There's a new sheriff in town at Renewable Energy Group (REGI). Cynthia J. Warner officially took over as CEO of the nation's top biodiesel producer in mid-January, although she led the fourth-quarter 2018 earnings conference call held in early March. A veteran of the renewable fuel industry, she will look to mobilize employees and capital to continue building on the company's strengths while seizing new opportunities on the horizon.
The new era might get off to a rocky start. National average diesel prices in the first quarter of 2019 were lower than in the year-ago period -- the first time that's happened since 2016. Prices for renewable identification numbers (RINs), credits attached to each gallon of biodiesel and renewable diesel produced, are sharply lower than in the year-ago period. And expected policy changes have been slow to materialize because of gridlock and a lack of priorities in Washington.
Can Renewable Energy Group navigate the headwinds by controlling the factors within its reach? Here's what to watch when it reports Q1 2019 earnings.
1. What's the impact of lower diesel prices?
According to the U.S. Energy Information Administration, national average diesel prices in January were lower than in any month the previous year. Selling prices in February weren't much better, although there was a significant increase in March. The biggest impact could come from much-lower RIN prices, which add a significant amount of value to production volumes. The recent decline comes after RIN prices fell 60% in 2018 from the prior year.
The takeaway for investors is that selling prices could be a headwind this year. That said, there are multiple factors that could blunt the impact from the year-over-year price decline. For starters, national average diesel selling prices in Q1 2019 are only low relative to last year, and the quarter actually ranks as the second-best start to a year since 2015. Renewable Energy Group has also been able to allocate product to specific regions to maximize value, which means the national average price might not be the best signal to read.
The business might also be able to offset lower selling prices through increased operating efficiency and managing feedstock spreads. After all, the business reported a $107 million decrease in the cost of goods sold in 2018 compared to 2017 -- and that's with an 11% increase in gallons sold in that time.
2. What are the plans for distribution infrastructure expansion?
It's easy to think purely in terms of production and sales volumes, but one of Renewable Energy Group's core strengths is its nationwide distribution network. The infrastructure allows the business to tap into regional trends such as state-mandated low-carbon fuel initiatives to diversify revenue with petroleum-based diesel and to capture and serve a broader customer base.
In 2018 the company added seven new terminals to its network. That helped Renewable Energy Group end the year with 46 points of distribution and 33 end-user customers -- double the total from the year-ago period. Expanding the network creates incremental demand and higher margin revenue, which can also help to offset the perpetual volatility in the biodiesel market. Will management provide specific expansion goals for the year or years ahead?
3. Renewable diesel -- and various loose ends.
Renewable Energy Group could provide updates on a handful of other events of varying degrees of importance. For instance, the business is looking to sell its life sciences unit. While it's unlikely to fetch a needle-moving sum of money, the most value will come from freeing up management's bandwidth -- and how management decides to redeploy the capital will be important.
The most likely candidate: renewable diesel production. The fuel is chemically identical to petroleum-based diesel but fetches premium prices and higher per-gallon subsidies than biodiesel. Case in point: Renewable diesel represented less than 15% of total production but generated over half of the company's profits in 2018. Renewable Energy Group and Phillips 66 could finalize plans for a previously announced large-scale renewable diesel project on the West Coast by the end of this year.
A less visible catalyst could be an announcement to expand the company's sole renewable diesel facility in Geismar, Louisiana. Not only would a brownfield project be cheaper than building a new project, but Renewable Energy Group has acquired a lot of land around the facility in recent years to provide the option for future expansion.
Management also could provide an update on the progress -- or lack thereof -- of federal policy initiatives. Investors are still hoping that the Blenders Tax Credit (BTC) for 2018 will be retroactively reinstated by Congress, which would create a $237 million windfall for Renewable Energy Group. While the subsidy has been reinstated each time it's been allowed to expire in the past, there's no public indication that Washington is focused on providing long-term certainty for the industry.
Think long term
Judging from year-over-year trends in national diesel selling prices and RIN prices, investors may want to temper their expectations for the first quarter of 2019. No matter how it shakes out, it's important to remember that diesel and biodiesel markets are prone to short-term fluctuations. Renewable Energy Group has consistently made the right decisions for long-term growth and earned great returns on invested capital because of it. Therefore, it'll be more important to watch for updates on the long-term strategy than focus on quarter-to-quarter volatility.