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Refiners: Acquire Renewable Energy Group To Turn RIN Lemons Into Lemonade

Viking Analytics profile picture
Viking Analytics


  • Refiners face a regulatory gauntlet, and RINs have become their highest operating expense.
  • Refiners that make ethanol can be trapped - knee deep in a river of RINs and dying of thirst.
  • Unlike ethanol producers, biodiesel producers have an ability to separate and control RINs.
  • REGI creates enough RINs to satisfy the obligation of many refiners.
  • The company is currently trading at less than 50% of its replacement value.


The petroleum industry is faced with a gauntlet of compliance that grows more burdensome every year. It shouldn't surprise us when we see the petroleum industry fight regulation - it is a learned behavior from years of harsh treatment. If we were forced to walk a mile in their sandals, we would understand. Meanwhile, we enjoy the freedom of driving our cars 15,000 miles a year while we pay less for gasoline than we pay for milk.

Gauntlet (defined) - a form of punishment when someone is forced to run between two rows of people who are armed with sticks which they use to strike out at the runner

The pinnacle of a refiner's regulatory burden is found in the Renewable Fuel Standard ("RFS"). To the refining industry, the RFS is burdensome in its scope, its reach, its complexity, its deficiencies in fraud protection, and perhaps most painful, its financial costs. We won't outline the RFS in detail here, because it is quite complicated (and boring) and we don't want to lose our audience. There are plenty of sources (including the EPA) which provide a good overview of the RFS and how Renewable Identification Numbers ("RINs") work to satisfy regulatory compliance.

Please don't misunderstand, we fully support the RFS vision to promote growth in renewable fuel consumption. The RFS regulation has improved in many ways over the years, and we anticipate that the EPA will continue to tweak the system to make it more transparent, fair and effective. Moreover, we have spent the last decade launching, promoting and growing a renewable fuel business. We believe that renewable fuels are good for the environment, the economy, and for energy security. We also believe that the RFS - whether modified or not - is here to stay. Jeff Stevens, CEO of Western Refining (

This article was written by

Viking Analytics profile picture
Systematic and quantitative analysis.Rob McBride has 15+ years of experience in the systematic investment space and is a former Managing Director at a $14 Billion hedge fund. Rob has deep experience with market data, software and model building in financial markets. Erik Lytikainen has 25+ years of experience as an entrepreneur, business developer and financial analyst. He founded Viking Analytics in 2015 after selling a commodity production & trading company he co-founded in 2006.

Analyst’s Disclosure: I am/we are long REGI. 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.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (21)

goat21, typically I would agree, however at their market cap you get the whole kit and caboodle.
goat21 profile picture
Oil refiners tend to by biofuel facilities and not companies.
7519671 profile picture
A brilliant, brilliant, brilliant untangling of a Gordian knot.
Viking Analytics profile picture
I am truly humbled. Soli deo gloria.
Viking Analytics profile picture
Excellent article here by OPIS shows how the RIN battle pits refiner vs. refiner: http://bit.ly/2c3qlew. The RFS rules will not be resolved quickly, and that's why the refiners who are short really should make contingency plans.

Let's assume that REGI can find a way to separate and control 50% of its annual 960 million RINs over a 5-year horizon. That would result in 960 * 50% * 5 = 2.4 Billion RINs. Current REGI market cap is just under $350 million, so a controlling interest would cost $175 million. That would mean a control stake - if REGI simply breaks even for five years - would be the equivalent of paying $0.07/RIN ($175 million / 2,400 million). We estimate that CVRR will pay $0.79/RIN in 2016 ($230 million / 290 million). In other words, and acquisition of REGI would enable CVRR to reduce its RIN costs by more than 10X.

With a continuing glut of crude oil, resulting in the lowest petroleum crack spreads that we have seen in years, the refiners need all of the margin that they can find.

REGI was up 2% on 2X average volume yesterday (August 30th), while the oil market sold off 3.5% and S&P declined.
Tongariro Capital profile picture
Nice article. Well written. Thanks
BigtimeSTAN profile picture
Also, refiners could effectively manage this problem by buying up these credits when they are cheap and holding them rather than purchasing them on a as need basis. The cost of RIN go through cycles just like prices in any commodity environment - It's not to say that it is uncontrollable to manage these costs throughout different market environments.
BigtimeSTAN profile picture
REGI doesn't exactly have the greatest history of managing their capital and their debt load has increased a good amount over the past several quarters - is it worth buying and assuming their debt where they already have trouble managing their own capital and creating a steady reliable stream of cash flow from operations?? If you buy it solely on the idea of getting RIN credits, you're not making the right decision for long-term business. There are other ways to get around this other than buying a low quality business that really would not be so accretive to their business if say there were changes in the regulatory environment - not worth the risk
I've long thought the same as the author, however I could not articulate this as well as he has.
With a democratic wh (most likely) I don't see the RIN's and BTC going anywhere fast, in fact there may be more. To bet against an outright dissolution is foolhardy. If your long at a reasonable price I would hang in there for awhile. The authors case is quite compelling.
Viking Analytics profile picture
Thanks for the feedback! It is a complicated topic, and am glad that you took the time to read more than just the headline. I have worked in biofuels for a decade, and even so, these ideas took some time to formulate. Yes, a refiner that chooses to fight for dissolution without contingency planning reminds me of the definition of insanity: "doing the same things and expecting different results."
darnoc111 profile picture
Seems like the government has made a rigged system (crony capitalism), that when you get down to the bottom line the consumer will lose since indirectly since they will have to pay for these RINs.
Viking Analytics profile picture
I completely agree that we unfortunately have a system of crony capitalism, and wish that it weren't so. Unfortunately for the refiners and their shareholders, they are uniquely bearing the cost of the RINs at the moment, not the consumer.
Yes. It will be a huge win-win for the Big Oil to spend $800m (about $20 a share) to buy REGI for great PR and RIN benefits.
Viking Analytics profile picture
$170 million for a controlling interest of 960 million annual RIN potential does seem like a better use of cash than $230 million for a one-time 290 million RIN obligation, doesn't it? Even if REGI stock price doubles (resulting in $340 million for a controlling interest), it seems quite compelling. Thanks for the feedback.
Only makes sense if acquiring company thinks that RINs/blenders tax credit are here to stay as a long-term policy. REGI stock overachieving is dependent on subsidies that are only granted grudgingly by congress. If we had a five-year comprehensive EPA plan for renewables then the industry could be smarter about capital allocation.

Think XON is most likely candidate for a takeout apart from RINs -- if they were to act soon they could get REGI at a considerable book discount and it would be peanuts for them - carefully managed PR benefit alone would be worth the purchase price and the deal would be quickly cash positive.
Viking Analytics profile picture
ZA - I agree that there is policy risk; however, I would see an acquiring refiner as having less policy risk than a non-strategic investor. As it is now, they would be removing current policy risk on RINs. I don't see the tax extenders bill as "grudgingly granted by congress." Since it always has special loopholes for everyone on both sides of the aisle, it is always a crowd pleaser. I am not approving the system of special interest lobbyists controlling legislation, but it is what it is. Again, my message is for a refiner to make "lemonade out of lemons."

I assume that you meant XOM, since XON is a biotech company that, among other things, is creating genetically-engineered frankenstein mosquitos to kill zika virus carrying mosquitos. What could possibly go wrong?? An interesting thing about XON is that it is working with DAR on ways to create proteins out of rendered byproducts using the black soldier fly. XON has a market cap of $3 Billion, with negative cash flow. Maybe it could issue more fiat shares to acquire REG Life Sciences in a spin off.

XOM is running this commercial over and over on CNBC that touts all of the good things they are doing in the world, including "algae into biofuels." I believe XOM's R&D commitment to algae biofuels is greater than REG's market cap. Algal lipids are being produced now at commercial scale by others, with a commercial price near $500 per gallon (250X more than the price of diesel). Those are the "healthy omega 3 fats" that you can get in Horizon organic milk. It will never be profitable to turn algal oil into biofuels, but I don't expect anyone to stop talking about it. Unlike algal biofuels, XOM could get real accretive cashflow from an acquisition of REGI, but maybe they think they have all the positive spin PR that they need.
Yes, XOM, thank you for being gracious on that slip.

That was sloppy of me. The Mobile merger happened a while ago....
Viking Analytics profile picture
It turned out to be a relevant malaprop. No worries!
RIN system needs to be abolished.
Agreed. Author makes a case for someone to acquire REGI, while they are long in it. Just get rid of the overburden process, which was intended to conserve oil/gas....we're awash in it now.
Viking Analytics profile picture
Whatever one's opinion on environmental and RFS policy, the fact is that some form of the RFS is most likely here to stay. WNR (a refiner/blender) and CVRR (refiner only) agree on this. The refiners - for better or for worse - are stuck with the obligation. I am just proposing a solution for one of them to turn a difficult situation into something favorable. The "system needs to be abolished" strategy has not yet worked.
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