Methes Energies: A Look Beyond the Surface of Its 10-Q
Methes Energies International Ltd. (NASDAQ: MEIL), a renewable energy company that offers an array of products and services to a network of biodiesel fuel producers, reported a not so attractive first quarter on the surface. Revenues fell 93% to $2.98 million as biodiesel sales dried up, while higher SG&A expenses doubled the net loss to nearly $1.4 million. But looking under the surface, these results were just a temporary roadblock in an otherwise bullish long-term story.
Revenues Take a One-Time Hit
Methes Energies’ revenues were the biggest surprise for investors last quarter, thanks to a 95% drop in biodiesel sales. These declines were driven by uncertainty about the integrity of RINs in the U.S. following several recent issues in the biodiesel industry. For instance, Absolut Fuels pilfered more than $50 million in fake RIN credits without producing any biodiesel and Clean Green Fuel LLC allegedly make $9.1 million selling credits that were never delivered.
The end markets for these credits – large oil and gas companies – purchase these credits to meet federal Renewable Fuel Standard (“RFS”) guidelines. Unfortunately, the Environmental Protection Agency (“EPA”) had forced these large companies to purchase new RINs after the fraud, resulting in a complete loss on their part. As a result, many of these large customers began purchasing RINs from only large and established biodiesel providers to reduce risk.
The good news is that things are changing. In early February 2013, the EPA introduced quality assurance programs (“QAPs”) that would enable RIN buyers to verify their validity. The system provides a clear path for EPA-approved independent third parties to audit and monitor the production of biodiesel and verify that RINs have been correctly generated. Consequently, the uncertainty in the market should be greatly reduced moving forward.
Sombra Facility Should Pay Off vigrx plus does it work
The second big surprise last quarter was a 52% increase in SG&A expenses to $1.29 million, which may have been a hard pill to swallow after the lower revenues. But, a look deeper into the financial statements shows that these expenses primarily included salaries, wages, utilities, and equipment necessary to bring its Sombra facility online. These efforts may have been painful in the short-term, but they should pave the way for strong top-line improvements in the long-term.
According to the 10-Q filing, the company anticipates that the Sombra facility will generate positive cash flow from operations and will operate profitably once sufficient level of commercial operation is achieved in the second half of the current fiscal year. While some additional capital is needed, the rapid payback period suggests that the project will generate a high return on equity for shareholders over the long-term, justifying the high expenses.
Long-term Picture Remains Intact
Methes Energies’ long-term outlook remains very healthy, despite the hiccup in the most recent quarter. The EPA mandates that 1.28 billion gallons of biodiesel be produced for domestic use in 2013, which is a figure that will be difficult to meet with existing production. Meanwhile, the RIN market has now stabilized and larger companies have the incentive to look for RINs in all corners of the market, including small to medium producers like Methes Energies.
The company has also passed the start-up phase for its Sombra facility, which means that full production should be reflected in upcoming financial results. These top-line improvements should occur with relatively modest expenses moving forward, paving the way towards bottom-line improvements, too. And finally, ongoing growth and stability in the biodiesel market could drive demand for its equipment sales and royalties moving forward.
Company Website - www.methes.com