The rising use of renewable sources of energy is an indisputable trend here to stay. But the performance of renewable energy companies has generally been erratic so far, giving investors a tough time in selecting the right stock for them. Two emerging players in the renewables space — though with different offerings — are Renewable Energy Group (REGI) and Clean Energy Fuels (CLNE -3.04%). While one of the two looks like a buy, it’s best to avoid the other one for now. Let’s see why.
While both Renewable Energy Group and Clean Energy Fuels are renewable energy companies, their operations differ significantly. Renewable Energy Group is a top producer and distributor of biofuels, primarily biodiesel and renewable diesel. The company carries out all the operations from acquiring feedstock to constructing and operating biorefineries and distributing fuel through terminals. Renewable Energy Group owns 13 biorefineries — 11 in the U.S. and two in Germany. The company has diesel production capacity of 505 million gallons per year.
In comparison, Clean Energy Fuels primarily sells renewable natural gas, which is derived from organic waste. The company doesn’t produce renewable gas itself, but rather purchases it from third parties. It then sells it, in compressed and liquefied forms, through customers’ as well as its own fueling stations. Clean Energy Fuels owns two liquefaction plants.
Renewable Energy Group’s performance so far is impressive. Since 2010, the company’s annual sales grew at a compound annual growth rate (CAGR) of 30%. In the first nine months of 2020, Renewable Energy Group’s performance was resilient, despite the effects of the pandemic. For the nine months, even though the company’s sales dipped by nearly 2%, its EBITDA grew by nearly 3%. In comparison, Clean Energy Fuels continues to struggle to grow its revenue.
Renewable Energy Group has also been able to translate its sales growth into bottom line growth. Over five years, its profit margins averaged nearly 4%. By comparison, Clean Energy Fuels has largely been generating losses.
Indeed, earnings of both companies may be significantly affected by changes in governmental policies and incentives. As an example, the constrained growth in renewable volume obligations for refineries during the years 2017 to 2019 affected Renewable Energy Group’s earnings. The U.S. Environmental Protection Agency’s Renewable Fuels Standards require refineries to blend a minimum percentage of renewables-based fuels to their petroleum-based volumes, or purchase credits — called renewable identification numbers or RINs — in lieu of blending. Some small refineries may be exempted from this requirement. Any changes in this policy affect the demand and pricing for RINs, thereby affecting the profitability of bio and renewable diesel producers, including Renewable Energy Group.
Renewable Energy Group stands to benefit from several current and potential governmental incentives. The BTC, or Biodiesel Tax Credit, which provides a tax credit to bio-diesel blenders, has been retroactively reinstated and will be effective through 2022. Other incentives, including the RFS, the Renewable Energy Directive II, the Low Carbon Fuel Standard or LCFS, and other state incentives all bode well for Renewable Energy Group’s growth.
Renewable Energy Group’s strategy of increasing renewable diesel production is smart considering its premium pricing compared to biodiesel. Renewable diesel can be blended more easily with petroleum-based diesel, and it generates more RINs on a per-gallon basis. Moreover, Renewable Energy Group is also focusing on expanding its distribution capabilities. This will not only help it diversify its earnings, but also help it to improve margins.
Clean Energy Fuels should also benefit from the push for renewables. However, the growth of electric vehicles is expected to limit the use of renewable natural gas as a vehicle fuel. Notably, its prospects remain bright in the heavy vehicles segment, due to limited breakthrough of electric technology in that segment so far. However, Clean Energy Fuels has until now been unable to deliver on its top and bottom lines. I would rather avoid this stock till it progresses on these fronts.