Renewable Energy Group Inc. (REGI), the biggest U.S. biodiesel maker, was little changed in its trading debut after raising $72 million in an initial public offering, less than first proposed.
The shares rose 1 percent to $10.10 at 4 p.m. New York time. The Ames, Iowa-based company, which turns ingredients including soybean oil into biodiesel for cars and trucks, sold 7.2 million shares for $10 apiece after earlier offering them for $13 to $15. UBS AG (UBSN) and Piper Jaffray Cos. (PJC) led the offering for the company, which is trading under the symbol REGI on the Nasdaq Stock Market.
Renewable failed to fetch its asking price after seeking a valuation three times higher than Archer Daniels Midland Co., the world’s biggest grain processor and a competing biodiesel producer. The IPO is the first in the U.S. this year after stocks that debuted in 2011 lost an average of 4.2 percent percent through yesterday, as global economic turmoil sapped investors’ appetite for risk.
The midpoint of the IPO price range valued Renewable Energy at $401 million, or about 0.6 times revenue of $627 million in the 12 months through Sept. 30. That’s about three times the comparable ratio of 0.2 for ADM, which has a market value of more than $19 billion. The IPO was the first biofuel offering since June, when Kior Inc. (KIORQ) raised $162 million and then lost more than 30 percent of its value.
Renewable Energy is a “pure commodity business,” whose profitability depends on how it hedges against price changes, said Pavel Molchanov, an analyst at Raymond James & Associates Inc. Prices for agricultural commodities such as soybeans are tougher to predict than diesel prices linked to crude oil because they are affected by factors such as weather and how many crops farmers choose to plant, he said.
The company has been reducing its dependence on soybean oil since 2009 after prices of the commodity increased almost fivefold in seven years to 70 cents a pound, according to its filing. About 9 percent of Renewable Energy’s feedstock was soybean oil in 2010, compared with 22 percent in 2009, with the remainder coming from inedible animal fat, used cooking oil and inedible corn oil, its filing shows.
Still, “the markets for used cooking oil and inedible corn oil are in their nascent stages,” meaning Renewable Energy can’t make forward contracts for its ingredients at fixed prices, the filing shows. Losses from hedging in 2010 widened to $1.2 million from $1.1 million in 2009.
Most biodiesel in the U.S. is used as part of a blend with petroleum-based diesel fuel for on-road vehicles, according to the filing. Oil companies must blend 36 billion gallons of biofuel by 2022, including 1 billion gallons a year of biodiesel starting in 2012, according to a U.S. Environmental Protection Agency regulation.
Pilot Travel Centers LLC, the operator of highway truck stops, is Renewable Energy’s biggest customer, accounting for 29 percent of revenue in 2010, according to the filing.
Kior, Gevo Inc. (GEVO) and Amyris Inc. (AMRS), all backed by billionaire Vinod Khosla, are developing so-called advanced biofuels, including hydrocarbons that can be processed into replacements for gasoline, diesel and jet fuel. Renewable Energy, in contrast, is considered a “first generation” biofuel company and is more similar to corn ethanol producers, Molchanov said.
Gevo, valued at about 2.6 times sales in the 12 months through Sept. 30, dropped 58 percent in trading through yesterday since its IPO in February 2011. Amyris was down about 34 percent since its debut in September 2010. None of the companies is profitable.
Renewable Energy’s net income in the first nine months of 2011 was $781,000, following annual net losses from 2008 through 2010 totaling $106.3 million. The U.S. biodiesel industry faced a downturn starting in 2008 because of anti-dumping duties imposed by the European Union, the global financial crisis and a higher cost of soybean oil, according to the filing.
The company planned to offer about 6.9 million shares, and owners including U.S. Renewables Group LLC, Bunge Ltd. (BG), ED&F Man Holdings Ltd. and NGP Energy Technology Partners planned to sell about 343,000 shares, according to the original terms of the offering.
Renewable Energy planned to use the proceeds to buy a factory it is currently leasing and to invest in new processing technologies, its prospectus showed.
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