Biodiesel Tax Credit Bonanza

The executive and legislative branches of the U.S. government seem hopelessly fraught with partisan fighting.  However, the dysfunctional bunch of politicians sometimes get it right  -  even if it first takes a period of protracted squabbling.  In December 2019, Congress passed and Trump signed a budget deal that included a five-year extension of the biodiesel and biofuel blenders’ tax credits.  Retroactive to the end of 2017 when the last authorization had run out, the extension reinstated $1.00 per gallon tax credits until the end of 2022.  The extension represents the longest period of authorization for the critical economic foundation, restoring to the industry predictability of cash flows and stability of investment resources.

Of course, at the end of December 2019, as the industry celebrated their good fortune, the coming year was expected to be a bonanza.  Few if any recognized the warnings signs emanating from China or imagined how a disease in the form of a tiny coronavirus could derail nearly all industries the world over.  Business shutdown orders aimed at stemming spread of the deadly virus also destroyed demand for fuel of all kinds.  In the first half of 2020, when renewable fuels producers should have been recording strong sales and extra revenue from tax credits, they were left to hunker down with the rest of the world to wait out the once-in-a-century pandemic.

In the two years leading up to the reinstatement of the tax credits, a number of producers scrapped expansion plans and idled production plants.  At the end of 2019, about one hundred biofuel plants remained in operation in the U.S., with a total production capacity of 2.6 billion gallons per year.  Some of these plants are in the control of companies with publicly traded stock, giving investors a chance to participate in the return of good fortune to the biofuel industry.

Recent financial reports for a selected group of U.S. renewable fuel producers reveal how the year 2020 has unfolded.  Cash flow resulting from the retroactive tax credits was in evidence in the first half of 2020.   For example, FutureFuel (FF:  NYSE) reported an income tax benefit of $18.1 million in the first six months of the year 2020, helping to boost cash flow from operations to $84.2 million for the period.  This compared to $13.5 million in the same stretch in the previous year.  Despite dramatic decline in revenue in 2020, renewable diesel and specialty chemical producers like FutureFuel have been able to report improved cash flows.  FutureFuel used some of its extra cash to pay a special dividend to shareholders, who received $3.00 per share in April 2020.

Likewise Renewable Energy Group (REGI:  Nasdaq) reported a $499 million benefit to net income attributable to credits for previous years.  At the end of June 2020, the company disclosed a $65.7 million receivable from the government related to the blender tax credit.  The windfall helped flip the company to net profitability in the first half of 2020, compared to losses in the same period of the previous year.  The company was able to dramatically increase capital investments from $18.0 million in the first half of 2019, to $31.0 million in the first half of 2020.

 

SELECTED RENEWABLE FUELS PRODUCERS
Company	SYMB	Operations	Sales	EBITDA
Aemetis, Inc.	AMTX	Ethanol, biodiesel, glycerin, distillers grains	$196.8 M	$10.5 M
The Andersons	ANDE	Ethanol, grains, agriculture nutrients and crop protection	$7.610 B	$188.8 M
FutureFuel	FF	Bio-based fuel and specialty chemicals, petrodiesel blends	$186.4 M	$88.1 M
Gevo, Inc.	GEVO	Renewable jet and diesel fuel; renewable chemicals	$17.8 M	($20.5) M
Green Plains	GPRE	Ethanol, distillers grains, corn oil	$2.4 B	($32.5) M
Pacific Ethanol	PEIX	Ethanol, distillers grains, corn gluten and feed co-products	$1.25 B	$3.0 M
Renewable Energy Group	REGI	Biomass-based diesel, distillers corn	$2.6 B	$637.1 M
REX American Resources	REX	Ethanol and by-products	$330.2 M	($3.6) M

 

With the certainty of the blenders tax credit through the end of 2022, producers have called off plans to close plants and reduce force.  For example, in July 2019, management at Renewable Energy Group had warned that it might close a plant in New Boston, Texas and temporarily idle another plant at Beatrice, Nebraska.  Both appear to have been pulled back from the brink.

Going forward investors can count on reinstatement of the blenders tax credit to make renewable diesel and cellulosic ethanol more competitive alongside fossil fuels even in periods of reduced demand.  The $1.00 per gallon credit helps to narrow the gap between the cost of conventional fuels and the higher cost of biomass-based diesel fuel.  When coupled with credits from the sale of renewable identification numbers available under the Renewable Fuel Standard, the blender tax credits make biomass-based diesel fuel nearly on par with petro-based diesel.  The competitive boost should be reflected in earnings in the coming quarters.    

 

SELECTED RENEWABLE FUELS PRODUCERS
Company	SYMB	Price	Mkt Cap	Price/Sales	Price/EPS	Pr/EBITDA
Aemetis, Inc.	AMTX	$3.49	$73.4 M	0.37	Neg	7.01
The Andersons	ANDE	$19.75	$647.1 M	0.09	34.05	3.40
FutureFuel	FF	$11.96	$516.2 M	2.77	4.56	5.86
Gevo, Inc.	GEVO	$1.02	$78.8 M	0.82	Neg	Neg
Green Plains	GPRE	$16.20	$577.9 M	0.24	Neg	Neg
Pacific Ethanol	PEIX	$8.83	$560.7 M	0.36	Neg	185.66
Renewable Energy	REGI	$60.16	$2.4 B	1.03	4.49	3.70
REX American	REX	$72.19	$47.5 M	1.38	79.58	Neg

 

 

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.