The Trump
Administration is using tariffs on China goods as a trade war tactic to
pressure China into relenting to U.S. trade policy demands. Unfortunately, the fallout has been heavy and
widespread. Farmers have taken the
heaviest hits as China has dropped orders for corn and soybeans. Ethanol producers have been ensnared in the
trade war skirmish as well and in recent weeks have been caught an
uncomfortable ‘pincer-like’ squeeze by the Trump Administration.
Trump’s
Environmental Protection Agency has continued its practice of granting waivers
to oil and gas refiners, eliminating the requirement to blend biofuel with the
refiners’ petroleum gas production. In
early August 2019, the EPA granted 31 waiver applications. Originally intended to help small refineries
already in financial trouble and unable to afford expensive biofuel to blend
with their own production, the Trump EPA has quadrupled the number of waivers
granted. Trump’s EPS has even given a
number of waivers to large, highly profitable refinery companies such as
ExxonMobile, Chevron and CVR Refining.
On top of
reduced orders due to tariffs, the waivers have been particularly devastating
for the ethanol industry and their corn suppliers. The Iowa Renewable Fuels Association claims
the Trump Administration has destroyed over a billion gallons in biofuel demand
in order to help large oil refinery companies.
CVR
Refining (CVRR: Nasdaq) has specifically quantified its
benefits from receiving a waiver in 2018, citing an estimated savings of $120
million.
The waiver
program has also had the effect of reducing the value of a Renewable
Identification Number or RIN associated with producing a low carbon biofuel. RINs have
recently been quoted near $0.11 compared to $0.20 near the beginning of the
year. All refiners, whether they get a
waiver or not, benefit from a reduction in the cost of these credits. Again CVR Refining has provided a glimpse
into the financial benefits from the drop in RIN prices. In early 2019, the company reported a $23
million profit on RINs. Likewise Valero Energy
(VLO: NYSE), the
largest oil and gas refiner in the U.S., earlier this year guided for a cost of
$550 million in compliance credits in 2019, compared to $942 million spent in
2018.
With the ethanol
industry reeling from trade war tactics and EPA policy decisions, the shares of ethanol producers
have reached new lows. Pacific
Ethanol (PEIX: Nasdaq)
shares recently set a new 52-week low price near $0.50. Compared to the 52-week high of $3.24 for the
shares, it is clear Pacific Ethanol is on sale.
Or course, the company has debt problems and may be over-leveraged. However, it's struggles to meet debt service
requirements are exacerbated by reduced demand for ethanol and the drop in RIN
prices. In the most recently reported
quarter ending June 2019, Pacific Ethanol reported a 15.6% decline in revenue
year-over-year.
Green Plains, Inc. (GPRE:
Nasdaq) shares have followed a similar
fall from grace and are also trading near a 52-week low. When reporting second quarter financial
results in early August 2019, management cited weak demand and even weaker
profits margins as the company continues to operate below targeted capacity
utilization. Revenue from production of revenue and by-products declined 28.4%
in its June 2019 quarter.
Not all ethanol
producers are complaining. Valero
produces about 1.2 billion gallons of ethanol per year at plants located the
Midwest. The well capitalized oil and
gas refiner snapped up ethanol plants in Iowa, South Dakota and Minnesota
when operators faced financial distress in previous years. Valero is also a joint venture partner with Darling
Ingredients (DAR: NYSE)
in a renewable diesel production facility in Louisiana. The biofuel operations provide Valero with a
perfect hedge against renewable fuel price moves….as well as the vagaries in
national energy policy.
Should investors
follow the example of Valero by buying up shares of ethanol producers at
bargain stock prices? Probably not. Valero’s strategy only works when gaining
control over ethanol assets and making changes in operations.
Furthermore, it is not likely ethanol producers will get much help from
policy makers unless the current administration changes its views on renewable
fuels or gets replaced by a friendlier president. What is the probability of either? The answer is pending. However, ass noted above, one of the largest beneficiaries of the Trump
Administration policies has been CVR Refinery. That company figures
prominently in the portfolio of one of Trump’s strongest supporters, Carl
Icahn.
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.
No comments:
Post a Comment