Why Aren't First Gen Biofuel Companies Making Money?
On October 8th, Renewable Energy Group (REGI),
the leading US biodiesel producer, announced unexpectedly that it
now expects to report Adjusted EBITDA ranging from a loss of $2
million to a loss of $7 million. The company’s prior guidance for
Adjusted EBITDA was a gain of $10 million to $15 million. The
company expects to report gallons of biodiesel sold in a range of
60 to 63 million, compared to prior guidance of 55 to 60 million.
The good news
REG CEO Daniel Oh said that “Despite these fluctuations in our
markets, we remain optimistic about the long-term prospects for
REG and the biodiesel industry. The recent finalization of the
[1.28 billion gallon biodiesel obligation for 2013] provides
growing demand for the next year. Our flexible feedstock
technology gives us a long term advantage as a low cost producer,
since we can adjust to fluctuations in feedstock prices.
Furthermore, REG continues to have a strong balance sheet with
cash to sustain our growth strategy.”
What’s going on?
In biodiesel, the change in REGI guidance is directly related to movements in commodity prices, a steep depreciation in the price of RINs and tighter margins than expected.
On the ethanol side, it’s been commodity margins that have led to rough times. Caused, in turn by drought-induced steep corn prices, falling gasoline demand and the resulting overcapacity in ethanol production leading to surplus ethanol stocks.
Accordingly, Biofuel Energy announced in late September that it has decided to idle its Fairmont, Minnesota ethanol facility until further notice. The plant ceased ethanol production as of the end of last week. The Company reported that its second plant in Wood River, Nebraska continues to operate.
Low-cost ethanol capacity
|Aventine Renewable Energy||AVRWD||312||5.34||$0.02|
|Green Plains Renewable Energy||GPRE||740||179.71||$0.24|
|Renewable Energy Group||REGI||201.58||220||$1.09|
The market caps on publicly traded pure-play ethanol stocks are averaging $0.18 per gallon of installed capacity, a fraction of the construction cost. Biodiesel is down on the weaker outlook for REGI, but still substantially better.
Relief in sight?
For first-generation ethanol capacity, there’s marginal relief in sight starting in mid-2013 when corn prices are expected to climb down from the $7.40 range – first falling to $7.34 next July, according to the futures price at CBOT this week, and then falling into the mid-$6 range by September. But, with ethanol prices expected also to fall, there are modest improvements expected in the ethanol-to-corn price ratio, but it’s not exactly time to strike up “Happy Days Are Here Again”.