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Oh, No! Renewable Energy Group CEO Departs
Intirim CEO plans no strategy change
In Iowa, Renewable Energy Group (REGI)
announced that Dan Oh has resigned as President and Chief
Executive Officer and as a member of the Company’s Board of
Directors. The resignation was effective July 3, 2017. The Board
of Directors appointed long-time director Randolph (Randy) L.
Howard as Interim President and Chief Executive Officer.
Howard is a 33-year veteran of Unocal, has been on the REG board
since 2007 — so, a familiar face — at 67, may not be in the job
for the long-haul, but a strong interim pick.
Oh departs as the company’s stock hit a 3-year high of $13.39 in
Monday trading, and has surged 46.2% in the past 12 months,
topping the notable surge in biofuels equities which has seen the
Zack’s biofuels sector average jump 30.6% year-on-year.
REG stock traded down a whopping 5.74% on the news, closing at
Staying the course
“The strategy is in place and there’s no change,” CEO Randy
Howard told The Digest. “That is our #1 message. We placed markers
on the table and we intend to execute, and today we are seeing
part of that execution as we bring in leaders who can take us to
that next level.”
Howard is the iCEO for now, but there’s no sense of a caretaker —
the company will continue to drive while the search takes place.
“We’ve grown dramatically, and we’ve presented to our investor
community a growth perspective for our biodiesel projects, and for
hydrocarbon projects like Geismar, and new products. We’ll need
leadership that can manage can build big projects like that, and
manage companies of that scope and scale. I obviously hope to
accelerate that growth, there’s no time limit on the search [for a
new CEO], and I am all in until we get it right, with the
long-term leadership that can take us to the next level.”
Projects there are, but also the ongoing project known as public
policy. The EPA proposed a 2019 “no growth” RVO. But Howard was
“We see in the next several months,” Howard predicted “public
policy coming together to give the biodiesel a secure future for
an extended time. Not this year to year of tax credits, RVOs and
import penalties. All of it we think is coming together, so that
we will have a public policy in place that permits the industry to
manufacture to its capacity.”
Meanwhile, Howard pointed to the short-term organic growth
opportunities. “We have opportunities such as our Ralston plant
where we were birthed, to increase capacity — and projects like
these can fundamentally can help us grow in the mid to long term.
I think that’s why investors have become excited in recent months.
They see benefits in the financial short term but also a vision
for long-term growth. Not just running a set of assets.”
Bullish outlook, yes. But there’s some ‘whoa Nelly’ in terms of
expectations on timing. Think ‘expansion to 112 million gallons at
Geismar’ as an all-but-certain reality. Think the same way about
optimization of existing assets. Think “not ready to make that
decision, but soon” on further doubling Geismar’s capacity as much
as 234 million gallons — specific volumes to be better studied
before decision time. As far as greenfield hydrocarbon projects,
Howard noted, “the other facilities we are looking at, that’s not
this year for sure. That’s all in process, but there are a lot of
issues to work through when it comes building greenfield
A three-year stock high
Late last month at the company’s Investor Day in New York City,
the company pointed analysts confidently towards $150 million or
higher annual earnings, saying that they saw $100 million or more
coming from the company’s biodiesel operations and as much as $50
million in annual earnings from its renewable hydrocarbon business
based in Geismar Louisiana.
Oh said that the company would be “expanding, adding geographies,
products and markets and capturing more downstream margin, citing
the development of speciality products. Though Argentine imports
have surged into the US in response to favorable prices for
advanced biofuels, Oh predicted that “trade sanction activity is
underway, and it looks like going to happen.” He saw the import
and export trade “moving back to balance”. And he said that a
reinstatement of the $1.01 per gallon biomass-based diesel tax
incentive “seems likely”.
Oh pointed to the “growing global distillate market,” and said
that, in contrast to the travails of ethanol producers, “we don’t
have tension with petroleum,” because of the global call for more
heavy-duty, distillate fuel. The world needs more of what we do.”
Oh noted at the time that just a 3 percent increase in global
demand would increase the market for diesel by 12 billion gallons,
and noted that LMC and EIA projections saw the distillate market
growing from 480 billion gallons per year to more than 700 billion
REG’s Competitive Advantage
We’ve noted it before, REG has been building a mini-trading
behemoth, accessing a wide range of lower cost, lower carbon
intensity (CI) raw materials that gives the company “pricing
flexibility”, and “reliability as an off-take customer for key
suppliers of contract-manufactured fuel”. The company also notes
that it is “a preferred supplier to key customers and trading
partners” known for an “ability to meet stringent customer
specifications” with its REG-9000 biodiesel product. For carbon
value, the company ability to deliver a massively advantaged
molecule with 50% lower CO2 emissions has given it access to
$1.00+ per gallon RIN credits that have been giving biodiesel the
cost advantage it has needed.
Accordingly, the company has been on a production tear, growing
39% annually since 2010, reaching 567 million gallons of
production in 2016, and displacing 3 million tons of CO2 last
The company was growing with the industrial sector, in many ways
— global biobased diesel production had risen from just over 4
billion gallons at the height of the “green fuels craze” in 2008
to more than 10 billion in 2016, and LMC is projecting the global
production will top 14 billion gallons by 2020.
The boom has been particularly on in California, where sales of
biomass-based diesel rose, according to the California Air
Resources Board, from less than 20 million gallons in Q4 2012 o
110 million gallons in Q4 2016.
One trouble spot in boom times? Surging imports from Argentina
and Indonesia in 2016 — according to REG, an 843 percent increase
over 2014 for Argentina and 117% increase for Indonesia. The US
Department of Commerce will determine on August 22nd whether
countervailing duties will be imposed over charges of dumping. The
European Commission imposed antidumping duties on Argentine and
Indonesia biodiesel for five years starting in Q4 2013, crushing
the volume of fuels shipped to the EU.
Overall in 2016 the company recorded a record $2.0 billion in
revenue and recorded $102 million in adjusted EBITDA. Overall,
EBITDA has been growing even faster than the gallonage — the
company has recorded a 67% annual growth rate in earnings since
2010 when the com[any was essentially a break-even proposition,
before RFS2 kicked in strongly starting in 2011.
Overall, revenue has doubled since 2012; although the company’s
annual EBITDA has been on the up-and-down, following the mercurial
policy ups and downs in DC. and the low energy prices seen since
2015. EBITDA reached a high of $148M in 2013 and dipped to $50M in
2015 before recovering last year.
However, the balance sheet has been strengthened — net working
capital has doubled since 2012 and book value has almost doubles,
and the company had $82 million in cash and just $217 million in
debt, which is down from a high of $252 million in 2014.
Feedstock Market Outlook
In its analyst presentations, REG saw corn oil supplies expanding
with a growth in US ethanol exports, and an uptick in animal
rendering fats with meat production numbers climbing. Oh said that
the company would continue to intensify its efforts on waste
feedstocks. The company presented this overview of historical
price data on feedstocks and molecule prices — the “crush spread”:
The big growth opportunity? The EU
REG acquired its first production capacity in Eastern Europe,
Petrotec, not long ago, and strategically there’s a strong
rationale, with a advanced biofuels target under the proposed
Renewable Energy Directive set in the 1.5-9% range, or an overall
6.5 billion gallons market. “ REG noted that the “RED II proposal
aims to expand success by growing and emphasizing the lowest
carbon advanced biofuels.”
Geismar, the Rock Star
The old Dynamic Fuels plant, which REG acquired in 2014 after it
had been idled for nearly two years, never produced more than 75%
of its nameplate capacity in any given month, and what REG
described as “significant Mechanical & Processing Issues”
dropped utilization as low as 20% in selected months. With new
catalysts and upgrades to the technology, the Geismar plant
reached 100% of nameplate in December 2016 and has produced in
aggregate more than it’s nameplate capacity since then. The
company acquired 82 acres at the GEismar site and is aiming at
expansion at a site strategically located less than a mile from
the Mississippi and less than 3 miles from the Bengal pipeline.
Another set of upgrades are taking place in June.
The biggest opportunity is capacity expansion, and Geismar is
slated for a 37 million gallon capacity increase, to north of 110
million gallons. An interesting opportunity worth noting?
Specialty chemicals. The company says that its “Specialty Products
Unit adds 10 MMGY of RHD capacity with an option to produce
significantly higher margin specialty chemicals.”
Terminals and Energy Services
REG is aiming at life beyond producing fuels and chemicals, sold
in to various third-party terminals. The company has identified
seven terminal growth opportunity regions in the US.
The Life Sciences gambit
In 2015, REG acquired LS9 as the base for an entry into specialty
chemicals and more. The division has been 11 years in the making
with $135 million invested — and not much to show by way of
revenue, although there have been a steady stream of brand-name
partners such as ExxonMobil. The REG Life Sciences unit is a
“fatty acid derivative platform” from idea to manufacturing, with
a small facility already in place in Florida.
The company has identified 11,000 “unique structures” and
assembled nearly 200 patents — to date, one multi-functional fatty
acid (musk) has reached “phase 4 -pre-launch” and a second sale id
expected in Q3 2017. Nine other products are in the development
pipeline, i various stages of partner discussions — ranging from
nutrition, esters plastics, fragrances, and polyamides.
Overall, REG Life Sciences aims to compete in four markets —
flavors & fragrances, the C8/C10 platform, speciality
polyamides and novel building blocks, with a total addressable
market size of $25.3 billion, growing by more than 5 percent per
The Digest’s Take
Here’s your takeaway. REG is staying the course and ready to
execute its strategy as unveiled with its investors last month in
Transitions at the top always create nervousness. They involve
regret for the loss of valued leaders. In this case, no reason for
nerves. And reason to re-focus on REG’s big, big opportunity. If
it executes the strategy, builds a large and strongly committed
investor base, and gets the decisions right on expansion
opportunities. A great strategy is validated by great execution.
Let’s salute Dan Oh and the company he built — the people and the
systems that remain will be his substantial and substantive
legacy. Now, let’s salute Randy Howard and the company that’s
emerging — with growth opportunities that any company in this
sector would envy.
Now, it’ll be noses to the grindstone in Ames as the company
tackles decisions on optimization and expansion — Geismar,
terminals, upgrades in the existing fleet, M&A opportunities,
generating cash out of REG Life Sciences. It’s a heady set of
opportunities and choices for REG as it aims to go from a 3-year
high in the stock price to something even more special.
Jim Lane is editor and publisher of Biofuels Digest where this
was originally published.
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