I recently wrote an article about Valero (NYSE:VLO) and I mentioned that the information it provided about its margins would likely be used in a future article. This is one of those articles. In this article I will compare the margins of a "Big Oil" company VLO to the biggest independent biodiesel firm Renewable Energy Group (NASDAQ:REGI).
The first point is the margin per barrel of refined oil. For a 42 gallon barrel (NYSE:BBL), that works out to $9.26/42 = $0.22/gal actual, or $10.63/42 = $0.25/gal in 2012. I highlight that to identify a margin benchmark, and I'm almost certain to reference it in future articles about biofuels.
From the quote, VLO made about $0.22/gal of refined product. Not all of that is diesel fuel, so the comparison isn't a true apples to apples comparison to biodiesel, but it at least provides a ball park figure for discussion. The $9.26/bbll figure also doesn't include operating expenses, which are $3.82/bbl, so an estimate EBITDA equivalent would be $9.26 - $3.82 = $5.44/bbl margin. As a double check, VLO reports EBIT as $3.88/bbll, adding back in DA of $1.56 = $5.44/bbl. Using the EBITDA of $5.44/bbl yields a $5.44/42 = $0.13/gal EBITDA margin per gallon.
Last night REGI released earnings and had a conference call. Unfortunately REGI doesn't report like other biodiesel firms where you are told about average revenues per gallon, average cost of feedstock per gallon, average OPEX and delivery cost per gallon of feedstock that make calculating gross and net margins per gallon easy. REGI does however report EBITDA and gallons sold, so we can calculate a proxy EDITDA per gallon. This metric EBITDA/Gallons may actually be a better way to track profitability than modeling each gallon of fuel, and provide an apples to apples way to compare energy firms.
From the REGI conference call, we learned that REGI had an EBITDA of $41.6 on 69 million gallons of sales. That works out to be $41.6/69 = $0.60/gal EBITDA. That makes biodiesel 60/13 = 4.6x more profitable than refined petroleum on an EBITDA/gal basis.
The quarter was very strong...we sold more than 69 million gallons of biodiesel,... led to an adjusted EBITDA of $41.6 million.
REGI had DA expenses of $2.487 million for Q2 2013, so on a per gallon basis that is 2.487/69 = $0.036/gal. VLO has a 1.56/42= $0.037/gal DA expense, so they are comparable to REGI.
I recently wrote an article about why "Big Oil" should embrace biofuels, and this analysis of EBITDA/gal simply strengthens that argument. "Big Oil" can improve their margins by expanding their production of biodiesel, as well as reducing the regulatory "tax."
In conclusion, the high profit margins combined with the ability to lower the regulatory "tax" should make the biofuels industry a favorite for M&A activity of "Big Oil." VLO and others have already made significant strides in that direction, and I would expect the journey to continue as long as the current regulatory environment exists. With the economics so compelling I would expect VLO and the rest of "Big Oil" to accelerate their efforts towards making biofuels a reality, and M&A is most likely the shortest distance and least costly path between two points.
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.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.