Please ensure Javascript is enabled for purposes of website accessibility

Here's Why Renewable Energy Group Is Plunging Today

By Maxx Chatsko - Mar 9, 2020 at 2:23PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The company might be a biomass-based diesel leader, but it's still dependent on the price of crude oil.

What happened

Shares of Renewable Energy Group (REGI 0.08%) fell as much as 24.7% today as global markets reacted to the crude-oil price war between Saudi Arabia and Russia. While the company is a leading provider of biomass-based diesel, the selling prices of biodiesel and renewable-diesel fuels are largely determined by the price of petroleum-based diesel fuel. 

For what it's worth, the business received a net cash benefit of $499 million in the fourth quarter of 2019 due to the retroactive reinstatement of federal tax credits supporting biomass-based diesel. That could be enough to cover operations for a year or two in a worst-case scenario, although the company has more pressing needs. 

As of 1:37 p.m. EDT, the small-cap stock was down 13.9%.

A declining arrow crashing through the bottom axis of a chart.

Image source: Getty Images.

So what

The Organization of the Petroleum Exporting Countries (OPEC) had been hammering out new production allotments for its members. While Russia isn't a member of OPEC, it has joined the organization in recent years to support global oil prices and balance markets. Moscow took issue with the direction of the latest talks, which called for more production cuts, arguing the move would create an opportunity for American shale oil to continue gaining market share.

Russia isn't wrong (the United States just reported its best ever month of exports), but Saudi Arabia decided to flex its muscle as a reminder that dissent won't be tolerated. Riyadh lowered the contract prices it was willing to accept in Europe and Asia, and committed to increasing oil production. The move is intended to inflict economic pain on Russia, which has relatively high production costs and cannot easily stop and start production at its frozen-tundra fields.

Of course, the decision by Saudi Arabia is inflicting economic pain on the rest of the world, too. Major crude oil benchmarks tumbled toward $30 per barrel. Since biomass-based diesel selling prices are largely determined by petroleum-based diesel prices, investors are preparing for a difficult, low-margin future for Renewable Energy Group. 

Now what

Renewable Energy Group was riding a wave of enthusiasm following the retroactive reinstatement and extension of federal subsidies for biomass-based diesel. The extension provided a rare opportunity for certainty in the volatile renewable-fuels space. 

Today's news all but wipes out that certainty. Considering Renewable Energy Group was far from profitable without tax credits in 2019, investors aren't taking any chances by assuming tax credits will be enough to overcome pricing challenges in 2020. That said, a long-term mindset is still the best bet for investors. If the company can successfully bring new renewable-diesel production online in the next three years, then it should be less dependent on federal subsidies.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Renewable Energy Group, Inc. Stock Quote
Renewable Energy Group, Inc.
$61.50 (0.08%) $0.05

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 06/30/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.