Shares of Renewable Energy Group (REGI) dropped over 13% last month, according to data from S&P Global Market Intelligence. North America's largest producer of biomass-based diesel fuels reported third-quarter 2018 earnings. While operations were relatively strong compared with the year-ago period, the business increased gallons sold 18% and still saw revenue slip nearly 5%.
The year-over-year decline in revenue was driven by a nearly 6% decrease in average selling prices, but more so from selling fewer renewable fuel credits (called renewable identification numbers, or RINs) in the marketplace. Sales of the credits can fluctuate from year to year based on the value of the credits, the timing of purchases from petroleum refiners, and policy decisions or the anticipation thereof. In other words, it's not something Renewable Energy Group can control.
The important thing for investors is that Renewable Energy Group continued to control the factors within its reach. A combination of shifting product mix (including more petroleum-based fuels) and more efficient operations helped to deliver over $24 million in net income during the third quarter of 2018, compared with a net loss of over $11 million in the year-ago period.
Meanwhile, the business delivered adjusted EBITDA of approximately $35 million in the third quarter of 2018, significantly less than the $55 million reported in the year-ago period. However, the figure from 2017 includes income from the blender's tax credit (BTC), which is inactive this year. (RINs are credits that track progress toward annual mandates for all renewable fuels, while the BTC credits are a separate subsidy for biodiesel producers.)
If the BTC is retroactively reinstated for 2018, then Renewable Energy Group would have reported adjusted EBITDA of $104 million in the most recent period -- a $70 million increase -- and an additional $179 million in adjusted EBITDA for operations through the first nine months of 2018.
Despite a bad November, Renewable Energy Group stock has splashed on to the scene in 2018. The business has been rewarded for outgrowing the volatility of the BTC and turning in profitable operations without the subsidy -- the first time it's ever done so. There are no signs the momentum will slow down anytime soon.
On Nov. 30, the United States announced sharp increases for the volume of renewable fuels required to be blended into the nation's fuel supply in 2019 and 2020. There's a new global fuel standard going into effect in 2020 that could increase global diesel demand by 12 billion gallons per year. And the business just introduced a new CEO to carry through on the long-term vision for growth.