Based in Ames, Iowa, Renewable Energy Group (REGI) scheduled a $100 million IPO with a market capitalization of $401 million at a price range mid-point of $14 for Thursday, January 19, 2011.
It's the only IPO scheduled for this week. Two IPOs are scheduled for the week of January 23, so far ... IPO calendar.
REGI is the largest producer of biodiesel in the United States. In 2010, REGI sold nearly 68 million gallons of biodiesel, representing approximately 22% of United States biodiesel production.
Without federal mandates and subsidies the biodiesel sector would not exist, in our opinion. Therefore, we believe investments in REGI and/or the "government mandated" biodiesel sector are inherently risky. For example, we can’t point to any resounding successes in either the wind power or solar sectors, both "government mandated."
Looking at the income statement we see $63 million in 'other charges' for the nine months ended September, 2011, mostly from the "change in fair value of the Series A Preferred Stock conversion feature embedded derivatives.”
That $63 million charge indicates management and REGI insiders made some bad judgments, which raises questions about their business acumen going forward. Backing out that charge, applying a 40% tax, and annualizing the September months results in an adjusted price-to-earnings ratio of 8.
The price-to-book value is 1.3 so we would be surprised it the REGI IPO didn't happen. There are a number of concerns, however, including the following.
REGI’s REVENUE GROWTH NOT SUSTAINABLE
Three non-sustainable drivers help REGI increase top line revenue
(1) REGI believes it has completed more acquisitions in the biodiesel industry than any of its competitors since 2006. With a 22% market share the rate of growth due to acquisitions is likely to diminish.
(2) Government usage mandates may level out (see below)
(3) REGI benefited from higher prices in 2011 “In the first nine months of 2011, our average price per gallon of B100 was $5.24, or 66% higher than the average price during the first nine months of 2010, and we sold 102 million gallons of biodiesel, including twelve million gallons we purchased from third parties and resold and six million gallons that we manufactured for others, compared to 68 million gallons sold in all of 2010.” S-1, page 43
It’s not realistic to assume future price increases of the same magnitude.
(1) Government sponsored market
“There can be no assurance that Congress or the EPA will not repeal, curtail or otherwise change the RFS2 program in a manner adverse to us” S-1, page 10
REGI is in the government sponsored ‘green, alternative energy’ category, which includes wind and solar power. On a longer term basis it’s not good to be in a sector whose success depends on politically driven federal mandates and subsidies.
For example, without federal tax credits and governmental mandates, wind power would never have gotten as far as it has -- which isn’t really very far all things considered. And in the area of solar power, think Solyndra for example.
(2) Supply exceeds demand
The annual production capacity of plants that have already been built and plants under construction is higher than both historic U.S. consumption of biodiesel and the future requirements for consumption under a RFS2 federal regulation.
(3) No technology advantage
REGI has technology advantage compared to others in the biofuel sector such as
- Solazyme (SZYM), which transforms plant-based sugars into oils
- Amryis (AMRS), which uses a synthetic biology platform to provide alternatives to petroleum-sourced products used in specialty chemical and transportation fuel markets
- KiOR (KIOR), which has developed a technology platform to convert non-food biomass into hydrocarbon-based oil.
(4) No sustaining competitive advantage
REGI makes a big point of converting to lower cost feedstocks. For example “During 2010, 91% of our feedstocks were comprised of inedible animal fats, used cooking oil and inedible corn oil, while as recently as 2007 we used 100% refined vegetable oil. We have increased the use of these feedstocks because they are lower cost than refined vegetable oils.”
That, however, is not a sustainable competitive advantage without a technology edge, which REGI does not have.
And costs may increase as well “Rising U.S. corn prices are likely to keep pressuring ethanol margins and production levels, with government-mandated use of the biofuel keeping output flat at lower levels.” read more
While REGI is the largest producer of biodiesel in the United States, it still faces competition in the biodiesel market from other biodiesel producers, marketers and distributors.
REGI also faces competition in the biomass-based diesel RIN compliance market from producers of renewable diesel, in the advanced biofuel RIN compliance market from producers of other advanced biofuels and in the distillate fuel market from producers and suppliers of petroleum-based diesel fuel.
In the United States and Canadian biodiesel markets, REGI competes with large, multi-product companies including Archer Daniels Midland (ADM), Cargill (private), Louis Dreyfus Commodities Group (private) and Ag Processing Inc. Agribusiness competitors tend to make biodiesel from higher cost virgin vegetable oils such as soybean or canola oil, which they produce as part of their integrated agribusinesses.
Unlike REGI, most of these competitors own only one biodiesel plant and thus, do not enjoy the benefits of scale that REGI does. Many competitors own biodiesel plants that can process only higher cost virgin vegetable oils. Furthermore, in REGI’s marketing and distribution, it faces competition from biodiesel traders such as Mansfield, Astra, Gavilon, Tenaska and ED&F Man. These competitors are often customers of ours as well.
In the RFS2 biomass-based diesel and the Canadian renewable fuel requirement markets, REGI is in competition with producers of renewable diesel. Renewable diesel, like biodiesel, is a petroleum-based diesel substitute made from renewable feedstocks.
Renewable diesel can also satisfy the RFS2 biomass-based diesel requirement if the renewable diesel meets the greenhouse gas reduction requirements and may satisfy Canadian renewable fuel requirements. Some of the future producers of renewable diesel, like the renewable diesel joint venture between Valero Energy Corp (VLO). and Darling International (DAR), may have greater financial resources REGI. In the RFS2 advanced biofuel market, REGI also competes with other producers and importers of advanced biofuels such as Brazilian sugarcane ethanol producers.
USE OF PROCEEDS
REGI expects to net $86.5 million. $12.0 million is allocated to exercise the option to acquire the Seneca facility, which REGI currently leases. The Seneca facility is beneficially owned by three of REGI’s stockholders: Bunge, USRG, and West Central.
The remainder is expected to be used for working capital, capital expenditures related to improvements of production processes and logistics, and investments.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.