There’s little question that biodiesel will grow over the coming years, with improving economics and growing federal mandates. The National Biodiesel Board – an industry trade association – envisions biodiesel production equal to 10% of the on-road diesel market by 2022. While these estimates may seem aggressive to some, the group’s prediction in 2005 for biodiesel to encompass 5% of the market by 2015 may be surpassed before the target date.
Investors looking to capitalize on the growth in biodiesel have a number of options, including larger companies like Renewable Energy Group Inc.(NASDAQ: REGI) and Amyris Inc. (NASDAQ: AMRS) But, Methes Energies International Ltd. (NASDAQ: MEIL) may offer the greatest potential for investors, as a provider of turnkey solutions within the industry. These solutions yield a razorblade business model that could generate significant long-term value for shareholders.
Why Now’s the Time for Biodiesel
The benefits of biodiesel are clearly apparent in various studies; showing a 47% reduction in particulate matter, 67% reduction in unburned hydrocarbons, and a 48% reduction in carbon monoxide in its pure form. Given these benefits, the U.S. government established the Renewable Fuel Standard program (“RFS2”) to encourage the production of biodiesel fuels in recent years, with production hitting some 1.1 billion gallons in 2012.
In 2013, the industry appears set for even greater growth rates. The federal biomass-based diesel requirements have been raised to 1.28 billion gallons (28% higher than 2012), and a $1.00 per gallon tax credit has been set. These items coupled with rebounding RIN prices all promise to boost the industry well past the 1.1 billion gallons sold during 2012. As well, more and more end markets are also accepting both B5 and B20 or higher biodiesel blends in their equipment.
And finally, problems with RIN fraud are being addressed in order to instill greater confidence in the market, according to the U.S. Environmental Protection Agency (“EPA”). A newly proposed rule would offer obligated parties an affirmative defense against civil liabilities from buying, trading or retiring bad RINs, and include an option that also relieves obligated parties from paying for the replacement of any invalid RINs, solving a key problem.
Methes Energies’ Offers a Unique Play
Methes Energies develops and sells fully automated, compact biodiesel processors that come in two different sizes; the Denami 600, which can produce up to 1.3M gallons a year, and the Denami 3000 which can produce upwards of 6.5M gallons per year. Methes Energies is targeting the rapidly growing small and medium-scale segment of the biodiesel market with these processors, which are flexible with regards to feedstocks and operate with low production costs, low labor costs, and without wastewater discharge.
The sales of these processing units generate upfront income for Methes Energies that is supplemented over the long-term by recurring network revenues. By purchasing bulk feedstock, methanol, catalyst and related products, the company distributes these necessary biodiesel ingredients to its growing network of customers. Meanwhile, the company operates two biodiesel processing plants in Canada that it uses as small-scale production and demonstration facilities.
Combined, these attributes make the stock an attractive opportunity for investors. While scaling up its Denami sales and network, the company already generates revenues using its own technologies as a proof of concept. These sales are expected to increase with the additional capacity at Methes’ Sombra facility, capable of producing 13M gallons a year, which will help fund sales and marketing efforts for its Denamimachines and ultimately expand its higher margin network revenues.
Potential Investment Opportunity
Methes Energies, along with all biofuel producers, had a degree of uncertainty in 2012 due to the expiration of the blender’s tax credit on December 31, 2011 and ambivalence about the integrity of some RINs in the U.S. These developments particularly hurt small producers, which the company falls under given that its revenues come largely from its two processing plants in Canada.
Fortunately, the market has shown signs of recovery 2013 with a number of actionable news events including; President Obama calling for climate action in his State of the Union, the EPA approving Camelina as an additional biodiesel feedstock, and the rejection of New Mexico’s legislative efforts to repeal their B5 law requiring a 5% biodiesel blend. With biodiesel now being produced in all 50 states, and supporting 64,000 jobs nationwide in 2012, it is apparent that this industry is a crucial cog in the overall energy plan of both the Unites States and Canada.
With Methes Energies recent press release (http://ir.methes.com/phoenix.zhtml?c=251486&p=irol-newsArticle&ID=1785582&highlight=) announcing a contract of 50 rail cars of ASTM quality biodiesel (B100) from its Sombra facility, the company has taken significant strides towards a goal of establishing recurring, long term relationships, with clients throughout the US and Canada. The contract was their largest to date, and with a fleet of 28 rail cars transporting feedstock and biodiesel to and from the it’s Sombra facility, increased production and revenue numbers are likely to be close behind.
For more information, please see the following resources:http://www.methes.com/
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