The 2010s marked the beginning of the energy transition from fossil fuels to renewable energy in the power sector. The United States ended the year with over 100,000 megawatts of installed wind power capacity and over 33,000 megawatts of installed utility-scale solar power capacity. By 2030, that could increase to 236,000 megawatts and 211,000 megawatts, respectively, which could help the nation to generate half of its total electricity from renewable energy.
The 2020s will likely mark the beginning of the energy transition from fossil fuels to renewable energy in the transportation sector. Nearly every major automaker is introducing lineups dominated by electric vehicles (EVs) in the next few years, while massive investments in next-generation biomass-based diesel could lessen the environmental burden of heavy-duty ground and marine transportation.
That suggests it will be a pretty good decade for lithium producer Albemarle (ALB -0.43%) and renewable fuels leader Renewable Energy Group (REGI). But catalysts on the way in 2020 suggest investors won't have to wait long to begin reaping the rewards for these renewable energy stocks.
A game-changing transaction could be on the way
Albemarle limped through 2019. Weaker-than-expected lithium demand due to the ongoing economic slowdown in China weighed heavily on selling prices, forcing many major producers to delay previously planned expansion plans. There were signs in the second half of the year that the stewardship was stabilizing global markets, but many lithium stocks lost value during the calendar year, nonetheless.
That said, there are reasons to expect Albemarle stock to change course in early 2020. For starters, the business was still comfortably profitable last year, delivering an overall operating margin of 20.3% in the first nine months of 2019. The lithium segment didn't drop off significantly compared to 2018, either. Albemarle reported lithium sales of $947 million and lithium adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of $385 million in the first nine months of last year, compared to $886 million and $386 million, respectively, in the same period of 2018.
Additionally, on the third quarter 2019 earnings conference call, CEO Luke Kissam told investors the company was in discussions with multiple parties regarding a possible sale of its catalysts segment and fine chemistry services business. If the two units sold for just one times sales (roughly the floor for valuing fine chemical businesses), then Albemarle could gross at least $1.2 billion in proceeds from a sale.
There's no guarantee that such a transaction will be finalized, but Kissam said it would occur in 2020 if it were to happen. The proceeds would allow Albemarle to repurchase all of its outstanding long-term debt or perhaps just the portion coming due in 2021. It would also pad the balance sheet to ease any anxiety on Wall Street about the company's ability to wait for the lithium market to improve.
The timing would be perfect. By delaying certain near-term expansion projects, Albemarle expects to become free-cash-flow positive in 2021. That would allow it to fund future expansion from operating cash flow, further strengthen the balance sheet, and make the lithium stock a solid investment for investors with a long-term mindset.
A 400% increase in renewable diesel volume by 2023
Renewable Energy Group is the largest biomass-based diesel producer in the United States. Roughly 80% of the company's total effective capacity is dedicated to biodiesel, while the remaining 20% churns out renewable diesel from a single facility in Louisiana. What's the distinction?
Both biodiesel and renewable diesel are produced from fats, greases, and inedible agricultural oils. However, unlike biodiesel, renewable diesel is chemically similar to petroleum-based diesel, which provides a number of advantages. The next-generation renewable fuel can be seamlessly blended with petrol, utilize existing fossil fuel infrastructure, can be used year-round, sells for a premium compared to biodiesel, and generates 13% more compliance credits per gallon (which can be sold on the open market for additional revenue) than biodiesel.
How important is renewable diesel? Consider that in 2018, when the federal biodiesel excise tax credit (BTC) was inactive, Renewable Energy Group's lone renewable diesel facility was responsible for more than half of the company's total adjusted EBITDA.
The company has been eager to significantly increase renewable diesel production but after exiting September with just $64 million in cash, financing a larger footprint wasn't possible on shareholder-friendly terms. Uncle Sam just solved that problem, however.
In December, Congress retroactively reinstated the BTC to the first day of 2018, which means Renewable Energy Group will collect a windfall of over $500 million in early 2020 for all gallons produced in the last two years. Congress also extended the BTC through the end of 2022, which means the company could earn $1 billion more in tax credits over the next three years.
That sent shares soaring in the final weeks of 2019, but the rally is likely to continue in the new year. Renewable Energy Group now has enough cash to fully fund a large-scale expansion of its Louisiana facility and finalize a proposed joint venture with Phillips 66. The former should increase the facility's annual capacity to at least 200 million gallons (roughly doubling its size), while the latter will begin operations with a 250 million gallon per year manufacturing facility next to a Phillips 66 petroleum refinery in Washington state -- making it perhaps the lowest-cost renewable diesel in the country.
In other words, Renewable Energy Group is on pace to increase its renewable diesel production by at least 400% by 2023, when the BTC expires. That could finally make the business independent of federal subsidies and comfortably profitable. As details of the next steps are publicly announced in the coming months, investors are likely to keep the stock's rally going.