Renewable Energy Group Gets Key Order

A utility has given Renewable Energy Group (REGI:  Nasdaq) a key order to for its renewable diesel product.  Charlotte Water is using REG’s renewable diesel for a pilot project to power a fleet of service vehicles used in the utility’s water delivery and wastewater collection services.  The order demonstrates that success in the renewable diesel market is not entirely dependent upon blending by fossil fuel refiners.

Blending is a practice that is mandated by the Renewable Fuel Standard (RFS) that originally came about through the Energy Policy Act passed by Congress in 2005.   The RFS sets minimum amounts of renewable fuel that must be blended with fossil fuel.  The standard increases annually to 36 billion gallons by 2022.  Compliance can be fulfilled through the collection of Renewable Identification Numbers (RINs) that are created by producers like REG as renewable fuel is generated.  

The RFS standard creates demand for renewable fuel but leaves renewable fuel producers highly dependent upon a fickle bunch of oil and gas refiners.  It also leaves them at the mercy of the whims of U.S. administration officials who seemingly have little interest in renewable fuel except where it can be used as political currency.  In recent years the U.S. EPA has granted waivers to oil and gas refiners that sets them free of the standards for the year and wipes out demand for renewable fuel

Over one million customers are served by Charlotte Water in the greater Charlotte, North Carolina area.  The utility wants its customers to view their water source as a protector of the environment.  According to REG management renewable diesel is a strong candidate for not just burnishing an image, but actually reducing greenhouse gas emissions.  Compared with ultra-low sulfur diesel made from 100% fossil fuel, renewable diesel reduces particulate matter by 40%, carbon monoxide by 25% and nitrogen by 15%.

Charlotte Water’s renewable fuel project began in May 2019, and has already delivered a net reduction on the utility’s carbon footprint.  The utility reports that in the first three months of the project greenhouse gas emissions were reduced by 75 tons.  They expect a full year on the project to yield a reduction of 300 tons.   

The encouraging news of demand not dependent upon federal environmental policy and fuel standards, makes REGI an interesting stock for investors to consider for an environmentally sound portfolio.  The company has generated increasing revenue over the past several years, but profits have been more elusive. In the most recently reported twelve months the company produced $2.2 billion in revenue from the sales of renewable diesel.  RIN sales and government incentives make up about one quarter of the mix.  While the company realized a cash earnings profit of $19.3 million, the net loss was $43.9 million or $1.68 per share.

Despite a spotty track record on profits, REG has built a fairly strong balance sheet.  At the end of June 2019, the company reported $65.1 million in total cash resources and a current ratio of 1.14.  Cash resources decreased over the last six months due in part to a net usage of cash to support operations.  The company also settled its 2019 convertible notes.  The debt-to-equity ratio is a relatively conservative 36.58, suggesting REG management has some wiggle room to act assertively if a strategic opportunity arises.

Management is thinking strategically.  At the end 2018, the team made the decision to divest its Life Sciences division and its results had been classified as discontinued operations on the company income statement and assets held for sales on the balance sheet.  The company had bought the operation in 2014 in order to pursue development and commercialization of industrial biochemicals.  However, deepening losses apparently made REG management have second thoughts.  At the end of May 2019, the company completed the sale to Genomatica.

REGI does not pay a dividend so bull case investors have to look only for stock price appreciation to realize gains on the stock.  The stock is currently valued at 7.43 times earnings expected in 2019.   This compares to a forward earnings multiple of 14.62 for a group of 89 specialty chemical companies and 28.64 for a group of 21 green and renewable energy companies.  The multiple may be enticing when weighed against the prospect of demand from sources beyond the oil refineries that have not slipped through blending requirements.

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.