Insider View on REGI

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by Debra Fiakas CFA

Insider buying is not one of my regular screening criteria in selecting long plays in the small cap sector.  However, to learn a chief executive officer has taken out his/her check book to buy shares in their company is influential.  In November 2016, the CEO of biofuel producer Renewable Energy Group (REGI:  Nasdaq) reported an increase in his stake in the company in recent months.

With REGI shares just above the prices paid by the CEO just three months ago, it is timely to look more closely from the outside.

In the most recently reported twelve months, Renewable Energy Group produced $1.87 billion in total sales of renewable diesel and chemicals, resulting in a net loss of $71.9 million or $1.70 per share.  Those two metrics are only part of the story as the company also reported generating $52.2 million in operating cash flow in the same period.   Using its typically low-cost feedstock such as inedible corn oil and used cooking oil, the company lays claim to being a low cost biofuel producer.  Nonetheless, the company has come through a particularly tough period in 2015, when thin margins failed to deliver enough profit to cover fixed costs.  Yet even during this difficult period, operating cash flows remained positive.

Free cash flow, that is operating cash flows net of investment requirements, may be a more helpful metric to evaluate a renewable energy producer.  REG operates a dozen biorefineries in North America with total nameplate capacity just over 450 million gallons per year.  The company is moving aggressively to expand its footprint.  In November 2016, management trooped out to Iowa to stage a showy groundbreaking ceremony with Iowa’s high profile governor, Terry Branstad.  The group turned over first shovels on a project to expand its Ralston biorefinery capacity from 12 million to 30 million gallons.

The price tag for the Ralston expansion is estimated at $24 million.  This is easily fit into the company’s regular budget.  Renewable Energy invested $42.8 million into its plants in the first nine months of 2016.  Indeed, capital investment has averaged $54.6 million per year over the last three years.  Operating cash flows have been more than ample to cover capital investments into existing plant and equipment, leaving $29.5 million in average annual free cash flow.

REG management has had no difficulty in finding places to use that extra cash.  Approximately $84.4 million in cash has been used to acquire new operations since the beginning of 2013.  The most recent deal in March 2016, was the acquisition of a biodiesel refinery in Wisconsin owned by Sanimax Energy.  REG paid a total of $21.1 million for 20-million gallons in nameplate capacity in a combination of cash and stock.
A more significant deal was struck in August 2015, for a facility in Grays Harbor, Washington that added 100 million gallons to the company’s total capacity.  A total of $36.7 million in cash and stock valued at $15.3 million were paid up front.  An additional $5.0 million was promised contingent upon achievement of milestones in renewable diesel production in 2016 and 2017.

A growing, profitable operation should be of interest for most investors.  The one reservation that investors should have regarding REGI, is the possible fall out of favor for renewable energy producers.  REG management has come out in support of a recent proposal for the 2017 standard set by the Environmental Protection Agency for Advanced Biofuel Renewable Volume Obligation from 4.0 billion gallons to 4.28 billion gallons.  Biomass-based diesel is a direct beneficiary of the standard.  Given the antipathy expressed by the incoming occupant of the Oval Office toward the environment and climate, renewable energy may not be a particular priority.  Indeed, petroleum-based energy is most often the lips of Trump and his surrogates.  Hopefully, REG management made a good impression on Branstad while they were in Iowa to put a good word in for renewable diesel.

Debra Fiakas is the Managing Director of Crystal Equity Research, an alternative research resource on small capitalization companies in selected industries.

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.


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