Bring Out Your Dead! As renewable equities soar, integrated oilcos sputter

February 6, 2014 |

Bring-Out-Your-DeadWhat’s going on – aren’t biofuels supposed to be dead, and fracking changing everything forever in oil & gas?

Yet, tough times for growth at the public oil companies, while bellwether renewable fuel equities are on the rise.

Why aren’t results tracking the hype?

It’s earnings season — time to look away from the pundits, the fans, and the Las Vegas oddsmakers — and look squarely at who made how much, where, when and why. And time to draw some conclusions and look ahead towards the 2014 calendar year.

Neste Oil

Renewable diesel owner/operator

2013 in review

Overall, a strong year at Neste.

Comparable operating profit totaled EUR 604 million (2012: EUR 355 million), a 70% increase in comparable operating profit, while net cash from operations totaled EUR 839 million (2012: EUR 468 million). The fourth quarter more than held up its end with a Q4 profit of EUR 164 million (Q4/2012: EUR 77 million). Return on capital was 11.8% (2012: 5.0%) and earnings per share were EUR 1.92 (2012: EUR 0.70).

CEO Matti Lievonen commented: “This was the first full year of operations at Renewable Fuels with all plants running at full capacity. The business succeeded in increasing its sales and customer base, particularly in the US, and opened up a new market in Australia. Margins were very strong, both in Europe and North America, during the summer, but declined towards the end of the year. The use of waste- and residue-based feedstock was successfully expanded to 52% of total renewable inputs. Renewable Fuels recorded a full-year comparable operating profit of EUR 273 million compared to a loss of EUR 56 million in 2012.

The 2014 outlook

In the global economy, volatility is expected to continue. Diesel is projected to be the strongest part of the barrel, and gasoline margins are expected to improve seasonally during the spring and summer. While demand for premium-quality base oils is continuing to grow, base oil margins are likely to remain under pressure due to overcapacity.

Vegetable oil price differentials are expected to vary, depending on crop outlooks, weather phenomena, and variations in demand for different feedstocks, but no fundamental changes in the drivers influencing feedstock price differentials are expected. Price differentials between vegetable oils are likely to widen from the current narrow levels during the year 2014 in both Europe and North America.

Uncertainties regarding political decision-making in the US are likely to be reflected in the renewable fuel markets. Examples of pending decisions include the volume targets for biomass-based diesel and renewal of the Blender’s Tax Credit, which both impact the US market. The reintroduction of a US Blender’s Tax Credit for biofuels would impact the result positively. Weakening of the euro against the US dollar would also have a positive impact on the result. Overall, the company is forecasting a full-year comparable operating profit of EUR 500 million in 2014.

Novozymes

Integrated supplier for renewable fuels fermentation technologies.

2013 in review

Also a good year at Novozymes. All financial targets were met or exceeded for 2013 following a good fourth quarter. Organic sales growth was 7% (5% DKK, 8% LCY), EBIT grew by 6% and net profit by 9%, and the EBIT margin increased by 0.3 percentage point to 24.7% compared with 2012.

Peder Holk Nielsen, President and CEO of Novozymes, comments: “Today we close the books on an eventful 2013 for Novozymes. We delivered a good finish to the year and ended at the high end of our guided ranges for sales growth and above that for earnings. We also signed a number of landmark agreements within Biomass Conversion and BioAgriculture that will enable Novozymes to change the world together with its customers. The outlook for 2014 is positive. We expect that our diversified growth platform will enable us to deliver good sales and EBIT growth. We also expect that The BioAg Alliance will receive the final green light from regulators soon, so we can hit the ground running on developing novel, game-changing BioAg solutions for farmers worldwide.”

The 2014 outlook

2014 is expected to show a continuation of trends seen in 2013. As a result, the outlook for 2014 is positive with good underlying sales and EBIT growth. The outlook includes the expected financial impact from The BioAg Alliance with Monsanto. The BioAg Alliance does not affect the outlook for organic sales growth, but is expected to have a negative impact on sales growth in LCY and DKK of up to one percentage point. The BioAg Alliance is expected to have a positive impact on the EBIT margin of between a half and a full percentage point. All in all, including The BioAg Alliance, Novozymes expects organic and LCY sales growth of 6-9%, sales growth in DKK of 4-7%, EBIT growth of 6-9% and an EBIT margin of 25-26%.

The longer-term for Novozymes

Novozymes is projecting that it will sell enzymes to at least 15 plants by 2017 with a ramp-up in 2015-16. This will include Beta and non-Beta projects.
Another projection is that Beta Renewables will have 15-25 new facilities contracted in 2015-17 (Novozymes made this forecast in 2012, and has not changed it.) Contracted doesn’t mean that the facilities will be complete , and buying enzymes at that time — but, ultimately, sales from those 15-25 projects are expected to be 1B DKK.

Novozymes is also projecting that “The biofuel market in the U.S. moves toward E15” — but Novozymes spokesman Johan Melchior put those expectations into context earlier this week. “At the time of launching those targets (one year ago), E15 appeared to be the way to increase the ethanol consumption in the US. Today, it is a little more opaque as to what could drive ethanol consumption higher. It could be E85, or it could still be E15.

Generally, growth in Novozymes’ corn ethanol business in the U.S. is not predicated on a growing ethanol production. We have launched a series of new technologies to this industry, which is generating a lot of growth today. We have innovation in the pipeline to secure growth in the future. Of course, underlying ethanol volume growth is preferred, but it is not a requirement for growth.

In the context of the company’s overall financial targets, it is also important to remember that U.S. corn ethanol currently only accounts for 14% of our business. This is of course significant, but it remains a smaller part of Novozymes’ business.

The Ethanol sector: Green Plains Renewable Energy, Pacific Ethanol, Aemetis

Let’s look at the ethanol companies, which have been on a complete tear, with an average share price gain of 54.53% in the past three months.

Pacific Ethanol (PEIX)
11/6/13 closing price $3.82
2/6/13 closing price $6.67
Gain: 74.6%

Pacific Ethanol announced this week it will implement yield-enhancing technology at its Magic Valley, Idaho plant. The company chose ICM Inc.’s Selective Milling Technology as a component in its process to increase corn oil production and boost ethanol yields by increasing available starch for conversion.

Neil Koehler, the company’s president and CEO, stated: “We are committed to increasing our product yields, diversifying our revenue streams and improving profitability. We began commercial corn oil production with an ICM-designed system at our Magic Valley plant in mid-2013. SMT complements these operations by increasing both corn oil and ethanol yields and positions our Magic Valley plant for the potential future production of advanced biofuels that builds upon the SMT platform.”

Last month, the company announced it has retired in full its $14.0 million senior convertible notes.

Green Plains Renewable Energy (GPRE)
Closing price 11/6/13: $15.77
Closing price 2/6/14: $23.50
Gain: 49.0%

In Nebraska, Green Plains Renewable Energy announced 4Q net income of $25.5 million compared to net income of $6.7 million for the same period in 2012. Revenues were $712.9 million for Q4 2013 compared to $883.7 million for Q4 2012.

Net income for the full year was $43.4 million, or $1.26 per diluted share, compared to $11.8 million, or $0.39 per diluted share for the same period in 2012. Revenues were $3.0 billion for the full year of 2013 compared to $3.5 billion for the same period in 2012.

“Green Plains generated operating income of $51 million in the fourth quarter and a company record of $108 million for the full year of 2013,” stated Todd Becker, President and Chief Executive Officer. “We have invested in our assets and employees which, we believe, will continue to drive our financial results in the future.” During the fourth quarter, Green Plains’ ethanol production segment produced approximately 209.6 million gallons of ethanol, or approximately 100 percent of its daily average production capacity.

Aemetis (AMTX)
Closing price 11/7/13: $0.20
Closing price 2/6/14: $0.28
Gain: 40.0%

Aemetis announced this week that its 50 million gallon per year capacity biodiesel and refined glycerin production facility in Kakinada, India has been upgraded to produce high-quality distilled biodiesel. The Aemetis plant was built in 2008 using advanced technology to produce biodiesel and refined glycerin using large volumes of lower-cost, non-food by-products from the edible oil industry as feedstock to supply the biofuel, pharmaceutical, and industrial markets.

The Aemetis plant is the only distilled biodiesel producer in India and is one of the only plants in Asia capable of producing large supplies of biodiesel that meet the rigorous European Union (ISCC) standards. During 2013, approximately $20 million of biodiesel was produced by the Aemetis plant in India and delivered to customers in Europe.

What’s driving the results?

These are good years, with strong outlooks for two businesses very much at different ends of the biofuels spectrum — one an enzyme supplier for fermentation technologies associated primarily with ethanol, the other an owner/operator of thermocatalytic refining capacity associated primarily with drop-in renewable diesel. Both have significant operations outside of renewable fuels, but are aggressive in terms of their ambitions in this sector, and realizing substantial results herein.

Reinforcing that there’s very good money to be made in renewable fuels — which may trouble some who fondly remember the days when it was more about a movement than an industry, and small biodiesel co-ops and ethanol co-ops were the order of the day.

But investment chases dollars — and stability — capital being a coward as well as greedy. Growth flows from growth. It demonstrates that the sector is not for the faint of heart — neither Novozymes nor Neste has had a series of free passes handed to them in building up their respective businesses (at one point, one crazy environmental group named Neste the worst company on earth, owing to their use of palm oil) — but the sector is definitely capable of generating the kinds of cash flows that even a hard-hearted, carbon-skeptic Wall Street financier would take an interest in.

Over at the integrated oil companies

Bad fourth quarter and a so-so year at ExxonMobil, Shell, Chevron and BP.

Shell reported a 71% drop in Q4 profits. Exploration costs, production drops and a weak refining & marketing environment were all to blame. Shell’s been backing out of projects — its ethane cracker in Louisiana, and it’s dropping out at Eagle Ford after acquiring 100,000 acres in 2010. Production dropped 4.7% compared to Q4 2012.

Chevron reported a production drop of 3.5% with revenue down 3.6% and earnings down 18,3 percent compared to 2012. Like Shell, they have dumped their oil shale project.

ExxonMobil. Earnings dropped 24% YoY, and costs rose 7%. Q4 was a little better, down 13% over Q4 2012. Production dropped 1.8% compared to Q4 2012. Both exploration & production and the refining & marketing businesses were down — profits dropped by half in the downstream.

BP. Profits are down 28% compared to Q4 2012, and 23.4% for the full year compared to 2012

The bottom line

For investors

Short-term. The Biofuels Digest Index, up 1.2% in the past year. Ethanol equities up 54%. A basket of Chevron, BP, Shell and ExxonMobil, down 1.9% in the same period. Neither looks all that great given the big run-up in the S&P 500, but certainly there’s a delta between the two that’s worth some thinking. Especially given that the BDI was somewhat dragged down by the weak performance of BP and Shell, two components of the Index.

Mid-term. Here’s the bad news on fracking. Polish reserve estimates were cut by 85% after drilling began, and operations in Romania were challenging given environmental opposition. On renewables: we recently projected 6B+ gallon in new advanced biofuels projects scheduled to be online by 2019. That’s just over 400,000 barrels per day — just enough to provide some pause for thought for the mid-term investor.

Long-term. If you are thinking long-ish term in the energy space, the production declines, fracking challenges, and the cancellations with respect to oil shale (kerogen oil) tend to confirm that the world is looking at $100+ production costs in terms of the marginal fields that will be needed to keep up with the IEA’s forecast for sharp increases in energy demand through 2035. Clearly, the space is ripe for another technology breakthrough either in fossil oil or renewable yields.

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