward do you expect the plant to be producing, with what feedstock, with what margins and at what capacity rate?
4) How do the current SYNM estimated margins compare to current REGI margins?
5) Does REGI have any plans to build more plants using the SYNM process?
6) Does REGI plan to use SYNM's Fischer Tropsch and/or LS9's biotechnology to pursue cellulosic biofuel, if so and when?
7) Does REGI have contingency plans in case the EPA's RFS2 is repealed in total of just the ethanol mandate?
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. Past performance is no guarantee of future results. For my full disclaimer and disclosure, click here.
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.
Additional disclosure: I own calls on REGI.