Biodiesel Magazine: M&A Transactions Help Define Current US Biodiesel Era
October 21, 2016 | By Ron Kotrba
For better or worse, the U.S. biodiesel industry continues to consolidate. While 2014-’15 has been a rough period in the sector, the fallout has presented undeniable opportunities for key players with strong balance sheets and keen business acumen.
The aftermath of that prolonged down biodiesel market is naturally a greater frequency in plant acquisitions, mergers and joint ventures by companies that were positioned to weather the storm, since 2016 brought with it a forward-looking tax credit, more stability in the renewable fuel standard (RFS) policy, and an increased reliability in U.S. EPA’s program management.
Three experts discussed biodiesel’s current business environment at Christianson & Associates’ Biofuels Financial Conference Oct. 17-18 in Minneapolis, during which mergers and acquisitions (M&A) took center stage.
“The biomass-based diesel industry continues to consolidate,” said John Campbell, a managing director with Ocean Park Advisors. “Today in the U.S., the 10 largest producers account for 62 percent of total industry capacity, with 28 percent of the total number of plants.”
He said once the expansion and upgrade projects from these 10 companies come online, the cumulative production capacity from plants owned by these producers will surpass projected domestic production volumes for 2016.
Campbell, who noted OPA has completed 400 to 500 MMgy of biofuels M&A deals over the past two years, said periods of higher profits for biodiesel producers coincide with times when expiration of the tax credit nears, which the industry has experienced four times in the past decade.
“You have to be working with strong balance sheets to get through these periods of breakeven or below-even margins when the tax credit is not in effect,” he said, “and then there are bursts of profit when it’s reinstated.” Campbell said ultimately biodiesel producers are faced with a feast-or-famine situation, often with long periods of famine interspersed with short feasts.
Policy drives volumes for biodiesel and directs trade flow, Campbell said. “And despite some issues, biodiesel policy has been very positive.”
He referenced the 800-plus million gallons of imports the U.S. could see this year, as discussed by Larry Schafer, co-founder of Playmaker Strategies LLC and senior advisor to the National Biodiesel Board, earlier in the day, calling it “a shocking number.”
Campbell said if Congress extends the blenders tax incentive and reforms it as a domestic producers credit, he doesn’t know whether EPA will take into consideration a resulting reduction in imports when setting future biomass-based diesel and advanced biofuel volumes in the RFS.
He added that at least six biomass-based diesel M&A transactions were completed in 2016. “Biodiesel and ethanol trade by appointment—not always, but mostly,” Campbell said. “There aren’t often for-sale signs posted, you have to go knock on their door. And there are very few financial players in the space. These are mostly strategic acquisitions.”
Jeff Kistner, president of Flag Leaf Financial Management, discussed items to think about when considering buying, selling or positioning for capital improvements. “When you are presenting a business plan, know it—and know the industry,” Kistner said. “Stress test your assumptions, keep your debt in control, and allow plenty of time for the business plan to develop.”
Pursue fewer initiatives, Kistner said, as to not get torn between too many directions and be spread too thin.
“Regardless of whether you’re moving forward with a capital improvement project, expansion, acquisition or sale, create a pitch book,” Kistner said. “Have benchmark measurements showing stable or improving margins. Make sure your financials are in order. Know your strengths and opportunities, and know and eliminate your risks. Know the impact of the value of your asset. Set the deal terms and expectations, and have a realistic value.”
Michael Laznik, the chief financial and operating officer of World Energy, rounded out the panel by sharing his company’s experience in biodiesel M&A transactions over the past several years.
“I got involved in the biodiesel industry in 2007,” Laznik said. “I saw a promise from the government, a national commitment to renewable fuels. We focused in on the advanced biofuel category. We thought we’d make money doing the right thing.”
He said government grants, tax credits and other funding opportunities were appreciated short-term benefits, “but the mandate was the real promise,” Laznik said. “And then unfulfilled cellulosic ethanol production created an excuse for EPA to ratchet down the advanced biofuels category, from which a much larger demand for biodiesel was supposed to come about.”
Oral arguments on the lawsuit filed against EPA on its use of the general waiver to lower all biofuel categories in RFS are expected next year. “If the court comes back with an opinion counter to what EPA is saying, we could see a much larger demand for RINs,” Laznik said.
He said when the tax credit is in effect or reinstated retroactively, it provides a boon for producers, and as it goes away, higher RIN prices are expected. “But this becomes a story that’s too hard to tell [to financiers],” Laznik said, adding that banks don’t like volatility and equity has become too hard to source. “If you pitch it as a biodiesel plant, they might walk away,” he said, “but if you pitch it as property, then you might get a mortgage.”
The tough times in biodiesel have been devastating for some, but as is often the case in business, one company’s misfortune is another’s opportunity. Laznik presented a list of conflicting perspectives on the market.
“The outsider view on the potential for RFS repeal is that it provides too much uncertainty, but the insider view is Congress is deadlocked so no change is likely any time soon,” he said. “The outsider view on the short-term tax credit is that it provides too much uncertainty, while our insider view is that its reinstatement provides windfall opportunities. The outsider view is that financing is unavailable. But the insider view is that with sufficient amounts of your own capital there are opportunities to partner with producers. The outsider view is that distressed assets create a rocky road ahead, while the insider view is that distressed assets create buying opportunities.”
In 2009, World Energy was a trading and distribution company importing biodiesel from Argentina and Southeast Asia, and with a plant in Florida. “We had storage tanks in Texas, the Midwest and the Northeast, and 400 railcars,” Laznik said. “Then, in 2009, the whole industry imploded. We took a good look at ourselves and we got rid of everything—our tanks, employees. We still believed in the mandate and if we stayed in, we’d prosper.”
World Energy then slowly began acquiring plants. In 2011, it acquired the 20 MMgy U.S. Biofuels plant in Rome, Georgia. In 2013, World Energy obtained the 40 MMgy Keystone Biofuels facility in Pennsylvania. Then, this year, both the 90 MMgy Green Earth Fuels plant in Houston (through a joint venture with Biox Corp.) and the 72 MMgy Elevance biodiesel site in Mississippi were acquired.
“Being a producer is so different than being a trader,” Laznik said.
For Keystone, Laznik said World Energy bought its debt from the bank. He said Green Earth Fuels was liquidated through a Chapter 7 bankruptcy and owned by the creditor.
“That is located in a Kinder Morgan facility and was built to produce biodiesel to put directly in the pipeline, but it was built too soon for that model,” Laznik said, referring to the recent increase in allowance of trace biodiesel in the jet fuel spec.
Since jet fuel travels through the pipeline, concerns over trailback of biodiesel into jet fuel has kept biodiesel largely out of pipelines, but after years of extensive testing and balloting at ASTM, the allowable trace limits have been risen, which bodes well for moving greater volumes of biodiesel in pipelines in the coming years.
“To us, Green Earth Fuels was not just a plant, but a trading terminal,” Laznik said. “That deal was really a terminal position.”
For U.S. Biofuels in Rome, Georgia, and Elevance in Mississippi, the former was a distressed asset and the latter was not part of the company’s core business, Laznik said.
What World Energy looks for in a deal is a plant that has demonstrated what it can—or cannot—do. Essentially, this means a plant with proven technology that has hit its production expectations, Laznik said.
“Distressed assets are a plus for us,” he said.
The minimum capacity World Energy will consider is 10 MMgy, Laznik said, “but if it doesn’t have that critical mass, it needs something else. It also must be logistically interesting with no logistical challenges. The dynamics of the deal are also important. And other than working capital, we don’t want to make any significant expenditures or investments to get the plant running. We also like retaining existing management—people with that institutional memory in place—and partnering with the existing owner.”
Finally, Laznik said some of the lessons learned in World Energy’s acquisition and partnership deals include keeping options open, and not to rely on quick, easy startups.
“Have patience,” he said. “Some deals come back years later. Be creative—that’s our industry. And listen.”
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