The nation's leading biodiesel producer had an amazing second quarter and continued its ascension as one of the best biofuel stocks on the market. Renewable Energy Group grew by double digits in almost every important category; including revenue and production volume. The stock has risen almost 150% this year, so should investors be wary of jumping in now? The answer may just lie in the earnings announced this week.
REG had a remarkable quarter compared to the same period of 2012. Of course, investors should expect nothing less considering all of the operational improvements and acquisitions made in the past year. The company completed upgrades at its Albert Lea biorefinery, started production at the recently acquired and renovated New Boston facility, closed the acquisition of a 30 million gallons per year multi-feedstock plant from Soy Energy, began construction of new barge offloading capabilities at its 60 million gallons per year Seneca biorefinery, and boosted storage capacity at the same location by 1.5 million gallons. Phew!
So how did the numbers stack up?
Average Selling Price (per gallon)
Adjusted EBITDA Without BTC
Source: REG 2Q13 presentation
You'll notice one negative number in the chart above, which is adjusted EBITDA without the blenders tax credit, or BTC. If you have been following the company or the industry then you are aware that the BTC for 2012 was retroactively instated in early 2013. GAAP requires the credit to be realized in the quarter the law was passed (the first quarter) -- REG just provided adjusted totals in its release. Either way, I wouldn't be overly concerned with the change since growing production will help offset falling BTC revenue in the years ahead.
Another bright spot for the quarter was cash flow. REG ended June with $95.5 million in cash -- almost double the $49 million at the end of March. The boost can be chalked up to more efficient operations and distribution over the last three months; improvements which are still working their way through the system.
The bearish take
No investment is perfect, so let's evaluate some negatives surrounding the second-quarter earnings and outlook. The first thing to note is that there is always uncertainty when it comes to the current Renewable Fuel Standard, or RFS2. While biodiesel subsidies are much, much further from the guillotine than those for corn ethanol, production mandates always seem to be handed down just before the clock strikes midnight. Investors can also expect the BTC to once again get caught in the crosshairs of this year's budget battle.
A few other things should concern investors about REG. First, take a look at the growth in inventory and accounts receivable:
Source: REG 2Q13 press release and SEC filings
Some of that is expected for a company with growing revenue and production, but I would keep an eye on the numbers. Just remember that it will be difficult to compare numbers in subsequent quarters given the seasonality of the biodiesel industry. The company's outlook may also be in trouble. Guidance for the second half of the year calls for between 110 million and 135 million gallons sold and $59 million-$84 million in adjusted EBITDA. That may be a big range, but it is also contingent on RINs holding their currently lofty value.
Source: REG 2Q13 presentation
Biodiesel RINs are in high demand right now since they can be used to fill first-generation blending requirements. With corn ethanol RINs at such high levels and refiners wary of the 10% blend wall (90% gasoline/10% ethanol mixtures), biodiesel RINs could very well stay at current highs or even trek higher. The sustainability of the trend would be a concern for me, though.
Foolish bottom line
Even with legitimate concerns I think future growth opportunities remain intact for REG. Once the company completes construction at new state-of-the-art facilities its annual nameplate production capacity will jump from 257 million gallons per year to 395 million gallons per year -- a 52% increase! REG is also trading roughly on par with its shareholders' equity. Looking at the undeniable growth ahead suggests that investors have room to profit even at near today's prices.
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The article REG Earnings Demonstrate Leadership in Biofuels originally appeared on Fool.com.
Fool contributor Maxx Chatsko has no position in any stocks mentioned. Check out his personal portfolio, his CAPS page, or follow him on Twitter @BlacknGoldFool to keep up with his writing on energy, bioprocessing, and biotechnology.The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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