Good times for now, headwinds on the horizon: Q3 earnings time for the advanced bioeconomy, energy

Novozymes, Shell, BP, Clariant, Green Plains and Pacific Ethanol report — what’s the trend, what’s new, what’s troubling? The Digest looks into the results.

In the first half of November we will be hearing from a slew of companies regarding Q3 earnings — but earnings season is well underway already, and we have good indicators from the likes of Novozymes, Clariant, BP, Pacific Ethanol and Green Plains about the overall environment for energy, speciality chemicals, industrial biotechnology — and specifically, biofuels.

Let’s take a look.

From the land of speciality chemicals – Clariant reports good times now, but outlook challenging in some regions.

This week, Clariant announced third quarter 2014 sales of CHF 1.507 billion compared to CHF 1.443 billion in the third quarter of 2013. This corresponds to sales growth of 8 % in local currencies, driven by 7 % higher volumes and average sales price increases of 1 %. Growth in Swiss francs was 4 % as currency developments still had an adverse, albeit weaker, negative impact. Important trading currencies – predominantly the US dollar – strengthened against the Swiss franc during the reporting period, leading to a less pronounced effect of –4 percentage points on sales compared to – 7 percentage points in the first half-year of 2014.

• EBITDA: Before exceptional items, up 8 % in local currencies, margin at 14.0 % compared to 14.1 %
• Outlook: For full-year 2014, Clariant expects around mid-single-digit sales growth in local currencies and an EBITDA margin before exceptional items above full-year 2013. The company notes that “the optimism in the market concerning the further path of the global economy has deteriorated, mainly with regard to the outlook for Europe.
• US a bright spot. The general economic environment in the emerging markets is “expected to remain mixed” — but “moderate growth should continue in the United States”. In contrast, Europe is “expected to remain flat at best”.

Industrial biotechnology — robust growth at Novozymes.

Also this week, Novozymes announced 9% organic sales growth for Q3 and 8 percent growth for the nine months of 2014 to date. The company is saying that growth is “broadly based” but highlighted that sales in Household Care and in the bioenergy business have been growing in line with expectations.

Outlook: In comments on the earnings call as reported by Seeking Alpha, CFO Andy Fordyce said that China “provides some headwinds” with “more competition” but described bioenergy as the “brightest star this year” with “23% organic sales growth” this year to date. Fordyne noted that the “U.S. ethanol market product is up around 10% this year so far” and alluded to “new innovation” in the “bioenergy pipeline” within the next six months.

SVP Thomas Videbæk highlighted the opening of celluloisc next-gen plants by Abengoa, GranmBio and POET-DSM as expected, but still great to see” and noted that upgrades at the Beta Renewables’ Crescentino “have started to contribute to higher production volumes” and that “Capacity utilization is increasing” while hailing Italy’s 1% advanced biofuels mandate. But Videbæk said that Crescentino is not yet running at full capacity though Novozymes remains “confident we’ll get there.”

He added that it has been “a significant ramp of time for Crescentino” and stated that “we certainly hope that the other ones will be able to do it faster.”

In looking at the company’s planned target of 15 biomass conversion plants by 2015, Videbæk described the target as “a very challenging and ambitious target” but did not back down from the target, saying that “There’s no indication that this is no longer possible,” while conceding that “It’s not going to be a walk in the park.”

On the 15 by 17 target, CEO Peder Holk Nielsen added that “it’s going to depend a lot on how many new investments goes into these plants in 2015.” On E15, CFO Benny Loft commented that on E15, “we certainly must commit or say that it’s really difficult to see where the E15 – when it will come.”

On the impact of US elections, CEO Nielsen commented that “there’s some risk around the U.S. midterm election and that will create a different mood around bioenergy in the U.S.” He also said that the company is watching for “a potential slowdown in Europe and the emerging markets.”

Ethanol — big earnings growth at Green Plains

In Nebraska, Green Plains announced its financial results for the third quarter of 2014. Net income for the quarter was $41.7 million, or $1.03 per diluted share, compared to net income of $9.4 million, or $0.28 per diluted share, for the same period in 2013. Revenues were $833.9 million for the third quarter of 2014 compared to $758.0 million for the same period in 2013.

During the third quarter, Green Plains had record production of 246.9 million gallons of ethanol, or approximately 96% of its daily average production capacity. Non-ethanol operating income from the corn oil production, agribusiness, and marketing and distribution segments was $22.2 million in the third quarter of 2014 compared to $14.2 million for the same period in 2013. Non-ethanol operating income for the nine-month period ended September 30, 2014 was $79.9 million compared to $52.7 million for the same period in 2013.

Revenues were $2.4 billion for the nine-month period ended September 30, 2014 compared to $2.3 billion for the same period in 2013. Net income for the nine-month period ended September 30, 2014 was $117.3 million, or $2.90 per diluted share, compared to net income of $17.9 million, or $0.56 per diluted share, for the same period in 2013.

For the nine-month period ending September 30, 2014, EBITDA was $260.0 million compared to $92.7 million for the same period in 2013.
The earnings took Wall Street by surprise, with Zacks Investment Research reporting a consensus Street estimate of 89 cents — so a 12% beat. However, Zacks reported a consensus Street expectation of $987.2M, with the company dragging in $833.9M — so a 15% miss there. Obviously a huge swing in margin — 5% margin delivered compared to Street expectations of 3.7%.

CEO Todd Becker commented, “U.S. ethanol production margins continue to reflect strong demand, both domestically and globally. As a result of this environment, we are reaffirming our mid-year guidance of stronger earnings per share performance in the second half of 2014,” added Becker.

Green Plains had $414.3 million in total cash and equivalents and $167.7 million available under committed loan agreements at subsidiaries (subject to borrowing base restrictions and other specified lending conditions) at September 30, 2014.

Confirming the ethanol trend – Pacific Ethanol reports record gallons, big growth in revenues, earnings.

In California, Pacific Ethanol reported net sales of $275.6M, an increase of 18%, compared to $233.9M for Q3 2013. The company’s increase in net sales is attributable to its record total gallons sold resulting from increases in both production and third party gallons.

Gross profit was $18.0M, compared to $3.5M for Q3 2013. The improvement in gross profit was driven by significantly improved production margins and corn oil production. Operating income was $13.6M, compared to $1.0M for Q3 2013. Net income available to common stockholders was $3.7M, or $0.15 per diluted share, compared to a net loss of $0.40 loss per share for Q3 2013.

CEO Neil Kohler noted: “We delivered solid financial results for the third quarter of 2014, supported by efficient operations and continued strong ethanol market fundamentals.” CFO Bryon McGregor, added: “Since December 31, 2013, we increased our cash balances by over $51.1 million. As a result, our working capital increased to approximately $93.3 million from $51.2 million at the end of 2013.”

In the diversified energy business: BP says $80 OK

In London, BP CEO Bob Dudley said at the Oil & Money conference, “We’ve positioned the company to weather any shocks. We make investment decisions based on an $80 price.” In comments to shareholders, CFO Brian Gilvary added that $80-$85 oil offered “opportunities” more than “threats”, and said that “we’re actually in a very good position to certainly withstand a sustained period of low oil prices.

In announcing Q3 earnings with operating profits at $9.4 billion, Gilvary said that “In the downstream, we continue to deliver strong operational performance across our refining system with Whiting now fully operational.

“In the third quarter, our petrochemicals business completed a strategic review. This resulted in a decision to halt operations at some of our older and less advantaged facilities while continuing to retrofit several facilities with new technologies. We expect these changes to lower fixed and variable costs as well as to improve returns, and as previously announced, Tufan Erginbilgic became the Chief Executive of the downstream on the first of October. Tufan brings a deep knowledge of BP’s downstream operations having held a variety of roles across the segment. Tufan is a great addition to the executive team.”

On the price environment for oil, Gilvary said that “A number of market fundamentals are driving this trend. Global supply has increased from the return of shut-in production in a number of locations as well as continued production growth in the United States where inventory storage also remains relatively high. At the same time, there is weaker demand growth globally. In China, demand growth has weakened to roughly half the rate of 12 months ago.

Over at Shell – rising profits, Holliday becomes chairman

In London, Shell announced Q3 earnings of $5.27 billion, up from $4.25B for Q3 2013. The downstream division (including refining, trading and marketing) recorded a $1.79B profit for Q3, strongly up from $892M for Q3 2013.

Shell CEo Shell chief executive Ben van Beurden commented on energy prices, saying that they underscore “the importance of our drive to get a tighter grip on performance management, keep a tight hold on costs and spending, and improve the balance between growth and returns.”

But perhaps the biggest bomb”shell”, if you will, was the appointment of former DuPont CEO Chad Holliday as Chairman, succeeding former Nokia chairman and CEO Jorma Ollila. Holliday has served on the Shell board since late 2010, after relinquishing the reins at DuPont. Holliday recently handed over the chairmanship of Bank of America to the bank’s CEO Brian Moynihan, but remains on the board.

Holliday is co-chair of the UN’s Sustainable Energy for All High-Level Group, and spoke at the Digest’s ABLC conference in 2013 on the topic. He is also the co-author of 2002’s Walking the Talk, which addresses corporate sustainability.