Atish Patel
FutureFuel Corp
Brief
It wasn’t long ago that oil prices hit $150 per barrel. Around 10 years ago to be precise. The concern around the cost of fuel drove an array of stories around fuels of the future, cars powered by hydrogen, by batteries, by compressed natural gas and pretty much anything to escape the domination of gasoline. A decade later and, unsurprisingly, many, if not all (other than electric) of these technologies have yet to disrupt the world of transportation as expected.
What is the future of fuels?
It’s not exactly a secret that the fossil fuels most cars run on are eventually going to run out and it’s also not a secret that they emit carbon greenhouse gases. Put that all together and there’s no escaping the inevitable conclusion: Fossil fuels have to go. But what are we going to replace them with?
Whilst there are a few possibilities such as electric batteries, hydrogen fuel cells, compressed air and liquid nitrogen, unfortunately, most of these technologies aren’t quite ready for primetime. Even electric vehicles which are very available have their drawbacks, like limited driving range, long recharge times and a limited infrastructure of recharging stations. So for now we’ll keep burning fossil fuels to drive our vehicles right?
There is however another alternative that’s available right now that’s barely being used which is biofuels. These are fuels made from vegetable matter that take advantage of their natural energy content, captured from the sun through photosynthesis, to produce a mixture that can be used, usually in conjunction with fossil fuels, to run internal combustion engines.
Although this alternative is available now, and there are vehicles that can advantage of it, biofuel really isn’t being used that much and only limited amounts of it are being created. The US government is offering tax breaks to those who make, mix and sell these biofuels to consumers.
About the company
FutureFuel is a company with a $750 million market capitalisation producing biodiesel and specialty chemicals for the domestic market. The Chemicals segment produces chemical products that are sold to third party customers. The Biofuels segment includes the manufacture and market of biodiesel, including biodiesel blends with petrodiesel, petrodiesel with no biodiesel added, RINs, biodiesel production by-products and the purchase and sale of other petroleum products. The company was founded by Lee E. Mikles and Paul Anthony Novelly on August 12, 2005 and is headquartered in Clayton, MO. Biofuels has a slight edge in driving revenue over specialty chemicals (60% vs 40%) but the latter is a solid producer with 25-30% gross margin year in year out, while biofuel margins can be volatile.
Key points:
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Biodiesel is very much a creature of feedstock prices and government tax incentives. The founder owns 40% of the company, but has other interests focused on petroleum - his plans for FutureFuel remains unclear and my concern is that they may rely on a quite significant biofuel tax credit. It’s these tax incentives that I will be keeping an eye on which will be a critical driver for most investors and their decision on this stock.
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Cash represented some 40% ($300 million) of the total market capitalisation of the company. However, it must be noted that the company’s cash burn is a merely a fraction of that.
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FutureFuel’s valuation reflects its hybrid biofuel and chemical business. Focusing on these two branches can be disadvantageous as pure play competitors (who are focusing its resources on just one line of activity) seem to offer better ways to invest in either business.
Looking at the technicals, FutureFuel Corp is rejecting the $13 mark which has previously held as a support level. Currently price seems to be making an upwards move bouncing off an upwards trendline. There was a strong sell-off in early March 2019, caused by Q4 sales decline of 13% to $65.5M primarily due to lower biofuel volumes. This is partially offset by continued volume strength in the chemical segment. FutureFuel Corp has been rallying from oversold areas using the RSI & Stochastics, with the most recent from the $13 area. The $19 region will be a strong target leading to a 45% increase in share price however a more conservative target of £16 is more realistic for a 20% growth.
Source: IG
Furthermore if we look at FutureFuels Corp’s intrinsic value, we can see its share price is below the future cash flow value, at a substantial discount of over 40%. As we progress to a more viable and long-term solution to replacing the fossil fuels we currently use, we should expect to see increase in value.
Source: Simplywallst
Additionally, the company’s debt (or lack of) makes for good reading. Currently FutureFuel has none and hasn’t had for the previous 5 years. With no interest payments to be concerned with and their full operating cash flow at their disposal, this is a healthy position for them to be in.
Source: Simplywallst
Perhaps this stock is not quite ready for a buy yet due to the fact that having biofuels used in the mainstream will undoubtedly take years but equally carrying on the way we are is simply unsustainable and at some stage change will take place. Definitely one to keep an eye on.
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