Ethanol Mergers at 5-Year High in 2021

LINCOLN, Neb. (DTN) -- U.S. ethanol companies pursued more mergers and acquisitions than they have in five years, and the renewable diesel industry continued to grow and expand in 2021, according to a new report by the preeminent biofuels mergers and acquisition adviser California-based Ocean Park Advisors.

As the face of the biofuels industry continues to evolve, Ocean Park said there is an increasing number of companies looking to secure feedstock supplies. This is especially true for those companies moving away from biodiesel and expanding renewable diesel production.

When it comes to ethanol, the firm said, the number of mergers and acquisitions in 2021 was more than double the same activity in 2020. Poet LLC's acquisition of about 800 million gallons of production capacity from Flint Hills Resources was the single-largest ethanol transaction in history, according to Ocean Park.

A total of seven transactions involving 12 ethanol plants and about 1.2 billion gallons of capacity closed in 2021 -- the most since 2013. Those mergers and acquisitions, Ocean Park said, represented about 7% of total U.S. industry capacity.

Of the 12 plants acquired, seven were large-scale operating plants that made up about 78% of all capacity sold. Archer Daniels Midland, Alto Ingredients and Green Plains also sold plants totaling 300 million gallons in production capacity.

"The flurry of dealmaking broke a lull of two years where no large-scale operating plants traded," Ocean Park said in its report.

"Sellers sought to unload underperforming plants or to generate capital to reinvest in higher-value specialty ingredients or carbon-capture projects."

RENEWABLE DIESEL EXPLODES

While ethanol industry ownership of current plants continued to evolve, Ocean Park said the biodiesel and renewable diesel markets experienced a boom in construction in 2021.

"Instead of acquiring operating plants, the larger companies spent significant capital to build and retrofit plants, amplifying a frenzy of investment amid a battle for limited feedstock supplies," Ocean Park said.

In particular, petroleum refiners and biodiesel producers "led a construction boom in renewable diesel, as 12 plants are either under construction, expanding or have been completed, accounting for 3.9 billion gallons and $7 billion-plus in investment through 2024."

As a result, Ocean Park said, there is a growing feedstock shortage for vegetable oil, used cooking oil, corn oil and other lipids.

Vegetable oil continues to be the primary feedstock used in biodiesel and renewable diesel. Ocean Park said most new renewable diesel plants start out using soybean oil and later add on pre-treatment equipment to process waste feedstocks.

"The integrated oil companies' and the independent refiners' newly found interest in biofuels stems from their decision to generate compliance credits internally, repurpose older refineries, turn a profit, respond to shareholder pressure, invest in a high-growth market, and hedge with investments in promising carbon markets such as California and Oregon," Ocean Park said in its report.

Renewable diesel and biodiesel production have continued to be hot commodities in 2022, as this week, Chevron Corp. announced the $3 billion cash acquisition of Renewable Energy Group based in Ames, Iowa (https://www.chevron.com/…). Renewable Energy Group operates 11 biorefineries and produced about 519 million gallons of renewable fuels, including biodiesel and renewable diesel, in 2021.

Despite an ongoing construction boom in renewable diesel, mergers and acquisitions in biodiesel and renewable diesel remained "sluggish" in 2021.

One exception was HollyFrontier's acquisition of Sinclair's 153-million-gallon renewable diesel plant in Wyoming last year.

RENEWABLE DIESEL RAPID GROWTH

Ocean Park said the "rapid growth" of renewable diesel was "taking market share and feedstock" away from the biodiesel industry.

"Whereas RD capacity in the U.S. more than tripled to 1.3 billion gallons per year in 2021, BD production declined by 8% to 1.7B gallons," Ocean Park said.

"Instead of buying biodiesel plants, companies deployed capital to renewable diesel projects and to secure feedstock for their plants. The largest soy oil producers are also the largest biodiesel producers. Last year, many of these firms notched deals with major oil companies to supply them with feedstock for their RD operations."

In some situations, vegetable oil producers are selling to renewable diesel producers at a higher profit than if they sell to biodiesel producers, Ocean Park said.

In all, 12 companies announced plans to build or have started construction on 2 billion gallons of new renewable diesel production capacity.

"Many of these projects will start up in 2022, leading to an even greater pull of feedstock into RD production," Ocean Park said.

Diamond Green launched construction on a 400-million-gallon-per-year plant in Port Arthur, Texas, that is expected to be operational by 2023.

Renewable Energy Group started construction of a 250-million-gallon expansion at its Geismar, Louisiana, renewable diesel plant. Seaboard began construction to convert a cellulosic ethanol plant in Hugoton, Kansas, into an 85-million-gallon renewable diesel plant.

In addition, Calumet, CVR, Cargill, PBF and a number of other companies announced renewable diesel construction plans in 2021.

"The boom in RD construction has set off a battle for feedstock," Ocean Park said.

"The year 2021 witnessed a flurry of investments, joint ventures, and acquisitions by integrated oil firms, refiners and large energy companies aimed at controlling and boosting feedstock for RD plants. The scarcity of feedstock has made its sourcing and control as important as owning processing plants."

That includes feedstock plans announced by Phillips 66, Archer Daniels Midland, Marathon, Bunge, Chevron, Neste, Tyson Foods and others.

Biodiesel plants lost money in 2021 as an increasing number of renewable diesel plants came online.

"If these headwinds persist in the near term, more plants could idle or shut down," Ocean Park said. "Liquidations or distressed sales could be common in 2022. Independent BD plants without secured feedstock supplies will face heightened competition for feedstock from RD plants."

Renewable diesel production capacity, however, was expected to grow by more than 50% in 2022, Ocean Park said.

"The rapid expansion underway is making feedstocks expensive and compressing margins," the firm said. "To mitigate these pressures, RD producers could pursue more deals to lock in feedstock supplies. Longer term, factors that could potentially limit RD growth and investment include relatively static mandated volumes, limited feedstock, and the size of the California and Oregon mandated markets (low-carbon fuel standards)."

Read more on DTN:

"Irwin: 2021 Devastating for Biodiesel," https://www.dtnpf.com/…

Todd Neeley can be reached at todd.neeley@dtn.com

Follow him on Twitter @DTNeeley

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