A Primer on US Renewable Diesel

THE COWEN INSIGHT

Renewable diesel (RD) will grow in the US from 500 million gallon production capacity presently to potentially 2.5 billion gallons in 2023. The growing popularity of the fuel is being driven by a combination of its ease in use and three government subsidy programs. In this report we address how renewable diesel is different from biodiesel, feedstock considerations, the three major relevant subsidy programs, capacity additions, and financial projections for various feedstocks.

Renewable Diesel Pricing Will Likely Decrease, Feedstock Will Likely Increase

Renewable diesel has been an attractive business the past couple years as higher oil prices carried diesel product pricing higher in contrast to declining feedstock costs. We expect this trend to reverse near-term given a reduction in oil prices.

Moreover, we estimate 2 billion gallons of new US capacity coming online through 2022. We expect that this new capacity will materially eat into the 5 billion gallons of RD feedstock produced in the US, 1.8 billion gallons of which is already being used to produce biomass-based diesel (RD + biodiesel). This dynamic will likely result in feedstock price appreciation.

Renewable Diesel Is Supported by 3 Government Subsidy Programs

We anticipate the Low Carbon Fuel Standard (LCFS), the benefit of which is dependent on feedstock, to continue to generate credits that trade at the defined price ceiling. Renewable identification numbers (RINs) underpinned by the Renewable Fuel Standard program should trade in-line with current levels moving forward. The flat $1/gal Blender’s Tax Credit (BTC) that expires in 2022 is in question given companies that are sanctioning new projects do not underwrite economics with the credit.

Renewable Diesel Margins Will Converge Lower As New Capacity Comes Online

The US currently produces 1.7 billion gallons of advantaged RD feedstock (tallow and used cooking oil), or feed that is cheap and generates relatively higher LCFS credit value. We estimate 0.5B gal of this feed is already used for biomass-based diesel production. New RD capacity will consume much of the remaining availability. We therefore expect RD margins to converge towards lower value feedstocks such as soybean oil and distillers corn oil.

At $60 oil, maximum LCFS credit price, $0.50/RIN, and no BTC, we estimate tallow, cooking oil and corn oil could generate a $0.50/gal EBITDA margin while soybean oil generates $0.20/gal. This compares to an estimated $0.45/gal soybean oil EBITDA margin in 2018-19 and $1.50/gal average for other feedstocks before the $1/gal BTC.

Refiners Need to Address Feedstock before Building New Plants

One refiner has an established 275 million gallon renewables plant and is currently expanding to 675 million gallons. This refiner also has a joint venture that gives it access to advantaged feedstocks. The company should benefit from the $1/gal BTC in 2020-2022 even if margins decline.

Conversely, another refiner is building 210 million gallons across 2 new renewable diesel facilities. These will come online in 2022. We estimate the plants that cost $700MM will generate $60MM levered FCF including 50% BTC capture. There have been reports other refiners are exploring converting refineries into RD plants, though we believe feedstock sourcing needs to be sorted out before moving forward.