Entering text into the input field will update the search result below

The Pandemic Isn't Slowing The Darling-Valero JV Diamond Green Diesel

May 04, 2020 11:58 AM ETDarling Ingredients Inc. (DAR), VLO7 Comments
Tristan R. Brown profile picture
Tristan R. Brown


  • Darling Ingredients and Valero Energy operate the joint venture Diamond Green Diesel, which is one of the world's largest producers of renewable diesel.
  • The COVID-19 pandemic and turmoil in the energy markets has prompted questions about the ability of DGD to continue its planned expansion of production capacity.
  • Valero's recent Q1 showed the first results for DGD since the pandemic began.
  • This article discusses why the pandemic is unlikely to have a negative impact on DGD's expansion plans.

Food processor Darling Ingredients (NYSE:DAR) and refined products producer Valero Energy (NYSE:VLO) operate a renewable diesel joint venture under the name Diamond Green Diesel [DGD]. DGD currently operates a renewable diesel production facility with 276 million gallons of annual capacity in Norco, LA. This facility is one of the world's largest production facilities for biomass-based diesel [BBD], which is a category that includes both biodiesel and renewable diesel.

Renewable diesel is produced by reacting lipid feedstocks (e.g., waste animal fats, used cooking oil, etc.) with hydrogen via a hydroprocessing step that is very similar to that employed in petroleum refineries. While the resulting fuel is properly categorized as a biofuel due to its immediate biomass feedstock origins, it qualifies for the same ASTM D975 spec that petroleum-derived diesel fuel meets. Renewable diesel's performance characteristics are therefore very similar to those of ULSD, with an important distinction being that its emissions of both localized pollutants such as particulate matter and life cycle greenhouse gas emissions are the lower of the two fuels by a large margin.

These beneficial characteristics of renewable diesel have caused policymakers to quickly embrace it as an ecofriendly version of petrodiesel. U.S. renewable diesel production has increased rapidly from virtually nothing in 2009 to almost 400 million gallons per year [MGY] in 2018 in response to the implementation of favorable policies such as the U.S. revised Renewable Fuel Standard and California's Low Carbon Fuel Standard [LCFS]. The Darling-Valero JV has been the country's largest renewable diesel producer during that time period.

DGD is in the process of greatly expanding its renewable diesel capacity while also adding a smaller amount of renewable naphtha capacity. The first expansion phase, which has already been finished, saw DGD's capacity expand from 160 MGY to 275 MGY. The second expansion phase, which

This article was written by

Tristan R. Brown profile picture
My articles do not represent investment advice. Readers should perform their due diligence before investing in any security or fund that is mentioned by my articles.

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

Recommended For You

Comments (7)

Nice article.

Will need to see what Q2 holds as that's when the full impact of corona/recession will reveal itself, but if margins (pre BTC) hold at ~$1.50/gallon EBITDA then in my mind the inherent value of the renewable diesel business will have actually been *improved* by corona/recession - very, very few refining & specialty chemicals assets worldwide will have had margins improve, let alone stay constant, throughout the sharpest economic downturn in memory.

What i don't think is well understood about renewable diesel is that - because global demand (driven by low carbon fuel standards) is so far ahead of global supply - a lot of it is contracted on a 'take-or-pay' basis, as opposed to traditional crude-based refining for which the products are almost entirely sold into spot markets. It's not clear exactly how much DGD contracts, but it's a high number - Neste said on their Q1-20 conference call that 70% of their renewable diesel production is sold under term contracts. This is why DGD is showing steady (rising) margins, versus the rest of the oil refining complex where margins collapse almost immediately when the spot markets roll over.

What EBITDA multiple is appropriate for an apparently recession-proof, cash printing machine like DGD, which can contract out 70% of its production at very high margins? Has to be close to double digits; certainly a lot higher than traditional refining assets.

By the way, Neste is trying to recreate DAR's by buying up feed stock / waste collection to feed the renewable diesel business, but DAR obviously has a big head start.
Cuip99 profile picture
The Norco refinery used to be a Shell facility. It is located just below the Bonnet Carre' spillway. It has been in existence for a very long time. Once had strike and Shell closed the gates and management ran the refinery for over a year. No maintenance was done except what was absolutely necessary. It soon looked like an eye sore but kept right on producing refined products. I guess I am not surprised it now belongs to VLO, they seen to buy and sell refineries here and there. The owned one at Krotz Springs but sold it. I am long in VLO.
goat21 profile picture
If all three subsidies were removed what would the IRR for such a project?
goat21 profile picture
I love that valero is so diverse. They can refine ethanol, gasoline, or renewable diesel and when one is not doing well they can just up the production of the other two. Great company.
ImpatientValueInvestor profile picture
Short term with restaurants and meat processing facilities shutting down they could have some serious issues around feed stock constraints and I would not be surprised if there were some big delays around the construction of the next phase not because of demand destruction like 2008 just because the virus complicates all that stuff
Tristan R. Brown profile picture
It will depend on how the feedstock supply issue is managed. There is currently a massive lipid glut developing as herds are being culled and rendered. But yes, I could see UCO being disrupted if social distancing measures remain in force through next year.
Disagree with this article? Submit your own. To report a factual error in this article, . Your feedback matters to us!
To ensure this doesn’t happen in the future, please enable Javascript and cookies in your browser.
Is this happening to you frequently? Please report it on our feedback forum.
If you have an ad-blocker enabled you may be blocked from proceeding. Please disable your ad-blocker and refresh.