Renewable Energy Group

Renewable Energy Group (former ticker: REGI) was a leading North American producer of cleaner fuels, specializing in biodiesel and renewable diesel. Before its acquisition by oil giant Chevron Corporation in 2022, REG was a titan in the bio-based diesel industry. The company's core business was wonderfully simple in concept yet complex in execution: it sourced low-cost, waste-based raw materials—like used cooking oil, inedible corn oil, and animal fats—and transformed them into high-quality, lower-carbon fuels. This process not only helped reduce waste but also provided a cleaner alternative to traditional petroleum diesel, positioning REG at the forefront of the energy transition. For investors, REG represented a pure-play bet on the growth of renewable fuels, offering a story of environmental benefit married to industrial-scale production. It was a company that turned what others threw away into a valuable, in-demand commodity.

At its heart, REG operated like a highly specialized refiner. Instead of crude oil, its primary input was a diverse slate of fats and oils, known in the industry as feedstock. The company's competitive edge stemmed from its ability to process a wide variety of these feedstocks, allowing it to pivot to whichever input was cheapest at any given time. This flexibility was crucial for protecting its profit margin. REG produced two main products:

• Biodiesel: An alternative fuel created through a chemical process called transesterification. It's typically blended with petroleum diesel in various concentrations (e.g., B5 is 5% biodiesel, B20 is 20%). While effective, it has some limitations in cold weather and isn't a perfect substitute for petroleum.
• Renewable Diesel: This is the premium product. It's a “drop-in” fuel, meaning it is chemically identical to petroleum diesel and can be used in existing engines and infrastructure without any blending or modifications. This makes it a far more valuable and sought-after product.

The profitability of this business was largely determined by the difference between the cost of feedstock and the selling price of the finished fuel, a dynamic often called the “crush spread” in commodity markets.

For a value investor, analyzing REG meant looking past the “green” hype and focusing on the underlying business fundamentals, competitive advantages, and, most importantly, the risks.

The investment thesis for REG was compelling and built on several key pillars:

• Secular Tailwinds: Governments worldwide, particularly in the U.S. and Europe, have implemented mandates and incentives to increase the use of low-carbon fuels. Programs like the U.S. Renewable Fuel Standard (RFS) created a guaranteed source of demand.
• Feedstock Flexibility as a Moat: Unlike rivals who were dependent on a single feedstock like soybean oil, REG's multi-feedstock technology platform acted as a competitive advantage, allowing it to manage input costs more effectively.
• Leading Market Position: As an early mover and one of the largest producers, REG benefited from economies of scale in production, logistics, and distribution.
• Growth in Renewable Diesel: The company was aggressively expanding its renewable diesel capacity, tapping into a premium market with higher margins and stronger demand from carbon-conscious customers like trucking fleets in California.

A prudent investor also had to weigh the significant risks inherent in REG's business model:

• Regulatory Dependency: The company's profitability was heavily influenced by government policy, especially the Blender's Tax Credit, a $1/gallon subsidy. The periodic expiration and last-minute renewal of this credit by the U.S. Congress created massive uncertainty and volatility in the company's earnings and stock price.
• Commodity Volatility: REG was exposed to the wild swings of commodity markets. A spike in feedstock prices or a plunge in energy prices could crush profitability, making long-term earnings difficult to predict.
• Intensifying Competition: As the renewable fuels market became more attractive, major oil and gas companies began investing billions to build their own renewable diesel plants, threatening to crowd out smaller players and bid up the price of scarce feedstocks.

The story of REG as a standalone public company concluded in June 2022, when Chevron Corporation completed its acquisition of the company for $3.15 billion. This event serves as a fantastic case study for investors. The buyout represented a logical end-game. For Chevron, acquiring REG was a fast and efficient way to become a major player in the renewable fuels space, advancing its own ESG (Environmental, Social, and Governance) targets and diversifying its energy portfolio. For REG shareholders, the acquisition was a validation of the company's value, providing a profitable exit at a significant premium. It demonstrated that a well-run, strategically important niche company can become an irresistible target for an industry giant seeking to adapt to a changing world, ultimately unlocking the value that long-term investors had been waiting for.