Investors in the biodiesel space have been on a bumpy road, after the so-called Renewable Identification Number (“RIN”) crisis. But, the Environmental Protection Agency’s (“EPA”) new Quality Assurance Program and ongoing government support for the industry has led to a swift recovery that has sent share of companies like FutureFuel Corp. (NYSE: FF) and Renewable Energy Group Inc. (NASDAQ: REGI) higher over the past 52 weeks.
In this article, we’ll explore where the biodiesel industry is headed and where some of the best investment opportunities may lie in the sector.
Biodiesel Demand Projected to Grow
The Renewable Fuel Standard (“RFS”) was developed by the EPA in collaboration with refiners, renewable fuel producers and many other stakeholders as a part of the Energy Policy Act of 2005. By requiring an increasing amount of renewable fuel to be blended with transportation fuel, the regulations helped the biodiesel industry reach production levels of nearly 1.1 billion gallons per year over the past two years, exceeding the programs requirements.
Between 2008 and 2022, the Energy Independence and Security Act of 2007 increased the volume of renewable fuel required to be blended into transportation fuel from 9 billion gallons to 36 billion gallons. These metrics help ensure that demand for biodiesel fuel will continue to rise over the coming years and create significant opportunities for biodiesel producers and affiliate companies to generate strong top-line revenues moving forward.
According to International Energy Administration (“IEA”) data, the OECD North American market is projected to continue its robust growth, but investors should also consider the significant growth opportunities that exist in other emerging markets.
Biodiesel Supply Appears Limited
Biodiesel demand may be on the rise, but the supply side was hit by the RIN crisis that impacted the market. Last year, there were several reported cases of RIN fraud, including Absolut Fuels’ sale of more than $50 million worth of fake RIN credits without producing any biodiesel to back them up. Clean Green Fuel LLC also allegedly made some $9.1 million selling renewable fuel credits, while several U.S. firms were implicated in a C$2.9 million Canadian fraud.
The EPA quickly issued new rules protecting customers, but customers that had purchased RINs from these groups were still penalized for failure to blend a sufficient amount of biofuel into their end products. Many of these customers consequently terminated their contracts with smaller producers and stuck to only larger reliable producers until the situation cleared up, which led to a number of bankruptcies in the space and sharply reduced production.
From the Energy Information Administration (“EIA”) data table below, it’s clear that biodiesel production fell sharply during the second half of 2012, compared to 2011, but has been recovering so far in 2013 to record levels.
Robust Economics & Public Support
The third key factor for investors to consider beyond supply and demand is public support and cost economics, since the industry’s growth does demand on government subsidies. Fortunately, it has become clear that the biodiesel industry offers a number of enormous economic benefits, environmental benefits, and public benefits worth considering. These benefits – outlined below – suggest that support for the industry remains robust.
According to the National Biodiesel Board, the industry has helped in many ways:
Jobs and Economic Impact: The biodiesel industry supports at least 50,000 jobs along with billions of dollars in gross domestic product (“GDP”) and household income, and at least $628 million in federal, state and local tax revenues. In many rural areas, biodiesel plants are the driving force of the local economy.
Reduced Foreign Oil Dependence: Biodiesel plays a major role in expanding domestic refining capacity and reducing reliance on imported fuels. Each gallon of biodiesel produced in the U.S. displaces an equivalent amount of petroleum with clean-burning, efficient fuel, keeping jobs and profits in the U.S.
Improving the Environment: Biodiesel is the only EPA-designated Advanced Biofuel with commercial-scale production nationwide. According to the EPA, biodiesel reduces lifecycle greenhouse gas emissions by 57% to 86% compared to petroleum diesel. Tailpipe emissions from trucking fleets and other heavy-duty vehicles continue to constitute a major national health hazard that must be addressed.
Finding the Best Opportunities
The biodiesel market has many large producers, including the names mentioned above, but investors may want to consider smaller producers, too. Methes Energies International Inc. (NASDAQ: MEIL) is one unique company in the space that develops small- to medium-scale biodiesel production systems for third party operators. With its own growing operations serving as a proof of concept, the firm has both existing revenues and significant platform potential.
Currently, the company’s Sombra facility has two of its Denami 3000 processors with a total production capacity of 13 million gallons per year. With operations ramping up during the second half of this year, the company’s most recent 10-Q filing indicates management’s belief that it will become cash flow positive. And finally, the plant has capacity for a total of six processors, while management plans to double to four processors by May 2014.
In the end, the biodiesel industry is experiencing bullish fundamentals with rising demand, limited supply, and cheap valuations after last year’s scandal. With these problems behind the industry and bright skies ahead, investors may want to take a closer look at large scale biodiesel producers like REGI as well as smaller companies like MEIL for their portfolios.
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