by Tom Konrad, Ph.D., CFA

Earnings Season Continues

Below are three more updates on second quarter earnings which I’ve been sharing with my Patreon supporters.  If you’d like to support my writing and see those thoughts in a more timely manner, consider becoming a patron. becoming a patron.

For everyone else, I’m reprinting those thoughts below.

Disclosure: Long NFYEF, CVA, GPP, GPRE.

DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results.  This article contains the current opinions of the author and such opinions are subject to change without notice.  This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

The post Earnings Roundup: Covanta, NFI Group, Green Plains Partners appeared first on Alternative Energy Stocks.

by Tom Konrad, Ph.D., CFA

Last week, two of the stocks in my Ten Clean Energy Stocks model portfolio cut their dividends.  Covanta Holding Corp (CVA) dropped its quarterly payout from $0.25 to $0.08 (a 68% cut) while Green Plains Partners (GPP) slashed its quarterly distribution from $0.475 to $0.12, a drop of 74.75%.

Before reducing their dividends, both companies had payout ratios near 100%, meaning that substantially all of their free cash flow was going to pay dividends.  In general, companies are very reluctant to cut their dividends because it is a signal that their management thinks they cannot grow without retaining more cash, and it typically sends the stock price tumbling.

I initially included both in the model portfolio because I believed that there were unlikely to be any near term factors that would force either to cut its dividend.  For Green Plains, I felt that a possible recovery of the ethanol market would lead to substantial capital gains, and that the then 14.3% dividend yield was sufficient compensation for the risk if the ethanol market remained in its then miserable state.  For Covanta, I saw a company with solid growth plans which would likely allow it to increase its cash flow in 2 to 3 years, after which it could start paying down its substantial debt load without having to cut its dividend.

The Coronavirus pandemic changed this calculation: all companies are experiencing business disruption, and dividend cuts for both became priced in when their stock prices fell more than 50%.  Investors’ no longer were concerned that these companies might not be able to maintain their dividends: they knew dividend cuts were coming as a near certainty.

Note: My supporters on Patreon got an early look at this article.  Want to support my work and get previews of my writing?  Join them here.

Differences

While the parallels are obvious, a deeper dive reveals significant contrasts.  Ethanol is a direct competitor for gasoline, so the large drop changed what had already been some of the toughest ethanol market conditions in years into one where even the most efficient producers lose money on every gallon of ethanol they sell.  With ethanol producers shutting down refineries, GPP’s transportation and storage facilities are also seeing less business.

Covanta

In contrast, energy from waste firm Covanta’s revenues are much more stable.  Approximately three quarters of Covanta’s revenue comes from tip fees- the money the company is paid by haulers to accept trash.  Of the remaining, most is revenue from electricity sales, plus small slice from the sale of metals recovered from the ash left after incineration.

The majority of Covanta’s trash is residential.  At least in my New York town, the the stay at home order has led to higher residential trash volumes being taken to the transfer station.  Apparently, now that people are spending more time at home, they are taking the opportunity to declutter.  This trend may also be a boon to another recent stock pick, Ebay (EBAY).  If this local increase in trash volume is indicative of the general trend across the Northeast (where the majority of Covanta’s plants are located), the tipping fee portion of its revenues are likely safe.  The company’s medical waste disposal business even offers some potential for upside out of the crisis

While the quarter of Covanta’s revenue which comes from energy and recycling is likely to fall in the short term, the majority of its revenue seems safe.  If the government decides to do an infrastructure program to stimulate the economy as the crisis abates, that should lead to a recovery of the prices Covanta is able to get for its recycled metals.

Green Plains Partners

The Green Plains Partners also can expect its revenues to remain relatively stable despite the miserable state of the ethanol industry.  This is because GPP enjoys take-or-pay arrangements with its parent, Green Plains (GPRE).  As long as GPRE remains solvent, Green Plains Partners’ revenue should remain relatively stable.

With ethanol producers operating at negative margins, and rapidly taking ethanol facilities offline, it would not do to take GPRE’s solvency for granted.  However, the company is relatively well capitalized and has also been taking steps to improve its capital resources.

Green Plains, Inc. suspended its own dividend in mid 2019.  In a presentation to investors on March 4th, the company summarized its efforts to improve its balance sheet.  It realized approximately $780 million in proceeds from asset sales between October 2018 and December 2019.  It used these sales to reduce or deconsolidate debt by nearly $1 billion, and had $270 million in cash on hand.

Other than Green Plains Partners’ revolving credit facility, Green Plains, Inc, does not have significant debt maturing before 2022.  Green Plains Partners needs to replace its revolving credit facility before it matures on July 1st.  Under normal circumstances, I would not be concerned about the prospects of replacing the facility, but this year is not what anyone would consider normal circumstances.

The April 16th press release which announced the dividend cut also quoted Todd Becker, president and chief executive officer of Green Plains Partners: “We believe this decision by our board of directors will strengthen our balance sheet for the benefit of all stakeholders and create long term value for our unit holders.  We are currently working with our existing lender group to extend our credit line which will likely include a change to overall commitment levels and pricing, as well as require principal amortization as part of the transaction. Our goal is to pay off the debt within the next 18 months through this distribution reduction and other actions.”

I take this quote to mean that GPP has made significant progress in its negotiations with lenders, and that the dividend cut is part of what was needed to get the lenders to agree to extend credit.

Given all these factors, it is no surprise that GPP cut its dividend.  However, both GPP and GPRE seem to be doing what it takes to make it through this crisis.  Long term, GPP is likely to come out of this as a stronger company with less debt.

Conclusion

Given the hard times the ethanol industry is experiencing – due both to low price of gasoline (with which it competes) and political favors to oil refiners from the Trump administration, it’s no wonder than Green Plains Partners is trading at about a third of its already-depressed price from the start of the year.  I don’t expect the company to recover its losses, but I expect to see significant stock price gains in the near term if the company announces new financing to replace the expiring revolving credit facility.

In contrast, I am at a loss to explain the full extent of Covanta’s recent decline.  When a stock declines and I can’t explain it, my usual reaction is to buy.  Which is what I am doing.

Disclosure: Long CVA, GPP, GPRE, EBAY.

DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results.  This article contains the current opinions of the author and such opinions are subject to change without notice.  This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

The post Covanta and Green Plains Partners Don’t Let A Crisis Go To Waste appeared first on Alternative Energy Stocks.

by Jim Lane

If you’ve not heard, NuGenTec is looking for Distillers to help supply Ethanol for Hand Sanitizers in California! We have two automated bottling lines waiting for ethanol to produce 8oz and 16oz gel type hand sanitizers, they write. You can learn more here.

And as we reported this morning, Aemetis (AMTX) is one of those companies jumping into the market, even as transport fuel demand falls off, driving fuel ethanol prices into an all-time low range of around $0.70 per gallon.

The shortage is real

If you’ve been trying to buy hand-sanitizer, it’s been hard to find. Here in Digestville, we’ve been making our own from 25 percent Aloe Vera and 75 percent rubbing alcohol. Most authorities have emphasized a 2:1 alcohol to Aloe Vera ratio, but Aloe Vera has also been hard to find near Digest HQ. On Friday, a shipment arrived but it was the industrial bags that go in large dispensers at offices and hospitals, not the individual spray bottle variety.

The catalyst

The catalyst? In response to the Coronavirus Disease 2019 (COVID-19) pandemic, the Alcohol and Tobacco Tax and Trade Bureau (TTB) created exemptions allowing certain alcohol fuel permit holders to sell ethanol (alcohol) for use in the production of hand sanitizers.

Consequently. Aemetis, Inc. said its 65 million gallon per year ethanol plant near Modesto, California has begun shipments of 200 proof alcohol for use in the production of hand sanitizer, which is in a significant shortage created by the worldwide spread of Coronavirus (COVID-19).

“Can’t hand sanitizer save the industry now?”

As an Argus media reporter asked at an emergency RFA online press conference on the coronavirus crisis, “why can’t the whole industry pivot to industrial ethanol production? Why can’t hand sanitizer save the industry now?”

The response from Randy Doyal, CEO, Al-Corn Clean Fuel, based in Minnesota was that there would be less vodka but more hand sanitizer coming in the next week to 10 days.

The good news

As Raymond James’ Pavel Molchanov observed this week, “Just as automakers converted their plants to supply tanks and fighter jets during World War II, and those same companies are now looking at supplying ventilators, many other enterprises amid the COVID-19 crisis are looking for creative ways to address the public health emergency. Here is one that, we admit, we would not ordinarily think about: producing hand sanitizer from corn ethanol.

“Aemetis, an early entrant into this market, points to prospective pricing of $70+ per gallon (yes, really). Amid oil prices at nearly 20-year lows, well below $30/Bbl, it goes without saying that ethanol prices are depressed: currently around $1.00/gallon. Selling into the hand sanitizer market can offer pricing that is 70x higher. Yes, you read that right. To be sure, the economics vary on a site-by-site basis, based on (among other things) proximity to hand sanitizer production facilities. Aemetis (AMTX), which produces ethanol in California, has the advantage of being located on the West Coast, and last week it became one of the first ethanol players to take advantage of the Treasury’s authorization. From our conversation with Aemetis, here is the economic proposition, in general terms… Retail stores are selling hand sanitizer at around $1.50/ oz. Of that, $0.50 goes to the retailer and distribution, $0.20 for packaging, and $0.20 for the compounder. That leaves $0.60 for the ethanol feedstock. With 128 ounces in a gallon, the implied selling price is upwards of $70/gallon.”

Raymond James rates this as as “a textbook ESG business opportunity” for which the economics look very lucrative. “At a time when ethanol prices are ultra-depressed due to the oil price meltdown, this is a fascinating, below-the-radar opportunity for ethanol producers, including Green Plains,” Molchanov writes.

Some market sizing

Hmm. Let’s quickly demolish the thought that this is anything but a small-scale opportunity.

The recommended usage, by the CDC, is 1.5 mL per application. Assuming, say, two usages per day by everyone in the United States, that would add up to around 45 million gallons of sanitizer over the next 6 months. Now, sanitizer is around 1/3 alcohol — so consider the maximum market size to be around 30 million gallons.

That’s US ethanol production for about 17 hours.

Now, we’ve assumed a perfect market. Imperfections abound. Two could make the market bigger, and that’s over application or simply stocking up on extra hand sanitizer. But many more factors could make the market smaller. First, not every person in America may hand-sanitize twice a day – they might wash their hands, do nothing, or the expected usage may not apply to children or people sheltering in place. Also, there are the existing suppliers of industrial alcohols. And, there is the problem of offtake contracting, manufacturing, shipping, retail display contracting and so forth.

And, the more ethanol producers that qualify for this market, the lower the price will go. Not to mention that the entire market is predicated on a waiver granted by the Alcohol and Tobacco Tax and Trade Bureau. And we know how reliable the US government has been on waivers that are friendly to the US ethanol industry.

To pivot entirely to producing hand sanitizer, every adult in the United States would have to sanitize more than 625 times per day.

Doesn’t mean it’s not a clever, niche opportunity. A 60-million-gallon ethanol plant like Aemetis’ Keyes facility could switch over say 33 percent of its production over the next 6 months or so, and the potential upside is very lucrative. So long as everyone doesn’t jump into the market and crash the price. Which presumably they will.

Donation in the offing

Some producers are simply donating ethanol to support the community.

Today, we hear that two Iowa Renewable Fuels Association members sent the first donated shipment of Iowa ethanol and glycerin to the state of Iowa to be used by Iowa Prison Industries for the production of hand sanitizer during the national shortage. The donation is made by Iowa ethanol producer Absolute Energy and Iowa biodiesel producer Western Iowa Energy. The Iowa Renewable Fuels Association (IRFA) worked with Iowa Prison Industries to secure the shipment of these products and other necessary ingredients. Templeton Rye is also providing distilled water for the project. The finished product will be distributed free of charge by the state of Iowa for priority use.

Reaction from the stakeholders

“Aemetis is moving quickly to help address the significant demand for hand sanitizer products in light of the COVID-19 pandemic during this time of national emergency,” said Andy Foster, President of Aemetis Advanced Fuels Keyes, Inc. “As the WHO and CDC strongly recommend the use of hand sanitizer products to help prevent the spread of Coronavirus, Aemetis is utilizing our ethanol production capability to address the current shortage of hand sanitizer by increasing the supply of high-proof alcohol used in the manufacturing of sanitizer products,” said Foster.

Jim Lane is editor and publisher  of Biofuels Digest where this article was originally published. Biofuels Digest is the most widely read  Biofuels daily read by 14,000+ organizations. Subscribe here.

The post Hand Sanitizer: Salvation for Ethanol Producers? appeared first on Alternative Energy Stocks.

by Tom Konrad, Ph.D., CFA

This monthly update for my Ten Clean Energy Stocks model portfolio is in two parts.  I published my thoughts on the current market turmoil on March 2nd.  You can find them here.  I’m not even going to get into the Fed slashing interest rates like they were a furniture warehouse going out of business on March 3rd except to say that apparently they are more afraid of the effects of covid-19 on the economy than they are of appearing to panic.

You can see overall performance for January and February in the following chart.  Not that it means much any more after just a couple days of rebound.

Hedges

As planned in a down market, the two positions intended to hedge the portfolio have been performing well.  The Put on SPDR S&P Oil & Gas Exploration & Production ETF (XOP) has risen in value along with the precipitous decline in XOP.  Gains on this and Pattern managed to offset half of the declines of the other positions in the portfolio.

Pattern Energy Group (PEGI) shot up above $28 when hedge fund Water Island Capital called on shareholders to vote against the planned merger arguing that Pattern would be worth more as a stand-alone company.  I delved into the details here, and told readers I thought it was a safer bet to just sell for $28 a share.  The stock market implosion since has undermined Water Island’s case that investors should put their trust in the market rather than in the cash in hand offered by the Canada Pension Plan Investment Board.  After selling on the way up, I bought back in on February 28th when Pattern briefly fell below $27, which once again made PEGI look like a good place to park some cash.

The current rebound in the market is an opportunity to reduce our market exposure.  As I have been saying for the last year, I think it’s a good idea to take some profits in our winners and build up a large allocation to cash.  If I am right about covid-19 being the catalyst which starts a new bear market, there will be nothing more valuable than cash to buy up newly cheap stocks at bargain prices after the bear runs its course.

Individual Stocks and Covid-19

I have not seen a lot of surprises in fourth quarter earnings so far, and the economic disruptions of the pandemic are likely to be much more significant in the short term. So rather than delve into earnings reports, I will instead take a look at how the individual companies are likely to be affected by the efforts to deal with covid-19.

Waste to Energy operator Covanta Holding (CVA) may see a boost to its revenues from the disposal of medical waste, but will probably continue to see headwinds from low prices for the scrap metal and energy it sells.

French autoparts maker Valeo SA (FR.PA, VLEEF, VLEEY) is seeing disruption of its supply chain in China, and will probably see further disruption as the virus effects the economy in Europe.  The auto industry as a whole will probably have a bad year as people drive less and delay purchases of new vehicles.  With all the bad news, the stock is down almost a third since the start of the year.  I’m buying cautiously, and will buy more if it falls more.

Ethanol MLP Green Plains Partners (GPP) and its parent Green Plains (GPRE) are going to be hurt by the decline in gasoline consumption, which will also reduce the sale of ethanol.  Pushing in the other direction is a court ruling that the EPA has improperly been granting waivers to the biofuel blending requirements of the Renewable Fuel Standard.  The EPA has until March 9th to appeal this ruling.  If the ruling holds or the EPA does not appeal, it will be applied nationwide.

So far, the Trump administration has consistently sided with the oil industry against the farm interests supporting the ethanol industry.  The oil industry and a number of the Republican senators who serve its interests in Washington are asking the EPA to appeal the ruling.  The Trump administration has to weigh the damage to farm states (whose support Trump needs for reelection in November) against the money it receives from the oil industry (which it also depends on for reelection.)  If the Trump EPA sides with Trump’s voters over Trump’s paymasters, it will be good news for these companies.  If it sides with the oil refiners, the decision will be appealed, and ethanol companies will continue to feel the pain until a higher court has a chance to rule or a Democrat sits in the White House and drops the appeal.

Both stocks are so cheap that I’m buying cautiously, but mostly GPP, which has both less downside risk and less potential upside.

Bus and motorcoach manufacturer NFI Group (NFI.TO, NFYEF) may see some supply chain disruptions, and bus ridership is almost certain to decline.  The supply chain disruptions are probably more important, because transit agencies are unlikely to cancel long planned purchases over a temporary drop in ridership.  Motorcoach customers (roughly a quarter of revenues) are more likely to reduce their buying, especially if a decline in ridership impacts their financial health.

Overall, I expect New Flyer’s business to be hurt, but not particularly badly.

MiX Telematics (MIXT) is exposed to disruption through its customers in the oil and gas and transportation industries.  I expect the damage to be temporary, so keep an eye out for buying opportunities.

Brazilian electric and water utility Companhia Energetica de Minas Gerais aka Cemig (CIG) Spanish transmission utility Red Electrica Corporacion, S.A. (REE.MC, RDEIF, RDEIY), and French water, waste, and energy management conglomerate Veolia Environnement S.A. (VIE.PA, VEOEF, VEOEY) have limited exposure to the economic disruption of the pandemic, although they do have the potential to decline in a bear market if stock valuations in general were to decline.

Conclusion

Overall, the stocks in this list with the greatest economic exposure to the disruption caused by the covid-19 pandemic are Valeo, Green Plains Partners, and MiX Telematics.  Green Plains has some potential short term upside if the Trump EPA does not appeal the recent court ruling.

For Valeo and MiX, the disruption is unlikely to damage their business in the long term, so readers should be ready to buy on any declines, but also maintain healthy cash balances for the future buying opportunities which will appear over the next year or two if I am right that the covid-19 pandemic will be the catalyst that starts a new bear market.  If you have not already done so, take some profits in your winners; long time readers will have plenty of Yieldco positions showing large gains.

Disclosure: Long PEGI, CVA, GPP, GPRE, VLEEF, NFYEF, MIXT, CIG, RDEIY, VEOEF, Puts on XOP.

DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results.  This article contains the current opinions of the author and such opinions are subject to change without notice.  This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

The post Ten Clean Energy Stocks for 2020: Navigating the Storm appeared first on Alternative Energy Stocks.

As quickly as the ethanol producer jumped into the cattle business, Green Plains (GPRE:  Nasdaq) has sold off half of its Green Plains Cattle Company to a group of investment funds for $77 million.  Operating at six locations in Colorado, Kansas, Texas and Missouri, the company has the capacity to feed 355,000 head of cattle each year.  The cattle business contributed $271 million to total revenue in the most recently reported quarter ending June 2019, delivering a modest operating profit near $7.3 million.

There has been considerable stress in the feed cattle industry.  The number of cattle in feedlots is down compared to last year, an unusual development in recent years.  New placements fell short of releases by 3% in early September 2019.  As is the case in most industries there is a China trade angle.  The Chinese are keenly interested in U.S. agriculture products, but have been frustrated in moving forward with purchase agreements by the tariff bluster of Donald Trump.  Nonetheless, a Chinese delegation has been set to tour agriculture operations in Montana and Nebraska this month in hopes of striking a deal even as disputes continue over tariffs and intellectual property protection.

The stress that the China trade dust up has place on the U.S. agriculture sector is beginning to wear on the cattle industry.  Everyone is out to protect their profits.  Certain beef producers are looking jealously at the profits earned by the packers even as producers are beginning to suffer losses.

Green Plains may have been looking over this environment when choosing to reduce their position in the cattle business.  Most likely it was more a matter of adjusting risk and shoring up the company’s overall financial position.  In making the announcement Green Plains management was quick to mention the impact of the sale on the company’s balance sheet.  Even with an ample bank account balance, few would turn away an incremental $77 million in cash.  Green Plains had $193.3 million in cash on its balance sheet at the end of June 2019, but long-term debt of $370.9 million puts the company in a negative net debt situation.  Deleveraging must have seemed like a worthwhile goal as management has made a point of using the proceeds of the cattle sale for a pay down in debt.

Reducing the risk on its balance sheet should be a plus for GPRE.  The stock hit a 52-week low of $7.01 in mid-August 2019, but has since staged a strong recovery.  The shares made a strong move back higher until meeting a line of strong volume-related resistance at the $11.00 price level The stock price movement may be mostly in sympathy with the rest of the small-cap sector that experienced a clear-sell off in the four months ending August 2019.  However, the announcement of the cattle-operation sale may have played a part in improving sentiment toward the company.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

This article was first published on the Small Cap Strategist weblog on 9/13/19 as “Green Plains’ Cattle Drive”.

The post Green Plains’ Cattle Drive appeared first on Alternative Energy Stocks.

by Jim Lane

In hand we now have the latest earnings reports from what you might call the 8 Pathfinders – eight publicly traded stocks whose second quarter results offer insights into the health and performance of the advanced bioeconomy as 2019 heads towards its closing crescendos.

Our 8 Pathfinders – In the world of global renewable diesel at scale, Neste (Neste.HE); pure-play enzymes, Novozymes (NVMB); In pharma and synbio, Codexis (CDXS); as a hybrid play in advanced fuels, Aemetis (AMTX); in advanced marine and jet fuels, Gevo (GEVO); for biodiesel and hydrocarbons, Renewable Energy Group (REGI); in advanced began foods, Beyond Meat (BYND), and for a diversified ethanol and nutrition play, Green Plains (GPRE).

At Neste

As CEO Peter Vanacker, noted: “Neste’s solid financial performance continued. We posted a comparable operating profit of EUR 367 million in the second quarter, compared to EUR 277 million in the corresponding period last year. Renewable Products’ quarterly sales and production volumes were the highest ever. The renewable diesel market continued to be favorable, but feedstock prices increased as communicated earlier. Our sales volumes were 745,000 tons, and this new quarterly record was also supported by the excellent operational performance at the refineries. The higher sales volume had a positive impact of EUR 79 million on the comparable operating profit year-on-year. The comparable sales margin averaged at USD 568/ton, which was 12% higher compared to the corresponding period last year, leading to a positive impact of EUR 32 million on the operating profit. During the second quarter 65% of volumes were sold to the European markets and 35% to North America. During the quarter our renewable diesel production facilities operated at a very high average utilization rate of 105%, based on the nominal capacity of 2.9 Mton/a. The share of waste and residues was 77% of the total renewable raw material inputs.”

Outlook: Developments in the global economy have been reflected in the renewable fuel, feedstock and oil markets; and volatility in these markets is anticipated to continue. Vegetable oil price differentials are expected to vary, depending on crop outlooks, weather phenomena, and variations in demand for different feedstocks. Global oil product demand growth is expected to continue at a lower rate than in 2018, while global refining capacity additions are expected to grow driven by large projects in Asia and the Middle East. Based on our current estimates and a hedging rate of approx. 80%, Neste’s effective EUR/USD rate is expected to be within a range 1.14-1.16 in the third quarter of 2019.

At Novozymes

Novozymes “confirmed on all fronts following the adjustments communicated on June 6,” with First-half year-on-year (y/y) organic sales growth of -3%: Household Care -2%, Food & Beverages -2%, Bioenergy -4%, Agriculture & Feed -6%, Technical & Pharma +2%. EBIT margin 30.0%. Net profit up 1 percentage point (y/y).

CEO Peder Holk Nielsen said, ““Our half-year sales performance is not satisfactory, but as expected, following the revised full-year outlook on June 6. Softness in US agriculture and some emerging markets, including the Middle East, has created headwinds. We’re confident sales growth will accelerate in the second half of the year as the Freshness platform, BioAg and Bioenergy all step up, and the Middle East comparison eases.”

At Codexis

As CEO John Nicols noted: “Product revenue increased a very solid 68% over the prior-year period with strong contributions from Merck, Urovant Sciences and four additional global Top 25 pharmaceutical customers. R&D revenue was spread across an increasingly wider base of customers including Nestlé Health Science, four global Top 25 pharmaceutical customers, and two new customers in two new verticals. We also secured a dedicated R&D project team working with another new global customer targeting an entirely different molecular diagnostics application class for Codexis. Additionally, we are delighted with Casdin Capital’s $50 million investment in Codexis, as announced in June. We appreciate their confidence and their recognition of the versatility of our CodeEvolver platform technology.

Q2 revenues were $12.3 million, compared with $13.5 million for the second quarter of 2018. Product revenue was $6.2 million, up 68% from $3.7 million for the second quarter of 2018, with the increase reflecting customer demand for enzymes for both generic and branded products.The net loss for the second quarter of 2019 was $6.5 million, or $0.12 per share, compared with a net loss for the second quarter of 2018 of $3.7 million, or $0.07 per share.

Codexis is affirmed its financial guidance for 2019 for revenues are expected to be $69-$72 million; and product revenues are expected to be $26-$29 million.

At Aemetis

Aemetis’ reported in Q2 $11.1 million of revenue from India operations during the second quarter of 2019, representing a 106% increase from the prior year quarter.  Aemetis said it continues to advance its ultra-low carbon California cellulosic ethanol biorefinery, which is expected, upon completion, to add approximately $80 million of high margin revenues. Utilizing thousands of tons of waste wood from California’s Central Valley, the Aemetis cellulosic ethanol biorefinery is expected to produce the state’s lowest carbon ethanol fuel and reduce greenhouse gas emissions in the process.

At Gevo

Gevo reported $5.1M in quarterly revenue, a $4.7M EBITDA loss and ended the quarter with cash and cash equivalents of $29.2 million. The company entered into an agreement with Air TOTAL for Gevo to supply its sustainable aviation fuel to Air TOTAL for use and distribution in France and other parts of Europe.  With the finalization of this new supply contract, Gevo will initially supply Air TOTAL SAF from the South Hampton facility in Silsbee, Texas and eventually from the expansion of Gevo’s advanced biofuels production facility in Luverne, Minnesota plant which is expected to be constructed in the next several years. Gevo also reported successful completion of the Port of Seattle renewables trial, and a trial with Virgin Australia.

CEO Pat Gruber noted “the pieces necessary to drive Gevo’s business are falling into place.  We believe we are making real progress on refinancing our secured debt, securing offtake agreements for our advanced renewable biofuel products and advancing manure biogas and wind projects to decarbonize our Luverne Facility.  Evidence of our progress include the supply agreement with Air TOTAL.  In addition, we are working on securing a loan for up to $45 million that could be used, in part, to pay off our current secured lender.

At REG

REG reported 197 million gallons sold, 127 million gallons produced, revenues of $560.6 million and adjusted EBITDA of ($42.3 million).

REG’s average selling price per gallon was $2.70, a decrease of 13.2% resulting primarily from lower biodiesel prices, which were down $0.55 per gallon from the second quarter of 2018. The lower biodiesel prices resulted from customers’ preference to take on smaller share of the benefit of a potential BTC reinstatement, and from lower ULSD prices. D4 RIN prices in the second quarter of 2019 were $0.16 per RIN lower on average compared to the second quarter of 2018. The Company produced 126.8 million gallons of biomass-based diesel during the quarter, a 2.0% increase.

CEO C.J. Warner noted:  “The challenging margin environment continued in the second quarter as a result of uncertainty around both the BTC and small refinery exemptions. Within this context, our underlying performance was strong with a 15.0% increase in gallons sold and a 2.0% increase in gallons produced. We continue to believe that the BTC will be reinstated, which will reward our strong operational performance. On the non-operating front, we are pleased that we finalized the sale of our Life Sciences business and paid off our 2019 convertible notes without financing, primarily from cash on hand.”

The Company estimates that if the currently lapsed BTC is retroactively reinstated for 2019 and 2018 on the same terms as in 2017, REG’s Adjusted EBITDA would increase by approximately $81.0 million for the quarter.

At Beyond Meat

BYND reported net Q2 revenues of $67.3 million, an increase of 287%; gross profit was $22.7 million, or 33.8% as a percentage of net revenues, net loss was $9.4 million, or a loss of $0.24 per common share, compared to net loss of $7.4 million, or a loss of $1.22 per common share in the year-ago period; and adjusted EBITDA, which is a non-GAAP financial measure, was $6.9 million compared to an Adjusted EBITDA loss of $5.6 million in the year-ago period.

CEO Ethan Brown said, “We are very pleased with our second quarter results which reflect continued strength across our business as evidenced by new foodservice partnerships, expanded distribution in domestic retail channels, and accelerating expansion in our international markets. We believe our positive momentum continues to demonstrate mainstream consumers’ growing desire for plant-based meat products both domestically and abroad,”

Brown said that Q2 growth was driven by an increase in sales volumes of products in the fresh platform across both retail and restaurant and foodservice channels, driven by expansion in the number of retail and foodservice points of distribution, including new strategic customers, international customers, and greater demand from existing customers.

At Green Plains

Green Plains reported a Q2 net loss of $45.3 million compared with net loss of $1.0 million, or $(0.02) per diluted share, for the same period in 2018. Revenues were $895.9 million for Q2 compared to compared with $986.8M for Q2 2018.

CEO Todd Becker noted, ““We continued to face a challenging ethanol margin environment compounded by a reduced run rate early in the quarter as we emerged from a first quarter production slowdown that impacted our financial performance,” commented Todd Becker, president and chief executive officer. “We believe that maintaining a strong balance sheet while continuing to reduce operating expenses through our Project 24 initiative, should give us the financial stability to withstand any elongated margin weakness the industry may face.”

“While our company and industry have been hit hard by government policy, geopolitics and oversupply, we are not waiting for the recovery to happen. We will continue to transition this platform to high protein animal feed production as a growing driver of more predictable and stable earnings, beginning with the completion of our high protein project in Shenandoah, Iowa in late 2019.”

Becker confirmed an LOI to sell a minimum of 50% of its cattle subsidiary for $75M. He also said that Project 24 remains on course “in lowering our operating expenses to an estimated 24 cents per gallon across our ethanol platform.

Looking at the Sector

So there we have it, choppy waters. Fast growth at Beyond Meat, confidence and strong growth in renewable diesel crisis in first gen US ethanol and biodiesel, lackluster growth in enzymes, particularly in agriculture. Synbio product revenues continue to be small but fast-growing, as we see at Codexis; Indian biodiesel finally performing as long expected, but slow development within Aemetis’ cellulosic ambitions. Gevo continues to zig and zag in search of the capital to realize its ambitions in marine and jet, with significant offtakers showing increased interest in the platform.

The bottom line, the more advanced the technology (Beyond, Neste, Codexis), the better the results for this quarter. For a number of years there has been a real increase in the dependence of the industry on its more established companies and sectors, such as first-gen ethanol, biodiesel, and conventional protein. The pendulum has been singing towards “advances via advanced” and it will be interesting to see how the second half of the year shapes up.

For sure, the Trump Administration is just killing farmers, advanced manufacturing and domestic renewable fuels. EPA has been a thorn in the industry’s side ever since the agency was handed responsibility for administering the Renewable Fuel Standard, but never more so than now. The distress is real, though companies that saw the headwinds are doing better than others. As Green Plains’ Todd Becker observed, “we are not waiting for the recovery to happen.”

Transition is in the air — it is a Year of Living Endangeredly.

Jim Lane is editor and publisher  of Biofuels Digest where this article was originally published. Biofuels Digest is the most widely read  Biofuels daily read by 14,000+ organizations. Subscribe here.

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by Debra Fiakas, CFA

The Trump Administration is using tariffs on China goods as a trade war tactic to pressure China into relenting to U.S. trade policy demands.  Unfortunately, the fallout has been heavy and widespread.  Farmers have taken the heaviest hits as China has dropped orders for corn and soybeans.  Ethanol producers have been ensnared in the trade war skirmish as well and in recent weeks have been caught an uncomfortable ‘pincer-like’ squeeze by the Trump Administration.

Trump’s Environmental Protection Agency has continued its practice of granting waivers to oil and gas refiners, eliminating the requirement to blend biofuel with the refiners’ petroleum gas production.  In early August 2019, the EPA granted 31 waiver applications.  Originally intended to help small refineries already in financial trouble and unable to afford expensive biofuel to blend with their own production, the Trump EPA has quadrupled the number of waivers granted.  Trump’s EPS has even given a number of waivers to large, highly profitable refinery companies such as ExxonMobil, Chevron and CVR Refining.

On top of reduced orders due to tariffs, the waivers have been particularly devastating for the ethanol industry and their corn suppliers.  The Iowa Renewable Fuels Association claims the Trump Administration has destroyed over a billion gallons in biofuel demand in order to help large oil refinery companies.  CVR Refining (CVRR: Nasdaq) has specifically quantified its benefits from receiving a waiver in 2018, citing an estimated savings of $120 million. 

The waiver program has also had the effect of reducing the value of a Renewable Identification Number or RIN associated with producing a low carbon biofuel. RINs have recently been quoted near $0.11 compared to $0.20 near the beginning of the year.  All refiners, whether they get a waiver or not, benefit from a reduction in the cost of these credits.  Again CVR Refining has provided a glimpse into the financial benefits from the drop in RIN prices.  In early 2019, the company reported a $23 million profit on RINs.   Likewise Valero Energy (VLO:  NYSE), the largest oil and gas refiner in the U.S., earlier this year guided for a cost of $550 million in compliance credits in 2019, compared to $942 million spent in 2018.

With the ethanol industry reeling from trade war tactics and EPA policy decisions, the shares of ethanol producers have reached new lows.  Pacific Ethanol (PEIX: Nasdaq) shares recently set a new 52-week low price near $0.50.  Compared to the 52-week high of $3.24 for the shares, it is clear Pacific Ethanol is on sale.  Or course, the company has debt problems and may be over-leveraged.  However, it’s struggles to meet debt service requirements are exacerbated by reduced demand for ethanol and the drop in RIN prices.  In the most recently reported quarter ending June 2019, Pacific Ethanol reported a 15.6% decline in revenue year-over-year.

Green Plains, Inc. (GPRE:  Nasdaq) shares have followed a similar fall from grace and are also trading near a 52-week low.  When reporting second quarter financial results in early August 2019, management cited weak demand and even weaker profits margins as the company continues to operate below targeted capacity utilization. Revenue from production of revenue and by-products declined 28.4% in its June 2019 quarter.

Not all ethanol producers are complaining.  Valero produces about 1.2 billion gallons of ethanol per year at plants located the Midwest.  The well capitalized oil and gas refiner snapped up ethanol plants in Iowa, South Dakota and Minnesota when operators faced financial distress in previous years.  Valero is also a joint venture partner with Darling Ingredients (DAR:  NYSE) in a renewable diesel production facility in Louisiana.  The biofuel operations provide Valero with a perfect hedge against renewable fuel price moves….as well as the vagaries in national energy policy.

Should investors follow the example of Valero by buying up shares of ethanol producers at bargain stock prices?  Probably not.  Valero’s strategy only works when gaining control over ethanol assets and making changes in operations.  Furthermore, it is not likely ethanol producers will get much help from policy makers unless the current administration changes its views on renewable fuels or gets replaced by a friendlier president.  What is the probability of either?  The answer is pending.  However, ass noted above, one of the largest beneficiaries of the Trump Administration policies has been CVR Refinery.  That company figures prominently in the portfolio of one of Trump’s strongest supporters, Carl Icahn.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

This article was first published on the Small Cap Strategist weblog on 8/23/19.

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Prelude to a spin-off?

by Jim Lane

The Archer Daniels Midland Company (ADM) is breaking news of breaking off their ethanol unit…and a tumbling 40% decline in profit.

In Chicago, Archer Daniels Midland Company reported their financial results for the quarter ended March 31, 2019, but most interesting to us, they are looking at separating their ethanol business with the option of spinning it off completely. They are also taking other actions to restructure and deal with challenges they say include weather issues and trade pressures.

ADM announced a “series of measures to continue to underpin long-term-value creation” which included:

“First, to meet growing customer demand, ADM plans to repurpose its corn wet mill in Marshall, Minnesota, to produce higher volumes of food and industrial-grade starches as well as liquid feedstocks for food and industrial uses, phasing out production of high-fructose corn syrup at that facility as soon as committed deliveries are complete.

Second, the company is creating an ethanol subsidiary, which will include ADM’s dry mills in Columbus, Nebraska; Cedar Rapids, Iowa; and Peoria, Illinois. The ethanol subsidiary will report as an independent segment. The new structure will allow the company to advance strategic alternatives, which may include, but are not limited to, a potential spin-off of the business to existing ADM shareholders.

Finally, ADM has begun a series of actions to enhance agility, accelerate growth, and strengthen customer service. These actions include organizational changes to centralize and standardize business activities and processes, and enhance productivity and effectiveness; accelerating the capture of planned synergies after a period of acquisitions; and offering early retirement for some colleagues in the U.S. and Canada.

As a result of Readiness-based improvements in capital prioritization, project evaluation and project execution processes, and in keeping with the company’s commitment to returns, ADM also plans to reduce 2019 capital spending by 10 percent, to the range of $0.8 to $0.9 billion.”

The $$$

Here are some financial stats from ADM’s first quarter earnings and a summary of how ADM’s various units did separately:

• Net earnings of $233 million.
• About a 40% decline in earnings – 41 cents per share compared to 70 cents per share a year ago. On an adjusted basis, earnings per share were 46 cents compared to 68 cents.
• Carbohydrates Solutions unit which includes starches, sweeteners and its ethanol business declined significantly from $213 million in first quarter 2018 to $96 million in first quarter 2019. Starches and Sweeteners was down versus the first quarter of 2018, driven by pressured European sweetener industry volumes and margins, impacts of severe weather in North America, higher manufacturing costs at the Decatur complex, and weaker margins in flour milling. Bioproducts results were much lower than the prior-year period. Ethanol margins were down significantly versus last year’s first quarter in a continued weak industry environment, and production volumes were affected by severe weather.
• Origination unit increased from $46 million in first quarter 2018 to $76 million in first quarter 2019.
• Oilseeds stayed close with $349 million in first quarter 2018 down slightly to $341 million in first quarter 2019. Crushing and Origination results were up significantly, but Refining, Packaging, Biodiesel and Other results were lower.
• Nutrition was slightly down with $96 million in first quarter 2018 to $81 million in first quarter 2019. WFSI results were higher year-over-year, with 21 percent profit growth spread across all three businesses, and WILD Flavors in particular turning in another very strong performance. Animal Nutrition results were lower.

What ADM says

“The first quarter proved more challenging than initially expected,” said Chairman and CEO Juan Luciano. “Impacts from severe weather in North America were on the high side of our initial estimates, and the ethanol industry environment limited margins and opportunities.

“Despite a challenging start to the year, we continue to make excellent progress on our key imperatives for 2019: improving performance in certain businesses, accelerating our Readiness efforts, and delivering results from our growth investments,” Luciano continued. “We are very encouraged with our new Neovia business and the creation of a global Animal Nutrition platform. Readiness continues to expand our efforts to enhance our competitiveness. And additional actions we are announcing today will help us advance our goals to deliver best-in-class customer service along with long-term growth and shareholder value.

“With three quarters of the year still ahead of us, the continued advancement of our strategy, combined with an anticipated resolution of the U.S.-China trade situation and an expected acceleration of soybean meal demand driven by African Swine Fever, make us optimistic for the second half. Taking all of these factors into account, we remain committed to continuing to pull the levers under our control to deliver our objective of full-year earnings comparable to or higher than 2018.”

What Others Say

ADM Chief Financial Officer Ray Young said on an earnings call that the industry must stop the self-inflicted wounds, according to Reuters. “Our decision to monetize the dry mills is frankly a strategic decision on our part to basically help the industry consolidate,” Young said.

According to Reuters, “Last week, U.S. ethanol production hit 1.05 million barrels per day, highest in at least five years seasonally, according to U.S. Energy Information Administration data. Inventories climbed to 22.75 million barrels, not far from the record of 24.45 million hit in March. Producers such as Green Plains (GPRE) and Pacific Ethanol (PEIX) have laid off workers and idled or sold plants to stay afloat during the sustained downturn. Ethanol prices are down 42 percent in the last five years, while Green Plains and Pacific Ethanol have seen their shares fall 33 percent and 92 percent, respectively, in that time.”

“We don’t have a demand problem as much as we have a supply problem. There are just too many inefficient plants out there, and they need to go before we see a rebound,” said one ethanol trader on Friday to Reuters. “It’s not like we are producing DVDs or CDs that no one wants.”

“Exports may provide some temporary relief,” Scott Irwin, an agricultural economist at the University of Illinois told Reuters. “(But) without substantial growth from higher ethanol blends you are looking at situation where the U.S. ethanol industry has to shrink” over the next 5-10 years.”

Bottom Line

As many companies have done before with pivots and moving from one area to another, ADM is following suit in order to boost profits and maintain competitiveness. We understand why they are doing it, it makes sense for the current time, but there’s a sense of “so long, farewell” sadness too since ADM is one of the world’s largest agricultural processors and food ingredient providers. What started in 1902 with George A. Archer and John W. Daniels as a linseed crushing business, to a huge ethanol powerhouse, to a recent shift to specialty food ingredients, nutrition and more, ADM is undergoing a transformation and we are excited to see where it goes next.

Jim Lane is editor and publisher  of Biofuels Digest where this article was originally published. Biofuels Digest is the most widely read  Biofuels daily read by 14,000+ organizations. Subscribe here.

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Tom Konrad Ph.D., CFA

July and August saw some mild recovery for the stock market after a difficult first half of 2018.  Clean energy income stocks continue to lag the broader market, but my Ten Clean Energy Stocks model portfolio has managed to maintain its lead over its broad market benchmark.

Through August 31st, the model portfolio is up 7.5%, compared to its broad dividend income benchmark SDY, which is up 5.3%.  Its clean energy income benchmark YLCO is down 1.2, even after dividend income.  The private portfolio I manage, the Green Global Equity Income Portfolio (GGEIP), is slightly behind the broad market of income stocks at 4.6%, but well ahead of YLCO.

Over the two months, most of these companies announced their second quarter earnings, and for most of them, there were few surprises, which no doubt contributed to the steady performance of most of the portfolio.

Details of the stocks’ performance are shown in the chart below.

Top Picks

In July, I highlighted Brookfield (BEP), Covanta (CVA) and Atlantica (AY) as my top short term picks.  These three stocks were up 2.4%, 7.1%, and 3.9% over the last two months. This average increase of 4.5% was solidly above the portfolio as a whole at 2.3%.  I currently think  CVA, GPP and TERP have the best prospects for short term gains.  Not that these prospects are great; I am taking an increasingly cautious approach towards the market as a whole and increasing my allocation to cash.

Stock discussion

Below I describe each of the stocks and groups of stocks in more detail.  I include with each stock “Low” and “High” Targets, which give the range of stock prices within which I expect each stock to end 2018.

Seaspan Corporation (NYSE:SSW)
12/31/17 Price: $6.75.  Annual Dividend: $0.50 (7.4%). Expected 2018 dividend: $0.50 (7.4%).  Low Target: $5.  High Target: $20.
8/31/18 Price: $9.22  YTD dividend: $0.375 (5.56%)  YTD Total Return: 43.3% 

Leading independent charter owner of container ships Seaspan’s gave back a little of its gains from earlier in the year.  The second quarter earnings call was “steady as she goes,” so I see the decline as mostly profit taking after the earlier large gains.  I took some gains myself.

Covanta Holding Corp. (NYSE:CVA)
12/31/17 Price: $16.90.  Annual Dividend: $1.00(5.9%). Expected 2018 dividend: $1.00 (5.9%).  Low Target: $15.  High Target: $25. 
8/31/18 Price: $17.65 YTD dividend:  $0.50 (2.96%)  YTD Total Return: 7.8% 

Covanta, the US leader in the construction and operation of energy from waste (EfW) plants reported second quarter earnings in July. The company is seeing improvements in profitability in most parts of its operations, and now expects full year results to come in at the high end of its previous guidance.

In August, the company reported several financial transactions that should improve overall profitability.  It sold  a small (13MW) hydroelectric project in Washington state to Atlantic Power (AT), and assumed the operation and maintenance of two EfW facilities in Florida.  Since Covanta already operates six other EfW facilities in Florida, it should be able to achieve synergies in these operations that were not possible for the hydroelectric plant in Washington.

The company also enlarged and lengthened the term of its senior loans, and refinanced a number of tax exempt bonds leading to a reduction in interest expense.  Given the company’s size, the move is likely to only result in a $0.01 per share improvement in annual earnings, but every improvement is good to see.

Clearway Energy, Inc (NYSE: NYLD and NYLD/A)
12/31/17 Price: $18.90 / $18.85.  Annual Dividend: $1.133(6.0%). Expected 2018 dividend: $1.26(6.7%)  Low Target: $14.  High Target: $25. 
8/31/18 Price: $18.50/$18.44   YTD dividend:  $0.927 (4.90%)  YTD Total Return: 10.1% 

Yieldco NRG Yield announced that Global Infrastructure Partners (GIP) had completed the purchase of NRG’ Energy’s (NRG) controlling stake in the Yieldco and had become its new sponsor.  NRG Yield has changed its name to  Clearway Energy, Inc, and will be holding a conference call to discuss its plans for the future on September 11th.  GIP is also acquiring NRG’s renewable energy assets and development platform.

Clearway’s stock has been advancing since the announcement, most likely in anticipation of renewed growth under its new sponsor.

Atlantica Yield, PLC (NASD:AY)
12/31/17 Price: $21.21.  Annual Dividend: $1.16(5.6%). Expected 2018 dividend: $1.39 (6.6%).  Low Target: $18.  High Target: $30. 
8/31/18 Price: $20.64 YTD dividend: $0.97 (4.57%)  YTD Total Return: 2.2% 

Atlantica Yield’s new sponsor, Algonquin Power (AQN) has been in place since early this year, and the Yieldco has been taking advantage of the stronger sponsor to refinance its debt at lower interest rates while continuing to pay down existing debt with retained cash flow.  The aftermath of Atlantica’s former sponsor Abengoa’s (ABG.MC, ABGOY, ABGOF) bankruptcy led to Atlantica focusing on paying down debt rather than growth for the last two years, but now that looks ready to change.  The company states that it is in discussions for the acquisition of $200 million in equity worth of accretive investments.

That would represent an approximate 10% increase in the company’s size if all the deals were consummated.  If we assume cash flow margins  20% to 30% above returns to current equity, we could see cash flow per share growth of 2 to 3 percent from these transactions.  I expect a return to even such modest growth will be welcomed by shareholders.

Pattern Energy Group (NASD:PEGI)

12/31/17 Price: $21.49.  Annual Dividend: $1.688(7.9%). Expected 2018 dividend: $1.70(7.9%).  Low Target: $20.  High Target: $30. 
8/31/18 Price: $20.38 YTD dividend: $0.844 (3.93%)  YTD Total Return: -0.7% 

Yieldco Pattern Energy Group’s stock is starting to recover from lows earlier this year as the company’s path to renewed dividend growth becomes clearer.  The company had been paying out nearly 100% of cash flow available for distribution (CAFD) in 2017, and has a goal of bringing this nearly unsustainable payout ratio down to 80%.  To do that without a dividend cut requires growing CAFD by approximately 25% over 2017.

Strong second quarter results increased CAFD by 8% in the first half of 2018 over the same period in 2017, despite a decline in the first quarter.  8% is a far cry from the 25% needed before Pattern is likely to resume dividend increases, but it does give the company breathing room.  Combine this with the completed sale of PEGI’s Chilean assets and the acquisition of higher yielding assets in Japan and Quebec and investors seem ready to put their fears of a dividend cut to rest.

I do not expect any dividend increases for the next year or two as Pattern brings down its payout ratio towards its 80% target, but at a current yield over 8%, increases are not necessary to make the stock an attractive investment.

Terraform Power (NASD: TERP)
12/31/17 Price: $11.96.  Annual Dividend: $0. Expected 2018 dividend: $0.72 (6.0%)  Low Target: $10.  High Target: $16. 
8/31/18 Price: $11.18 YTD dividend: $0.38 (3.18%)  YTD Total Return: -3.4% 

Yieldco Terraform Power completed its acquisition of European Yieldco Saeta Yield, and is now turning its focus on improving the operations at its fleet to improve profitability.  Terraform’s former sponsor, the now bankrupt SunEdison, operated the Yieldco’s fleet of wind and solar farms.  With the distraction of bankruptcy proceedings, such operations were doubtlessly neglected over the last two years.  Now, with a new operations agreement with General Electric (GE), TERP plans to invest in its existing fleet (which now includes Saeta’s as well) to improve operations.

The Yieldco says that these plans, along with the Saeta acquisition, give it a clear path to meeting its 5 percent to 8 percent dividend growth target through 2022 while maintaining its payout ratio below 85%.  Such a long term growth target is rare among Yieldcos, especially one which already has a 6.8% yield.

Brookfield Renewable Partners, LP (NYSE:BEP)
12/31/17 Price: $34.91.  Annual Dividend: $1.872(5.4%). Expected 2018 dividend: $2.02(5.8%).  Low Target: $28.  High Target: $45. 
8/31/18 Price: $30.77 YTD dividend: $0.98 (2.81%)  YTD Total Return: -9.0%

Brookfield Renewable Partners reported a weak second quarter results because of low production from hydropower.  The stock sold off as a result, and now looks quite attractive.  Brookfield’s large base of hydropower and limited partnership structure (you get a K-1 but it is safe to hold in a retirement account because it does not produce UBTI.)

In other words, BEP is a great diversifier in a Yieldco-heavy portfolio, and now looks like a good time to add it to that portfolio if you have not already.

Green Plains Partners, LP (NASD: GPP)
12/31/17 Price: $18.70.  Annual Dividend: $1.84(9.8%). Expected 2018 dividend: $1.90(10.2%).  Low Target: $13.  High Target: $27. 
8/31/18 Price: $15.20  YTD dividend: $0.945 (5.05%)  YTD Total Return: -14.3%

Ethanol MLP and Yieldco Green Plains Partners has been selling off in large part due to the Trump EPA’s attacks on the ethanol industry.  These include diluting the Renewable Fuel Standard, and granting waivers to oil refiners who don’t really need those waivers.  In other words, it is tough times for GPP and its parent GPRE.

At this point, however, I think much of the bad news is priced in, and there is some “good” news in the form of higher gas prices, as well as the tariffs that China and others are putting on corn.  This bad news for corn growers is good news for corn users, like Green Plains. China has also put a tariff on ethanol, but since ethanol can be substituted for gasoline (to a point), the price of gas should put a floor on the price of ethanol.  That is not true for the price of corn.

There are definitely risks with this stock, but the 12%+ yield is some very healthy compensation for those risks.

InfraREIT, Inc. (NYSE: HIFR)
12/31/17 Price: $18.58.  Annual Dividend: $1.00(5.4%). Expected 2018 dividend: $1.00 (5.4%).  Low Target: $16.  High Target: $30. 
8/31/18 Price: $20.89 YTD dividend: $0.50 (2.69%)  YTD Total Return: 15.2% 

Electricity transmission REIT InfraREIT reported much improved income and cash flow per share over the year earlier due to asset acquisitions.  The company is maintaining its $1 annual dividend while it re-evaluates its corporate structure.  It lost most of the advantages it gained by being a REIT as a result of the 2017 Republican tax bill.  At this point, the company could decide to become a normal corporation, be sold, or combine with another corporation.  There is also uncertainty around restructuring various long term lease transactions with its parent, Hunt Corporation so that they work with any new corporate structure and the new tax laws.

Earlier this year, the speculation about a possible go-private transaction drove the stock into the mid-$22 dollar range, at which point I wrote that I was “selling calls to lock in some profits in InfraREIT.”  Now that the stock has pulled back a bit, I’m happy to hold at the current price, collect my dividends, and see what happens.  I expect that there is more upside profit potential in a possible future transaction than downside risk, and I like the improving earnings numbers.  Finally, the company reached a beneficial tax settlement with the State of Texas, which was also good news.  With this positive backdrop, investor uncertainty about the company’s future corporate structure is likely leading to some current undervaluation.

Enviva Partners, LP. (NYSE:EVA)
12/31/17 Price: $27.65.  Annual Dividend: $2.46(8.9%). Expected 2018 dividend: $2.65 (9.6%).  Low Target: $25.  High Target: $40. 
8/31/18 Price: $32.00 YTD dividend: $1.875 (6.78%)  YTD Total Return: 23.2% 

Wood pellet Yieldco and Master Limited Partnership Enviva reported another strong quarter, with new long term contract signed for additional wood pellet supplies to both Europe and Japan.  Although the stock is up significantly this year, I am not ready to start taking profits, given its strong growth and and prospects.

Final Thoughts

While I’m happy that this model portfolio and GGEIP are both now comfortably up for the year, stock market valuation and political turmoil are making me increasingly cautious about the market going forward.  Although there are a few stocks here that I think are good values, I believe caution is increasingly warranted.  I see this as a great time to wait and see, while holding a healthy allocation in cash.

Disclosure: Long PEGI, NYLD/A, CVA, HIFR, AY, SSW, SSW-PRG, TERP, BEP, EVA, HIFR, GPP, AQN, GE.

DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results.  This article contains the current opinions of the author and such opinions are subject to change without notice.  This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

The post Ten Clean Energy Stocks For 2018: Second Quarter Earnings appeared first on Alternative Energy Stocks.

Last week ethanol producer Green Plains (GPRE:  Nasdaq) reported financial results for the quarter ending June 2018.   As expected the company reported a net loss, but actual results were far better than expected.  The news gave traders a reason to celebrate with bids that led to a gap higher at the opening on the first day of trading following the announcement.  Cooler heads came into the market as the day wore on and the stock closed below the open on heavy volume. Nonetheless, the stock finished the week higher and appears prepared to challenge lines of volume-related price resistance in the trading sessions ahead.   

There may have been more in the quarter report than just earnings news. Management just disclosed the acquisition of a cattle-feeding operation.  Yes, that is right.  Green Plains has become a beef producer!

Crush on Corn

The ethanol industry hangs on the ‘ethanol crush spread,’ which is a sexy way of referring to the gross production margin for the business.  The margin is computed as the difference between the combined sales value of ethanol plus distiller’s grain by-products and the cost of corn.  The difference is the stuff of much speculation in the ethanol industry and provides the profits, if there are to be any, in an ethanol operation.

Unfortunately, of late with current production practices margins on ethanol have been weak.  The story can be illustrated simply with Green Plains own reported gross margin.  Just four years ago, Green Plains recorded gross profit margins in the low double digits.  In the year 2014, the reported gross margin was 12.9%. Fast forward to the year 2017, the gross margin had fallen to 7.3%.  The downward trend continued in the first half of 2018, with the gross margins sinking to 5.8%.

Pulling Profit Levers

There are several levers that management of any company can pull to boost profit margins.  First thought is usually to increase prices and thereby build margins with higher revenue.  Unfortunately, ethanol is a commodity and its producers end up as price takers.  A higher price tag would likely kill sales.

A second brilliant idea is to find new markets and new customers with potentially a more favorable demand profile.  Exports of U.S. ethanol have been rising gradually over the past decade with China figuring prominently among customers. Exports reached a monthly peak in February 2018, at 5.3 million barrels, but have come down by 50% since the Trump Administration’s trade war with China heated up.  The export channel is for the time being not a solution to profit margin issues.

Of course, the ethanol crush spread could be improved by sourcing corn at lower prices.  Unfortunately, there is again that pesky commodity market dynamic that frustrates side deals and price undercutting.  Production efficiencies delivered by new technology or access to lower cost distribution transport also show promise.

Earlier this year Green Plains invested in technology to produce high-protein feed ingredients.  Sometime mid-2018, the company’s ethanol plant in Shanandoah, Iowa will commission a MSC Protein System from Fluid Quip Process Technologies.  Some of the distillers’ grains will be diverted to this process to produce higher value high-protein animal and fish feed ingredients.  Management estimates a dime could be added to its ethanol crush spread.

Feeding Cattle

A dime is impressive, but Green Plains management has an entirely different lever in their grip that might deliver more than dimes.  They have chosen to not only look for new markets, but to diversify their product line entirely by integrating forward into a beef production.  The day before the earnings announcement the company disclosed it has agreed to acquire two cattle-feed operations from Bartlett Cattle Company for $16.0 million.

This is not a really a new strategy for Green Plains. The company first started investing in food production in 2014, with the acquisition of feedlot and grain storage facilities in Kismet, Kansas.  That feedlot had capacity for 70,000 head of cattle. Since then Green Plains has made a series of small acquisitions that has increased feedlot capacity to 260,000 by the end of December 2017.   The latest deal is for the largest single operation that Green Plains has acquired so far, boosting capacity by more than one third to 355,000 head.

With this last deal Green Plains seems more like a serious player in the beef production supply chain.  Owning sizable feedlot operations gives the Company a meaningful internal source of demand for its distillers’ grains, corn oils and high-protein feed ingredients by-products of the ethanol process.  By integrating forward Green Plains captures the value created by those feed products in the cattle operations.

Green Plains management promised that the newly acquired feedlot operations will be immediately accretive to earnings.  Just three months from now when the company repots financial results for the quarter ending September 2018, investors can expect to see the impact from the deal. Since it will only be a two-month contribution, it may be too early to observe the contribution to profit margins from the increase in internal feed sourcing.

The company is paying for the deal in part with a $75 million increase in its revolving credit facility.  An agent approval can add make another $100 million available to Green Plains for working capital.

Industry Shakeout

With Trump’s trade war against China frustrating an already difficult profit margin situation for ethanol producers, the industry appears poised for some sort of shake out.  Smaller producers with limited access to capital markets may find it difficult to invest in technology for efficiencies or make diversifying investments.  We expect another wave of consolidation in the industry.  Green Plains may be in the market….or not.  Management has made clear its strategy is to stay true to its ethanol roots except when forward or backward integration makes sense.

Debra Fiakas is the Managing Director of Crystal Equity Research, an alternative research resource on small capitalization companies in selected industries. Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

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