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traders in Gary Haer’s sales group at Renewable Eenergy Group’s
aka REG) headquarters in Ames, Iowa.
And they’re not kidding. Everyone stands. For 15 minutes there’s
the rat-a-tat-tat of rumor, fact, competitors, pricing, spreads,
the who’s selling what and where, the buying and selling of
diesel, renewable diesel and biodiesel across North America.
On most minds this Friday morning, what’s going to happen with
The USDA late on Thursday released its annual spring plantings
report and it
was a shocker. Corn acres up 5 million, wheat down 5
million. Despite high corn ending stocks from last year. Prices
are sure to go low. But how low? By day’s end the price would drop
15 cents a bushel, almost 5 percent. That’s good news for REG —
they’re the major buyer of inedible corn oil from ethanol
producers, which they have figured out how to convert into
biodiesel. But how much good news, that will only become clearer
through the day.
Meanwhile, the dozens of Bloomberg TV screens and the overhead
pricing screens on B100 biodiesel, fossil prices and key REG
inputs such as virgin vegetable oils — they are spitting out the
numbers, updating nearly every second.
The rat-a-tat-tat continues as the team talks about dealmaking in
“I was up in North Dakota drumming up some business with
[omitted], and they had [omitted] come in at -15.” In the parlance
of the meeting, that’s15 cents below quoted market price. In a
market where wholesale diesel futures are selling at $1.13 per
gallon, that’s a gigantic discount. Someone is moving inventory
aggressively. The team pauses, takes it in, then the rat-a-tat-tat
resumes. Minnesota, California, a terminal here, a customer there.
It’s been a couple of years since we visited REG and the
difference is palpable. The company has become a little ADM,
rather than a big Amyris or TerraVia. You see the trading desks at
the bigger ethanol operations like Green Plains — relatively
massive and certainly lively trading ops. But it’s not something
we’ve seen in companies like REG. It used to be a company you
could safely describe as a biodiesel company, just as you could
safely think about biodiesel as a market for the soybean oil
byproduct of a soymeal crush.
But no more.
The old biodiesel paradigm gone by
The problem with biodiesel companies, for a long time, has been
the volatility of raw material prices and energy prices.
Biodiesel has long been America’s favorite advanced biofuel, but
they don’t call the spread between soybean prices and biodiesel
prices “the crush spread” for nothing. You can get crushed.
Favorable economic winds can turn on you lickety-split, leaving
you with upside down economics (high input, low output prices) and
working capital that burns faster than firecrackers on the 4th of
More than a decade ago, biodiesel was an answer to a problem for
soybean growers. Their soymeal had been approved and successfully
trialed as livestock feed, and orders were up, up, up. But after
the soy was crushed to make meal, the oil piled up, and after a
while there’s no place to store it, and dumping is neither
eco-friendly nor economically viable. Now, you can run a diesel
engine on straight veggie oil, but it’s gummy. But throw in some
methanol and a sodium-based catalyst under heat and pressure, and
you break the oil molecule into pure B100 biodiesel and a
glycerine by-product. The technology is complex enough, but costs
less than a dollar a gallon for the capex.
Then, soybean oil was trading at something like 10-11 cents a
pound, or around dollar a gallon for the raw materials in a gallon
of biodiesel, and energy prices were far higher. And an industry
Back then, there were a lot of companies that wanted to become
what REG has become today. A multi-plant, multi-feedstock,
multi-product producer with operations across the US and now
reaching into Europe.
Fast-forward to 2008/09, when soybean oil prices skyrocketed as
high as 70 cents a pound, and the easy good times were over.
Plenty of producers went idle.
REG, however, found the answer in a technology so critical that
even today, on a public plant tour, they don’t like to talk about
it. It’s a FFA stripper. This takes free fatty acids, which are
difficult to process, out of alternative feedstocks like fish oil,
choice white grease, yellow grease, brown grease, and inedible
corn oil. The technology allowed REG to manage its input costs
through supply diversification — and with a superior price
structure, came a series of mergers and acquisitions that brough
the company to 11 plants today, worldwide.
It’s not a license to print money, biodiesel. The company made
$50 million last year and without the December 2015 renewable of a
$1 per gallon biobased diesel tax credit, might have slid into the
red with the collapse of oil prices which began in Q4 2014.
Three legs to the REG stool
1. Diversification. The company is diversifying
everywhere you look. The afore-mentioned raw materials. Through
the recent acquisition of LS9 (now REG Life Sciences) and Dynamic
Fuels (now REG Geismar), the company has diversified on the
We expect to see a first commercial product from Life Sciences in
2016/17 — a fragrance product that can be manufactured at
commercial-scale at the company’s plant in Okeechobee, Florida.
Perhaps as importantly, LIfe Science’s feedstock is sugar — for
now, think corn sugars (dextrose), although any source of sugar is
technically acceptable; it comes down to price.
We also note that Minnesota and Iowa, where REG operates, are the
first states to put in renewable chemical producer’s tax
incentives. Iowa’s legislation expected to be signed this week by
Governor Terry Branstad.
Meanwhile, Dynamic Fuels is a going concern, although two fires
since acquisition have set back the commercial schedule.
2. Flat management structure. With 600
employees, the expectation is the kind of hierarchy that begins to
stifle innovation. But REG keeps it flat — 30-40 person teams at
individual plants, divided into 4 shifts of 7-10 people. Around
130 at HQ, most of whom are in trading or financial operations.
There are just a handful at the VP level, and decision-making is
3. Good outlook for biobased. Who’s said there’s
no green premium? REG’s average selling price was $2.69 in 2015 —
compare that to the afore-mentioned $1.13 futures price for
diesel. CEO Dan Oh told investors, “The regulatory clarity and
growth trajectory EPA provided last year with a multi-year RVO
will grow biomass-based diesel beyond two billion gallons by next
year, and effectively already has when you consider carryover
The rap on REG
1. Biofuels companies are not Wall Street darlings on the
equity side. From our POV, we wonder at that. Her’s a
company that debuted at $10 after its 2012 IPO, and is trading as
of last week at $9.48 despite awful energy prices. And is making
money in a down market, and building market share.
Yet, we see an astonishingly low PEG (price/earnings to growth
ratio), at 0.29, that led Zacks to highlight REG last week as an
2. Size matters. The company isn’t big enough yet, or
diversified yet, to have convinced investors to pay attention.
That’s the sub-$1 billion market cap problem, combined with REG
Life Sciences and REG Geismar offering limited revenues to date —
so, there’s an awful lot of dependence on biodiesel in the stock
So, the question for the investor is to pick a date when those
concerns have been addressed, but the rest of the market hasn’t
woken up yet. The first announce of a significant offtake and
product development deal on the chemicals side, that’s your
target. Could be something in the Q1 earnings call.
3 big news items
1. Expansion in life sciences. Last week, REG
started expansion and upgrade of the laboratory at the company’s
Ames, Iowa headquarters to further enhance renewable chemical
related biotechnology research, development and commercialization.
The lab expansion will include the installation of fermentation
equipment and significant analytical capabilities. Upon
completion, full-time positions will be added to focus on
commercialization and integration of products to be developed by
REG in South San Francisco into production and delivery platforms.
“This expansion is simply one of many examples of REG’s
commitment to innovation and economic development in Iowa and in
particular Ames which is a cornerstone of Iowa’s Cultivation
Corridor,” said CEO Dan Oh.
2. Acquisition in biodiesel. Two weeks ago, the
company completed its acquisition of Sanimax Energy’s 20 million
gallon nameplate capacity biodiesel refinery located in DeForest,
Wisconsin. REG paid Sanimax $11 million in cash and issued 500,000
shares of REG common stock in exchange for the biorefinery and
related assets. REG may also pay Sanimax up to an additional $5
million in cash over a period of up to seven years after closing
based on the volume of biodiesel produced at the plant, which is
now called REG Madison. Using the same REG patented and proven
high free fatty acid processing technology as REG’s Seneca,
Illinois plant, REG Madison produces biodiesel from lower cost,
lower carbon intensity feedstocks.
3. Building the capital stack. REG Energy
Services secured a $30 million line of credit from Iowa-based
Bankers Trust, the company last month, The line is a one-year
credit facility, with an accordion option to expand to $40
million, subject to customary conditions. “This credit line gives
REG Energy Services additional capital to expand our blended fuel
offerings and add to our already expansive distribution network,”
said Chad Stone, REG Chief Financial Officer. “It also frees up
capital allocated to the business from other sources. We are very
grateful to Bankers Trust Company for seeing the strength of this
part of our business and committing these funds to allow us to
The Digest’s Take
Over in the world of materials and products, we see a rush to
divest. Consider, for example, DowDupont, which will emerge as
three companies in distinct segments, out of two diversified
companies. But in the agricultural space, they’re generally
sellers, not buying raw materials from growers.
So, companies like REG are going the other way, diversifying.
Back then, one product, heading for many. One input, oils — now
oils and sugars, plus a diversified set of waste oils. Back then,
one technology, transesterification. Now, a suite of them ranging
from hydrotreating to fermentation.
So, we see it as a little ADM, with bigger
margins and growth prospects for some time to come, well
positioned. Inherently more diversified than a TerraVia (SZYM)
or Amyris (AMRS)
on the technology and raw materials side.
Meanwhile, we note that ADM is trading at almost exactly the same
price-to-EBITDA ratio as REG, and on a price-to-revenues basis.
That’s the “we’re so big and been around so long” premium that
benefits diversified plays in uplifting raw materials into
So, how big is big enough where REG will get a bump based on a
superior growth outlook? $1 billion market cap might just do it.
Keep an eye on expansion into Europe — and, with the expansion
into corn sugars, given that they’re into corn oil in a big way,
keep an eye on opportunities with corn protein.
Jim Lane is editor and
publisher of Biofuels Digest where this
was originally published.
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