DAR the Rins Blow!

by Debra Fiakas CFA

Last week the management of  Darling Ingredients (DAR:  NYSE) staged a webinar on its opportunities in biofuels.  Darling produces biodiesel in Kentucky and Canada and is in a renewable diesel joint venture with Valero Energy (VLO:  NYSE) in Louisiana.  As a recycler of wastes and excess from the food production processes, the production of energy with organic feedstock is a logical extension of Darling’s collection and aggregation infrastructure.

The event did not do much for Darling’s share price, but the presentation triggered a few questions about RINs  –  shorthand for Renewable Identification Numbers.  These are a creation of the U.S. Environmental Protection Agency (EPA) to track renewable transportation fuels.  They come in handy for the EPA to monitor how well oil refiners and blenders are doing in meeting the Renewable Fuel Standard (RFS).  Those standards were set up by Congress through the Energy Policy Act of 2005, to promote the use of renewable transportation fuels.  On the simplest level, the standards require the use of a minimum amount of renewable fuel usage based on the amount of petroleum product sales.
Here is where the RINs really become important.  Of course, refiners and blenders can meet the RFS standards by buying ‘wet gallons’ of actual renewable fuels.  They can also buy RINs from other parties who have exceeded the requirements.  There is a market for RINs.  As with any other asset, the value of a RIN is dependent upon the number of RINs sloshing around and whether refiners and blenders can get enough ‘wet gallons’ to meet the standards.

Progressive Fuels Ltd. publishes weekly RINs trading data. For example, in the week ending June 2, 2015, D3 RINs for cellulosic biofuel produced in 2016 ranged from $1.77 to $1.79.   Generally, RINs prices for cellulosic biofuel produced in both 2015 and 2016 have traded down from prices in late 2015.    Corn ethanol (D6), biomass-based diesel (D4), cellulosic diesel (D7) and advanced biofuels (D5) each have their own RIN code.

It is a well-intentioned arrangement  –  support development of renewable fuels with a clever economic support system.  Indeed, the D6 RIN for corn ethanol increased in value during times of higher RFS target announcements or near the compliance deadlines.  However, more recently the D6 RIN price has been influenced by the decline in gasoline prices.

What might be as important for renewable fuel producers like Darling is the amount of gasoline demand in the country.  With prices at the pump at record lows (at least since 2009), gasoline consumption is expected to rise.  The U.S. Energy Information Administration (EIA) estimates that gasoline consumption could reach 9,530 million barrels per day in 2016.  This is 1.5% higher than consumption in 2015.  However, ethanol blended into gasoline is expected to reach 950 million barrels per day, an increase of 1.1% compared to last year.

Darling is looking at RINs also, but in terms of market opportunity.  Looking at the EPA’s new 2016 advanced biofuels mandate in terms of RINs, the company sees an opportunity to sell fuel worth 440 million RINs.  Put into ‘wet gallons’ it would be 288 million in 2016.  With a capacity to produce 18 million gallons of biodiesel and 160 million of renewable diesel per year, that is an attractive prospect.  

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. Darling Ingredients is included in the Biofuel Group of the Beach Boys Index of alternative energy developers and producers.