Biodiesel giant Renewable Energy Group (REGI) is up on gallons, down on dollars as market prices weigh on results.
In Iowa, REG announced net income of $10.8 million for the second quarter on revenues of $332.9M, a drop from its Q2 2013 net income of $19.6 million, and a 13% drop in revenue despite an 11% lift in gallons produced. The company noted that net income was boosted by a tax benefit of $11.9 million, recognized primarily from the release of a valuation allowance resulting from recording deferred tax liabilities related to the acquisitions of Syntroleum and Dynamic Fuels and the convertible debt offering. The company recorded adjusted EBITDA of 6M.
In announcing results, the company highlighted:
- 77 million gallons sold, up 11% y/y, 56 million gallons produced, down 1% y/y
- Total assets surpassed $1 billion
- Completed acquisitions of Syntroleum Corporation and Dynamic Fuels, LLC
- Executed $143.75 million convertible debt financing
At June 30, 2014, REG had liquid assets, which includes cash, cash equivalents and marketable securities, of $125.9 million, a decrease of $10.2 million during the quarter. REG raised $139.2 million in cash from the convertible debt financing. Of those funds, $101.3 million was put in escrow as restricted cash supporting REG Geismar’s obligation on $100 million of Gulf Opportunity Zone Bonds issued for Dynamic Fuels in 2008, $30 million was used to acquire Tyson Foods, Inc.’s interest in Dynamic Fuels, LLC and $11.9 million to acquire a capped call relating to the convertible debt.
Expansion: new facilities
In addition, the company gave updates on three acquisitions in Mason City, New Boston and Geismar. Specifically, REG noted:
The Company’s two most recent biodiesel acquisitions, REG Mason City and REG New Boston, are now able to run at nameplate capacity. All upgrades are complete at REG Albert Lea, while previously announced upgrades to increase feedstock flexibility are progressing at REG Newton and REG Mason City. The Company also prepared for future improvements at its Danville, Illinois facility with the acquisition and rezoning of adjacent land. Finally, REG maintains a toll manufacturing arrangement that offers additional production capacity flexibility.
As announced in early June, the Company launched REG Synthetic Fuels, LLC with the acquisition of Syntroleum Corporation, which included Syntroleum’s 50% interest in Dynamic Fuels, a 75-million gallon per year nameplate capacity renewable diesel biorefinery located in Geismar, Louisiana. REG Synthetic Fuels acquired the remaining 50% of Dynamic Fuels from Tyson Foods a few days after the Syntroleum acquisition. Dynamic Fuels, LLC was renamed REG Geismar following the acquisition.
“Our second quarter results demonstrate the resilience of our business in the face of challenging market conditions,” said REG CEO Dan Oh. “We believe the industry has worked through the excess inventory from year-end and we have seen demand increase since the first quarter. During second quarter, REG demonstrated its ability to operate an expanding business while also investing for future growth. On top of ramping up gallons sold 63% from first quarter, we executed a complex series of transactions in order to acquire Syntroleum and Dynamic Fuels. Integration of both are underway and we are excited about the new employees, technology and products added to REG. With these acquisitions, our total assets now exceed $1 billion.”
The Digest’s Take
It’s been a rough ride for biodiesel prices this year to date and as the industry leader, REGI has been taking it on the chin, suffering through three downgrades from Piper Jaffray, Stifel Nicolaus and Cannacord Genuity in the process. Considering the run-up in the stock last year and the price environment, REG’s been doing quite well from an operating POV to maintain an average rating of “buy” from the Street, according to NASDAQ.com.
If the biodiesel tax credit makes a comeback that’ll be a major company windfall, but we’re not expecting anything on taxes from Congress, in an election season, until the lame-duck session beginning in November.
For the longer term, we’ll be watching progress with the newly-renamed REG Geismar, the former Dynamic Fuels facility that offers the company an entry in the drop-in renewable diesel market. REG Life Sciences the former LS9 remains a significant wildcard upside option for REG in 2015 and beyond given that LS9 was generally focused around sugar as a feedstrock, we’ll be watching REG’s expansion into that area of feedstock acquisition to see if their proven ability to play strong in upstream works well on the sugar side, too.