Renewable Energy Group Beat Expectations... As Expected

Executive summary:

• Renewable Energy Group beat EPS by $0.05 to $0.12 depending on the source.


• Renewable Energy Group expects positive adjusted EBITDA in Q1 2014, and at least break-even adjusted EBITDA in Q2 2014.


• Syntroleum is selling at a discount to the hypothetical buyout price and may offer a derivative play on Renewable Energy Group.

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Earlier this week I wrote an article detailing what to expect when Renewable Energy Group (REGI) reported earnings. REGI pretty much met or exceeded all my expectations.

Point #1:

If REGI was able to produce at 90% capacity in Q4, it would have production of 57 million gallons, 100% would be 64 million gallons. In Q3 REGI also sold 21.2 million more gallons than it produced, so REGI appears to be well prepared to surpass the high end of the "outlook."

REGI had an outlook of 65-75 million gallons sold, and sold 73 million gallons. While that didn't exceed the top 75 million gallons, the important number is that they produced 64.9 million gallons which slightly exceeds 100% capacity (257x0.25=$64.25). REGI was literally firing on all cylinders for Q4 2013, allowing them to maximize the benefit of the $1.00 blenders' tax credit before it expired.

Point #2:

This quarter analysts have REGI earning $0.75. That appears well within reach, but once again, because of the multiple regulatory factors that can impact earnings I would focus more on the adjusted EBTIDA than EPS. REGI has an outlook of adjusted EBTIDA of $25-$40 million, a number that looks well within reach.

REGI reported EPS of $0.80 beating estimates by $0.05. Some sources are saying REGI beat by $0.12. Adjusted EBITDA of $36.1 million was slightly below the upper end of the outlook's range, however, inventories increased by $26 million. That bodes well for Q1 2014. Cash also increased by $17 million.

Other important statistics and comments were:

1) REGI had $153 million in cash to end the year, making it well prepared to weather the expected low margins of Q1 and Q2 of 2014.

2) REGI has a book value per share of $17.97, and a cash per share of $4.63, cash and receivables per share of $7.14, and cash, receivables and inventory per share of $9.74.

3) REGI's stock price sells at a 34% discount to its book value per share.

4) Even with break even to negative margins for soy bean oil based biodiesel, REGI expects to have positive adjusted EBITDA in Q1 2014, and at least break even adjusted EBITDA in Q2 2014.

5) Uncertainty regarding the Blenders' Tax Credit, Senate's Producer Tax Credit and EPA's RFS2 RVOs may take all year or longer to resolve.

The other interesting aspect about the REGI conference call is that it has driven the PPS higher to $12.60 in after hours. REGI is in the process of buying Syntroleum (SYNM) for 0.3809 shares of REGI for each share of SYNM. SYNM is currently trading at $4.15 in after-hours. At the current price of $12.60 and conversion ratio$12.91 of 0.3809, the hypothetical price of SYNM should be $4.80. SYNM is currently trading at a 16% discount to that hypothetical price. SYNM's stock price is limited to $4.91 due to the buyout restriction, which will be reached if REGI makes it to $12.91.

REGI is 2% away from maxing out the SYNM stock price, yet SYNM is trading 18% below its potential maximum price. People interested in buying REGI may want to consider buying SYNM unless they think REGI is going to run more than 18% by the time the SYNM purchase is complete. Buying SYNM is like buying REGI at a 16% discount. With the buyout pending, SYNM is effectively a derivative of REGI. If REGI trades at $12.91 when the buyout is complete, SYNM should be treated to a nice 18% gain, however, if REGI trades above $12.91, SYNM shareholders will not benefit, their maximum gain is 18% or a SYNM share price of $4.91.

If investors think REGI will trade above $15.24 (an 18% premium to the $12.91 price at which SYNM reaches its maximum) at the time of the buyout, investors should buy REGI over SYNM because SYNM's gains are capped at 18% from its current stock price. If however investors think REGI will trade below $15.24 at the time of the buyout, it may be worth considering buying SYNM and holding them until they are converted to REGI shares.

If REGI remains where it currently trades until the buyout is complete, SYNM should gain 16%, and then shareholders of SYNM would be given REGI shares through the conversion. If REGI makes it to or above $12.91 SYNM shareholders should make 18% before their shares are converted to REGI shares. Only if REGI makes it above $15.24 at the time the buyout is completed would the gain of buying REGI over SYNM be greater.

Fly in the ointment:

SYNM shareholders still have to vote of the REGI buyout. If they vote against the REGI offer it could be a disaster for SYNM, but it is a possibility. SYNM would have to pay REGI $5 million to exit the deal, possibly leaving it without enough cash to fund a plant restart. In that situation SYNM would need to find other funding sources or risk losing control of the Dynamic Fuels Plant to Tyson Foods (TSN) or worse. Right now 25% of SYNM shares are held by institutions, and 15% are held by insiders for a total of 40%.

I would expect institutions and insiders to be solid votes for the buyout. In fact I wouldn't be surprised to see institutions and insiders try to gobble up another 10% just to ensure the buyout does go through. It is a safe way to increase the probability of turning the 16% discount into a nice profit. Even if institutions and insiders don't increase their holdings, the closer REGI gets to $12.91, the higher the probability the other 60% of shareholders will vote for the buyout. A bird in the hand is worth two in the bush theory.

If REGI is trading at or above $12.91 when the buyout is completed, SYNM shareholders should make a nice 18% gain. If however the shareholders vote against the buyout, and there is no other buyer available, it could be a disaster for the SYNM share price. Those are the risks and those are the returns to consider.

Disclaimer: This article is not an investment recommendation or solicitation. Any analysis presented in this article is illustrative in nature, is based on an incomplete set of information and has limitations to its accuracy, and is not meant to be relied upon for investment decisions. Please consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author's best judgment as of the date of publication, and are subject to change without notice. Past performance is no guarantee of future results. For my full disclaimer and disclosure, click here.

Source: Renewable Energy Group Beat Expectations... As Expected

Disclosure: I am long SYNM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)

Additional disclosure: I own calls on REGI

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