Shares of Renewable Energy Group (REGI) fell as much as 21.1% today after the company reduced second-quarter 2020 guidance. Previously, the biomass-based diesel producer expected to report adjusted EBITDA of $20 million to $25 million. The business now expects adjusted EBITDA of negative $2 million to negative $12 million for the quarter.
Although poor market conditions contributed to the revision, Renewable Energy Group admitted that previously issued guidance contained calculation errors. That's not exactly what shareholders want to learn, especially during a period of historically weak demand for transportation fuels.
At the close, the small-cap stock had settled to a 20.5% loss.
Regarding the calculation errors in previously issued guidance, Renewable Energy Group made the following statement: "Several factors contribute to the Company's revised outlook. The guidance model used in connection with the previous estimate contained inadvertent calculation errors, which on their own would have resulted in a significant reduction in the Company's previous Adjusted EBITDA estimate."
Considering that investors were already wondering how the stock proved so resilient despite the broader weakness in transportation-fuels markets, the revelation of calculation errors are likely making today's sell-off more pronounced. It doesn't help that management reported risk-management gains swung to a loss after a strong performance in April. That could be a sign that feedstock prices and availability are being stressed, which could pressure the company's operating margins in the near future.
Investors likely realize the volatility that comes with owning a renewable fuel producer, especially during a time when fuel consumption is significantly reduced. The silver lining is that the recent reinstatement of federal tax credits for biomass-based diesel fuels will provide a backstop against market uncertainty. But shares of Renewable Energy Group could be in for a wild ride in the coming quarters nonetheless.