World Energy and Valero Lead Rebound in Biofuels M&A: 2018 Review

by Bruce Comer (Ocean Park/Biofuels Digest) Convergence reigns as the North American biofuels industry witnesses a resurgence in mergers and acquisitions, including exceptionally large deals -- Merger and acquisition (M&A) activity in biofuels picked up considerably in 2018 after a slowdown in 2017, and by historic standards, the deals grew considerably in size. A total of 12 M&A transactions in the North American biofuels industry closed during 2018. In ethanol and biodiesel, nine deals took place worth an estimated $752 million, involving 15 facilities with 770 million gallons per year (MGPY) of capacity. In advanced biofuels, three transactions occurred involving two cellulosic ethanol facilities and one demonstration facility.

Two of these deals included the largest publicly reported biofuels M&A transactions since 2015. In ethanol, the sale of three Green Plains’ operating plants to Valero for $319M became the largest transaction in the ethanol sector since 2015. Post-transaction, Valero becomes the second largest ethanol producer in the U.S., accounting for 11 percent of total U.S. ethanol production capacity.

In biodiesel, the $345M combination between World Energy and BIOX Corporation took the mantle as the largest publicly announced biodiesel merger ever. The dollar-per-gallon transaction valuation of $1.17/gal reflects the high-margin operating environment for biodiesel in the U.S. The two companies had a history of working together, having previously formed a joint venture in 2016 to acquire a biodiesel plant in Texas.

While a few large strategic players focused on acquisitions in 2018, other biofuels producers focused on plant constructions and expansions. Ocean Park tracked 1.0 billion gallons per year (BGPY) of announced expansions and greenfield projects in 2018.

North American Biofuels Outlook for 2019

Regulatory: The year 2019 starts out with the looming question regarding the extension of the biodiesel Blenders Tax Credit (BTC), also not in place for 2018. Similarly to the BTC for 2017, retroactively reinstated in early 2018, the industry actively seeks reinstatement, retroactively, in early 2019.

Elsewhere in renewable fuels policy in the U.S., the EPA finalized renewable volume obligations for 2019 and 2020. A big win came for biomass-based diesel volumes for 2020, which increased 15 percent to 2.43 billion gallons, up from 2.1 billion gallons in 2018 and 2019.

Ethanol: U.S. ethanol producers continued to face strong headwinds in 2018 as profit margins deteriorated significantly through the second half of the year. The industry’s most active acquirer over the last five years, Green Plains, opted to divest several ethanol assets. High ethanol production levels, coupled with pricing pressure in corn and oil markets, will likely lead to more asset divestitures.

Biodiesel: For 2018, the effects of the U.S. International Trade Commission’s ruling against biodiesel imports from Argentina and Indonesia resulted in increased domestic demand and record profits. In August 2018, operating margins were as high as $0.66/gal, the highest since November 20131. As a result of this favorable operating environment, many companies now have healthy balance sheets. Ocean Park expects an active M&A environment to continue as companies look for expansion opportunities.

California’s Low Carbon Fuel Standard has been a key driver of increased production and local consumption of biodiesel and renewable diesel. The long-term, stringent carbon intensity reduction targets are motivating the expansion of new renewable diesel plants and continued M&A. Cross-border M&A might also be a theme as the financial incentives offered by the program attract global players.

Advanced Biofuels: The permanent shuttering and subsequent sale of DuPont’s $400 million cellulosic ethanol facility highlighted the challenges for new advanced biofuels technologies. Difficult macro conditions are likely to continue throughout 2019 for advanced biofuels as a result of low oil prices and volatile public policy. Due to these increased investment risks, many financial and strategic investors may have little appetite for project financing of nascent advanced biofuels technologies. Existing advanced biofuels companies on a tight cash runway that are unable to stretch funding are likely to come under financial pressure and seek M&A as a strategic alternative. READ MORE