Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…)
Capturing the “Microsofts” and “Caterpillars” of the investment world before they are large companies is a real art. In my research I enjoy looking for small Companies that are just in what I would describe as a “transition phase” that helps the company grow and generate more revenue. One small Company that I ran across is called Methes Energies(MEIL).
It is a renewable energy company that offers a variety of products and services to biodiesel fuel producers. It offers biodiesel processors that are unique, truly compact, fully automated state-of-the-art and can run on a wide variety of feedstock. Its clientele are in Canada and the United States. The company put together a strategic plan for growth that resulted in record shipments in October. This plan started with the commissioning of a new facility in Ontario.
Recently commissioned 13 MGY facility in Sombra, Ontario
The plan for the biodiesel facility at Sombra, Ontario, was twofold:
- Make more biodiesel fuel
- Improve efficiency and quality
In preparation for the strategy, the first thing the company did was refinance old debt at half the cost.
In July of this year, the company made a significant move in debt refinancing. In June 2012, the company had a loan at an interest rate of 23%. The refinancing of the $1.6 million CDN loan was done through a local facility in Ontario at 12%. This frees up thousands of dollars per month, allowing the company to strategically invest in its growth strategy.
Secondly, in August, the company closed on a total of $1.5 million working capital facility for its Sombra, Ontario biodiesel manufacturing plant, through a local lending firm. The facility will provide up to $750,000 of cash advances against the company’s Accounts Receivable and additional $750,000 cash that can only be used to purchase feedstock for the production of biodiesel.
Strategically, this move was important for the company’s planned growth. The facility in Sombra has plenty of room to grow and this provides additional resources to purchase more feedstock to increase production. This is how the company started to reach new records in biofuel production in September.
The company may have reached a new production record September, but it wasn’t finished.
Record Shipment in October
Its planned growth is working well, and the numbers support it.
In October of this year, the company shipped a total of 485,000 gallonsof biodiesel fuel from its production facility in Sombra. This was a record for the company and to show you how big it was in comparison to its past production, let me use the railcars it was shipped in as a comparison. In April of this year, the company shipped a total of eight railcars (which was considered good). This past shipment in October totaled 18 railcars.
At the rate the company is producing biodiesel, it will produce as much biodiesel fuel this last quarter of 2013 as it did the entire year of 2012. The company has plenty of room to grow in this one facility and is not finished yet. It presently has two Denami 3000′s in use at the facility and has sufficient room to double its production from 13 million gallons per year to 26 MGY without having to add any more Denami 3000′s.
The Company also intends to add a distillation column at the back end of the process to improve quality and efficiency
These numbers are a good start and in their exactly what I want to see when I am looking for a company I believe is going to be able to grow in value for me.
Research Biodiesel Industry
National mandates for the introduction of biofuels are by far the largest market drivers. Governments and regulatory pressure as well as subsidies help the market. There is no sign that the United States has any intentions of resending any mandates in the short term.
There is a worldwide push to limit the effects of carbon dioxide (CO2) on global temperatures and climate change. Tension exists, however, between environmental protection and economic growth, which often seem in conflict. Biofuel production is an example of them both coming together.
The “Renewable Fuels Standard” requirements are very ambitious. The goal for “Advanced Biofuel” which includes biodiesel is to produce 3.75 billion gallons in 2014 and raise that to 15 billion gallons by 2020. Even with its growth, it is only expected to capture 2% of the whole energy market share through 2040.
We hear stories about the energy sector growing and the demand for energy continuing to grow. The biodiesel sector will always remain a very small portion of the energy sector though.
Expansion will continue as the company begins to open up new markets.
Equipment Sales Expand with Ethanol Producers
Ethanol producers all over North America are finding new ways to generate revenue because they can extract corn oil from the corn before they convert it into ethanol. For this reason, these ethanol producers are interested in Methes Energy’s “Denami 600 & 3000″ biodiesel processors. The additional value and revenue Ethanol plants will gain by converting corn oil into biodiesel fuel is opening up equipment sales opportunity here in North America and abroad for the company.
Acquisition to work with Smaller Clients
Methes recently signed a letter of intent to grow its clientele. Instead of being able to cater to just large operations with deep pockets, it can also provide medium and smaller solutions to clients involved in the renewable energy sector. The letter of intent is to acquire the assets of OTC Energy Technologies Inc. (“OTC”), including all of OTC’s technologies and know how relating to the conversion of several types of biomass into a chemical quality syngas which can be converted into renewable alcohols such as ethanol and methanol, renewable hydrocarbons such as jet fuel and gasoline.
The goal of this purchase is to allow the company to make small and medium-size processors available to clients where large-scale facilities are just not feasible.
This is all part of the growth plan the company has put in place and we should see substantial value from this acquisition. John Loewen, Vice President of Operations at Methes Energies, summed it up best when he said:
“We are first and foremost a technology company, and we are proud to be adding to our portfolio this way. We are excited about the opportunity to offer a smaller solution to people that don’t have the $100′s of millions typically associated which such projects. What we’ve seen at their small scale facility is truly amazing, and our goal is to quickly package and deploy turn-key solutions similar to our biodiesel processors. We look forward to the completion of this transaction which we expect will bring substantial revenues and in turn create significant value for our shareholders.”
Since the company’s initial IPO, the stock looks like it has been struggling to find a “price identity.” Presently it is trading close to three dollars a share.
As one can see from looking at the weekly chart, the initial reaction to the company’s financial moves in August helped the stock find a bottom before its reactionary move up.
Even with the company’s increased productivity, I would like to see a reverse in the longer term bearish trend.
As you can see by this quarterly report from Yahoo finance, profitability for the company is going to come in “volume production.” This industry has a very high cost of revenue. You will notice that the company’s operating income loss in August 2013 was less than in February 2013 even though there was much more revenue generated. (G & A) stays pretty parallel even with more revenue generated, so the company’s profitability will center on increasing revenue through productivity.
I would expect to see gross profits continue to increase substantially from now on with the commissioning of the plant in Ontario. The company also believes it will double production without having to spend too much on investments.
These moves point out to me it’s a good time to invest in this company, as revenues should be substantially higher over the next few years.
Risk to Consider
Unlocking of the shale gas reserves, especially in the United States, may reduce the impetus on biofuels as a solution to feel secure. This puts off the need for a “biofuel only” strategy.
This increase in unconventional fuels has reduced some of the importance in biofuel production outside of government mandates. I believe it is important to point out though that shale gas is not a renewable fuel source so it doesn’t threaten biofuels in the long term, but may help its development. It can provide low-cost natural gas and alleviate the “quick paced development” of the biofuel industry. This will give it a chance to develop long-term and become more viable and efficient.