REX American: A Good To Great Ethanol Company

(Viking Analytics/Seeking Alpha) REX consistently outperforms its peers in making ethanol profitably. REX has zero debt, a large cash position, and has announced plans to buy back more shares. Stuart Rose, the Chairman of REX, displays the characteristics of a Level 5 Leader. -- ... Unlike these peers who have arguably over-extended themselves to grow, REX has paid off all of its long-term debt and continues to buy back its public shares. Since 2014, REX has already purchased 18% of its shares, and recently announced a plan to buy back another $50 million. With over $190 million in cash, we should expect to see REX's share buy-back program increase.

REX is a low-cost producer because it built large, high quality ethanol plants with good logistics.

If you listen to the company quarterly calls, it is clear to see that he (Stuart Rose) is self-effacing; he gives any credit to all of the people who make REX a great company. When asked a question, he talks straight and doesn't make promises that he cannot keep.

The company is about is un-flashy as a company can be. Its website might have been designed in the 1990s. On the other hand, REX sells a commodity and it quite frankly doesn't need a good website. REX isn't trying to promote its stock for retail investors. In fact, if you look at the ownership list for REX, you can see that it is majority owned by institutions and insiders.

Stuart Rose's "hedgehog concept" was to focus on large, high quality ethanol plants with good logistics, and find good farming and other partners nearby. Meanwhile, REX continues to upgrade, improve and de-bottleneck its world-class facilities.

Having founded and run a biofuel company for 10 years, I understand the importance of having very little debt in a volatile commodity environment. The best thing that any biofuel company can do is to eliminate financial leverage. This enables them to ride out any margin storms that are sure to arise.

Ethanol producers sell their product with the RIN attached, and the RIN premium is monetized by someone else- either by the downstream blender or the RIN trader. I covered some of the mechanics of this in an earlier article. The reader can click this link and search for the heading Valero's Ethanol Trap. In the case of Valero (VLO), it has been "knee deep in a river of RINs and dying of thirst."

There has been a firestorm of news and lobbying surrounding the recent announcement that the EPA has granted small refinery waivers to certain firms like Andeavor (ANDV). In my view, this has been a "tempest in a teapot" which will be resolved to the satisfaction of most interested participants. There is actually a very simple win-win-win America-First solution to satisfy the refiners, the ethanol producers and corn growers.

The cost of RINs to small refiners is indeed burdensome, and that pressure needs to be relieved. Small refiner exemptions make perfect sense and are actually written into the law. On side of the ethanol producer, they are faced with a 10% "blend wall," even though a 15% ethanol blend is perfectly fine for most vehicles. My four-year old Chrysler 300 is equipped with the standard ability to consume up to 85% ethanol. Many new gasoline vehicles are equipped with this flex fuel ability.

Just recently, it was announced that the Trump administration is weighing the removal of the 10% ethanol blend wall. It will be interesting to see how this plays out. More ethanol consumption will mean more ethanol production. More ethanol production will mean more demand for American corn. The small refiner exemptions make the playing field a lot more level. And all of these initiatives help American businesses. This would be a win-win-win-win.

Any effect of Chinese tariffs (another tempest in a teapot in my view) will be completely mitigated with the removal of the blend wall. READ MORE