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How the Top Biodiesel Stock Crushes the Field

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When it comes to the highly charged biodiesel industry, one company stands above the rest. Way above. Renewable Energy Group (NASDAQ: REGI  ) is not only the leader in terms of pure production capacity, but it also displays plenty of desirables that should be on every investor's radar. What makes the company so great? It is no secret. In particular, REG has focused on three areas to become the top biodiesel stock.

1. Focus on infrastructure
A lot of investors get giddy with excitement when talking about the distribution and logistics network of Clean Energy Fuels (NASDAQ: CLNE  ) . It may produce compressed natural gas for commercial truck fleets, but it has a lot in common with REG. Don't believe me? Take a look at Clean Energy Fuel's distribution network:

Source: Clean Energy Fuels.  

And see how it compares with that of REG:

Source: Renewable Energy Group.

The major difference is that REG has no need for dozens of filling stations, as it sells the biodiesel it produces to distributors. Nonetheless, coast-to-coast infrastructure for both companies will allow them to take advantage of short and long term market conditions, move fuels to high-demand hubs, build a loyal and dependent customer base, and weather volatility better than smaller peers.

2. Focus on smart growth
You can't build an enviable distribution and logistics network overnight. That's what makes smart growth such a key aspect of REG's business. When listening to the 2012 conference call, I was thrilled when management stated that it had turned down multiple acquisition targets in 2012 because more favorable opportunities existed elsewhere. Pulling the trigger at every opportunity and taking a "growth at all costs" approach can be a dangerous game for investors. Absorbing just one "lame-duck" biorefinery -- because of a retrofitting deemed too costly, an unfavorable location, or an unrealistic payback period -- into its network could do much more harm than good.

Luckily, managing cash in a responsible and sustainable way has paid off tremendously. REG has brought at least eight biorefineries under its control since 2006, which represent a total annual capacity of 260 million gallons (only 215 million gallons are currently active). Three of those acquisitions have been made in just the last three quarters. A stable of next-generation biorefineries currently under construction -- representing 135 million gallons of additional annual capacity -- may slow the pace of future acquisitions. However, I wouldn't bet against seeing management gobble up great growth opportunities should they arise.  

3. Focus on efficiency
A combination of factors plays a role in efficiently producing biodiesel. FutureFuel (NYSE: FF  ) , which owns an annual capacity of 59 million gallons to complement its niche chemical business, relies heavily on location. The company's two biorefineries don't have a nationwide infrastructure to aid in getting product to the market and are dependent on rail and barge access. Despite the FutureFuel's amazing progress is improving its process -- annual capacity jumped from just 35 million gallons in 2011 to 59 million gallons today -- the company admits that its relatively small operations may cease to exist given changes in feedstock prices, government mandates, and tax credits.  

REG obviously has much more extensive operations than FutureFuel, but has leaned on efficiency to mitigate market conditions as well. The company's facilities have been upgraded to run on multiple feedstocks, which include processed oils ("first generation," easier to convert) and crude oils ("second generation," more difficult to convert) such as used cooking oil and poultry fat. That should allow REG to combat price spikes in one feedstock, such as soy oil, by switching to another, such as yellow grease. Couple that with its burgeoning network, and it's easy to see why the company leads the pack in efficiency.

Foolish bottom line
Being a well positioned leader is a self-feeding growth mechanism in this industry. While smaller producers mothball facilities when market conditions get tough, REG comes swooping in to purchase and upgrade less-than-perfect biorefineries. That is, after all, how the company acquired its last several production facilities. If you're still skittish about investing in biofuels, that is understandable. But you should know that biodiesel is nowhere near the point of saturation of corn ethanol, and it doesn't compete with farmland used to grow food.

Whatever your concerns, I think there is a solid case to be made for a long-term investment in the top biodiesel stock. Growth remains intact for several years, and major efficiencies are still working their way through the network, which will compound over time. There is always the risk of losing the tax credit, but it won't spell disaster for a company as established as REG. What are your thoughts on the company? Let me know in the comments section below.

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Read/Post Comments (5) | Recommend This Article (6)

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  • Report this Comment On July 18, 2013, at 10:08 AM, TMFDoodleBugger wrote:

    Fantastic write up Maxx. Does anyone know what the removal of the tax credits would do for biodiesel? Seems like it needs to fly on its own eventually.

  • Report this Comment On July 18, 2013, at 11:35 AM, TMFBlacknGold wrote:


    Thanks Robert. I think a few tax credits/subsidies for renewable tech could be revisited and possibly axed by now. REG would likely still be profitable without the credit, although previous quarters have been iffy when feedstock prices soared or their hedging practices backfired. I think that should subside with recent upgrades to their facilities.

    And by profitable I don't mean wildly so. Without the tax credit in 2012 (which was retroactively reinstated earlier this year) REG made about $23 million on $1 billion in revenue. With the credit net income was $44 million, although another $58 million in income from 2012 will be recorded in 1H13.

    Increased production will boost revenue, but margins are always going to be relatively low.


  • Report this Comment On July 18, 2013, at 12:49 PM, portastatic wrote:

    Maxxwell -

    Have you considered Diamond Green Diesel, Darling internationals (DAR) JV with Valero?

    They just started up - will produce drop-in biofuels that can be distributes through existing infrastructure.. and DAR knows a little about the feedstock...


  • Report this Comment On July 18, 2013, at 1:05 PM, TMFBlacknGold wrote:


    I actually had never heard of the JV. That is an interesting story for drop-in fuels, however, and I will certainly look to cover it in a future article. I always wonder what next-generation fuels mean for REG. Will there always be a place for blendstocks? Or will they one day give way to drop-ins? Something to think about.


  • Report this Comment On July 18, 2013, at 3:32 PM, portastatic wrote:


    The DAR board over on stock advisor is a good place to start.

    Perhaps I'll see you there!


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