On January 19, 2012, Renewable Energy Group (REGI) held its initial public offering that seemingly slipped well beneath the radars of most prospective investors. Pricing 7.2 million shares at $10/share, the company raised $72 million in a poor showing that had originally listed an offering price of $14/sh. For the nation's largest biodiesel producer based on gallons produced, the disappointment stands as a clear reflection of the attitude investors have developed towards the biofuel industry's latest IPO's.
This comes with little surprise in light of the relatively poor stock performance experienced by such biofuel companies that have recently come off their IPOs. With companies such as KiOR (KIOR), Amyris (AMRS), Gevo (GEVO), and Solazyme (SZYM) all trading well below their initial IPO prices, the mood of the investment base has been all but welcoming. The sentiment of the industry was only further proven with the poor offering by biofuel-related company Ceres (CERE) in February 2012.
It remains difficult to compare each of these companies to each other in light of the numerous technology differences that each are pursuing. While Solazyme might offer the most potential with an addressable $3.1 trillion market opportunity, the company is still well over a year from developing the production capacity necessary to make a meaningful impact. Even then, Solazyme's dark-fermented algae technology is more likely to immediately address its higher margin markets of food, cosmetics, and chemicals before making significant strides to address the low-margin fuels industry.
In the same sense, KiOR's wood waste converting technology may hold promising margins when it comes to fuels, but it'll also take much time to ramp up its production capacity. The company's likely need for additional financing in order to build its own facilities has done little to bolster the industry's confidence that is already questioning if the industry went public too early. Perhaps Gevo's ability to retrofit current ethanol plants into more useful isobutanol-producing facilities offers one of the better chances for a fuel market penetration in some significant manner.
Yet while it's true that REGI may not offer the same market potential that many of these companies are likely to one day provide, the company has several distinct advantages in the present. Five such points are as follows:
The company is the largest biodiesel producer in the United States. REG owns five and leases one operating biodiesel production facilities with an aggregate production capacity of 212 million gallons per year (mmgy).
Lower costing feedstocks. When contrasted against competitors that use higher cost virgin vegetable oils, the company is able to produce biodiesel at a cost of approximately $0.37 to $0.67 less per gallon than its competitors.
Multiple feedstock flexibility. The company has the ability to use a wide variety of feedstocks that gives it the flexibility to quickly respond to changes in the pricing of those feedstocks in order to maintain its pricing advantage.
Well-established trading relationships. The company maintains long-term contractual arrangements and long-term trading relationships with key feedstock suppliers. As one of the largest in the industry, the company maintains the ability to work with the best, which includes a strategic partnership with Bunge (BG).
Among the best capable to effectively exploit RFS2. See below.
One of the most underrated advantages of being the largest so early in the game is the ability to exploit the advantages of a market being propped up. With the establishment of the Renewable Fuel Standard program (RFS2), the U.S. Environmental Protection Agency (EPA) sets the guidelines that accelerate the adoption of biofuels throughout industry. The company's biodiesel qualifies for the "biomass-based diesel" & "advanced biofuels" qualifications. Biodiesel is the only fuel produced in the United States in commercially significant volumes that can satisfy those requirements.
Therefore, with the production of every one gallon of renewable fuel, the company receives 1.5 renewable identification numbers (RIN). RINs are used effectively as a currency by Obligated Parties (read "petroleum refiners & importers") who must demonstrate their compliance with RFS2.
Thus far, the program has been a very profitable endeavor for companies like REGI. In terms of such propped-up success, it's important to note that the EPA has plans to continually raise the volumes required on an annual basis in order to meet its Congressional goal to use 36 billion gallons of biofuels by 2022. Below shows the steadily rising price of RINs over the past year.
Click to enlarge:
Needless to say, here is a subsidy that is unlikely to vanish anytime soon. As these RIN prices rise, Renewable Energy Group has found it opportunistic to increase its idled production in order to take advantage of the current economic environment. It's for this reason that the company was able to average prices of $5.20/gallon for its sold biodiesel according to the latest quarterly report.
It's with these lucrative prices that the company was able to achieve a 2011 operating income of $93 million, when contrasted against the 2010 operating income loss of $8 million. For a company with a $280 million market capitalization, it's clear the market is not placing a fair valuation on the company's current operations in light of the negative sentiment surrounding the industry.