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Last week the management of Darling Ingredients (DAR:
NYSE) staged a webinar on its opportunities in biofuels.
Darling produces biodiesel in Kentucky and Canada and is in a renewable diesel joint
venture with Valero
Energy (VLO: NYSE) in Louisiana. As a recycler of
wastes and excess from the food production processes, the production
of energy with organic feedstock is a logical extension of Darling’s
collection and aggregation infrastructure.
The event did not do much for Darling’s share price, but the
presentation triggered a few questions about RINs –
shorthand for Renewable Identification Numbers. These are a
creation of the U.S. Environmental Protection Agency (EPA) to track
renewable transportation fuels. They come in handy for the EPA
to monitor how well oil refiners and blenders are doing in meeting
the Renewable Fuel
Standard (RFS). Those standards were set up by Congress
through the Energy Policy Act of 2005, to promote the use of
renewable transportation fuels. On the simplest level, the
standards require the use of a minimum amount of renewable fuel
usage based on the amount of petroleum product sales.
Here is where the RINs really become important. Of course,
refiners and blenders can meet the RFS standards by buying ‘wet
gallons’ of actual renewable fuels. They can also buy RINs
from other parties who have exceeded the requirements. There
is a market for RINs. As with any other asset, the value of a
RIN is dependent upon the number of RINs sloshing around and whether
refiners and blenders can get enough ‘wet gallons’ to meet the
Progressive Fuels Ltd. publishes weekly RINs trading data. For
example, in the week ending June 2, 2015, D3 RINs for cellulosic
biofuel produced in 2016 ranged from $1.77 to $1.79.
Generally, RINs prices for cellulosic biofuel produced in both 2015
and 2016 have traded down from prices in late
2015. Corn ethanol (D6), biomass-based diesel
(D4), cellulosic diesel (D7) and advanced biofuels (D5) each have
their own RIN code.
It is a well-intentioned arrangement – support
development of renewable fuels with a clever economic support
system. Indeed, the D6 RIN for corn ethanol increased in value
during times of higher RFS target announcements or near the
compliance deadlines. However, more recently the D6 RIN price
has been influenced by the decline in gasoline prices.
What might be as important for renewable fuel producers like Darling
is the amount of gasoline demand in the country. With prices
at the pump at record lows (at least since 2009), gasoline
consumption is expected to rise. The U.S. Energy Information
Administration (EIA) estimates that gasoline consumption could reach
9,530 million barrels per day in 2016. This is 1.5% higher
than consumption in 2015. However, ethanol blended into
gasoline is expected to reach 950 million barrels per day, an
increase of 1.1% compared to last year.
Darling is looking at RINs also, but in terms of market
opportunity. Looking at the EPA’s new 2016 advanced biofuels
mandate in terms of RINs, the company sees an opportunity to sell
fuel worth 440 million RINs. Put into ‘wet gallons’ it would
be 288 million in 2016. With a capacity to produce 18 million
gallons of biodiesel and 160 million of renewable diesel per year,
that is an attractive prospect.
Debra Fiakas is the Managing Director of Crystal Equity
Research, an alternative
research resource on small capitalization companies in selected
Neither the author of the Small Cap
Strategist web log,
Crystal Equity Research nor its affiliates have a beneficial
interest in the companies mentioned herein. Darling Ingredients is included in the Biofuel
Group of the Beach Boys Index of alternative energy
developers and producers.
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