REG Earnings Get a Boost From Fuel Credits

I told you not to worry. Although, with such weak guidance to start the year one could argue that Renewable Energy Group (NASDAQ: REGI  ) set itself up for a positive earnings surprise yesterday. The nation's largest biodiesel producer recorded it best first quarter ever for production and volume of fuel sold. Since biodiesel use slows in colder winter months the solid quarter is a testament to its growing use in the nation's fuel supply and the company's ability to develop alternative products such as heating oil. Here's a quick breakdown from REG's first quarter.

Financials
The first quarter of 2013 compared quite favorably to the same period one year ago. However, it is important to note the huge effect of the blenders tax credit, or BTC, that was retroactively reinstated.

 

1Q13

1Q12

% Change

Gallons produced

40 million

38.5 million

4%

Gallons sold

38.9 million

34.1 million

14%

Average selling price of B100

$4.44 per gallon

$4.83 per gallon

(8%)

Net income

$46 million

$14 million

228%

Adjusted EBITDA before BTC

$79.3 million

$12.7 million

524%

Adjusted EBITDA without BTC

$22 million

$23.2 million

(5%)

Shareholders' equity

$455.8 million

$393.0 million

16%

Source: Company 8-K  

It is good to see REG continuing to increase production and gallons sold (including inventory) at a time when demand for biodiesel is increasing. That growth will continue to find its way to investors. In fact, shareholders' equity increased 14.8% in the last three months alone. Almost all of the increase was attributable to the BTC, which could leave investors with mixed feelings.

On one hand, REG earned the money just like every other reputable biodiesel producer. On the other hand, investors likely won't be able to see big one-time gains in net income again. Biodiesel is a relatively low-margin product, and while the industry should continue to grow for the foreseeable future, growth will be slow and steady. Of course, there is nothing wrong with that -- just don't invest now for the wrong reasons.

Outlook
Investors should look for continued progress at facilities under construction or renovation. For instance, the Albert Lea, Minn. biorefinery is on track to be commissioned again after upgrades to allow lower cost feedstock capabilities. The company's recently acquired New Boston, Texas, biorefinery will also be operable this quarter. In addition to in-house manufacturing, REG has agreed to terms with Iowa Renewable Energy to contract their 30 million gallon per year (MMgy) multiple feedstock facility. The deal will give REG increased flexibility to respond to volatile feedstock prices.

And don't forget the madness that comes at the end of every year as the industry awaits blending requirements for the next year. In 2012, the decision came down to the wire (the reason for the BTC uncertainty in the first place). New legislation has been proposed for axing or overhauling the Renewable Fuel Standard that has the support of both political parties, so this year may not be any better. Fortunately, biodiesel is nowhere near the saturation of ethanol and any amendments should not affect its growth in the long run. A short-term scare is entirely possible. 

Foolish bottom line
The market has finally begun to appreciate REG's performance, management, and growth. Book value stands at $14.85 per share -- $12.14 per share when preferred stock is accounted for -- which means there is still some value to squeeze out of shares. There is also a considerable amount of capacity coming online in the next year or two: 150 MMgy to be exact. Just remember that companies associated with renewable fuels tend to be volatile. My advice: Take a buy-and-hold approach and don't worry about the shocks. REG is still a solid long-term investment.

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