Biofuel Stocks Are Sputtering. They Could Soon Get a Jump Start.
Billions of gallons of fuel refined from cooking oil, french fry grease, landfills, and farm byproducts are being pumped into the engines of American vehicles every year. As long as people keep planting corn and eating fast food, there’s no imminent shortage of oil to pump into tanks. But there has been a shortage of cash to pay for it lately, stalling the industry’s growth and raising questions about its future.
Following a selloff in the industry that has pushed several stocks down more than 20% in the past year, some analysts now see buying opportunities. Among the names that are receiving positive buzz are Darling Ingredients (ticker: DAR) and Opal Fuels (OPAL).
The industry’s problems stem from upheaval in the market for carbon credits. California’s Low Carbon Fuel Standard, which went into effect in 2011, has been a key growth driver for the industry. It is designed to lower the overall carbon intensity of transportation fuels used in the state by establishing a credit and debit system for fuels. To comply, carbon emitters such as refiners need to produce cleaner fuels or buy enough credits from renewable fuel producers to offset their greenhouse gases. It’s so important to the biofuels industry—paying out an average of $4.3 billion annually over the past three years—that nearly all the renewable diesel produced in the country gets shipped to California to take advantage of it. But the value of the credits has fallen steadily since 2020—they’re paying out 63% less per ton than they did at their peak because of an oversupply. With more credits being produced than carbon-emitters need to buy, the value of each credit has declined.
The federal government has been running its own clean-fuels program since 2005, requiring that refiners blend certain renewable fuels into gasoline and diesel or pay for credits. But the Environmental Protection Agency’s latest clean fuel volume mandates are lower than some producers had hoped, and credit prices have slipped for products such as biogas.
The industry’s future will depend in part on whether the state and federal credit values rise, and which fuels are prioritized. The fate of at least a dozen companies—and major investments in the industry by companies like BP (BP) and Chevron (CVX)—hangs in the balance.
The price crash has “put everybody on ice,” says Eric McAfee, the CEO of biofuels company Aemetis (AMTX), whose stock is down 78% in the past year. “The impact is a lack of investment,” he says. “When something is not happening, it’s much harder for people to see the pain.” The result is that you’re “stuck with the same amount of high pollution, high-cost imported crude oils you had last year.”
The industry’s stagnation isn’t just a problem for the companies. The International Energy Agency says biofuels production will have to quadruple from 2021 levels by 2030 and make up 15% of global transportation fuel—up from 3.6%—in order to limit harsh climate-change impacts. Biofuels are considered the best near-term solution to decarbonize heavy equipment because electric-vehicle batteries are simply too heavy to support trucks right now, and the tech to electrify airplanes is decades away from being used at scale.
Most biofuels still cost considerably more than fossil fuels to make, so government policies play a key role in bridging the gap. There are companies like Amazon.com (AMZN) that buy cleaner fuels to reach a self-imposed net-zero goal, but they remain outliers. In the fourth quarter of last year, the value of credits tied to federal and state policies amounted to more than 100% of the adjusted earnings for Clean Energy Fuels (CLNE), a Southern California company that makes renewable natural gas for use in transportation, according to Raymond James. As a result, the company’s stock has taken a big hit as the value of credits has fallen; the stock is down 28% over the past year. Darling Ingredients, a renewable diesel producer, is down 22%. Opal Fuels, another gas producer, is down 26%.
The drops come despite the fact that several kinds of renewable fuels are showing they can be viable replacements for fossil fuels. Biofuels are nothing new, but the market has expanded dramatically in the past few years. The best-known biofuel is ethanol, which is mostly made from corn and has been blended with gasoline for decades; it still makes up about 70% of the biofuels market.
But other kinds of fuels are quickly making their way into fuel tanks around the country, thanks to government support and technological advances. About 5% of U.S. diesel fuel is now made up of biodiesel or renewable diesel, two forms of carbon-friendly fuel with somewhat different chemical compositions. Renewable diesel can be used as a direct replacement for traditional diesel, whereas biodiesel must be blended at a lower percentage rate. That’s helped spur quick adoption, with renewable diesel capacity quadrupling in the past four years. By 2025, renewable diesel is likely to account for the majority of diesel fuel used on the West Coast, according to the Energy Information Administration.
Major refining companies—including Valero (VLO), Marathon Petroleum (MPC), and CVR Energy (CVI)—are all investing in expanding capacity for renewable diesel. Chevron is also expanding capacity, after buying renewable diesel and biodiesel producer Renewable Energy Group in 2022.
But all that added capacity has begun to overwhelm the California market, resulting in an excess of low-carbon credits. The accumulated bank of excess credits—which can be used in future years—could cover at least half a year’s worth of carbon emissions without a single ounce of biofuel being sold in the state. That oversupply has caused the credits to crash.
Andy Walz, who heads up oil products for Chevron in the Americas, including its expanding portfolio of renewable fuels, said in an interview that the decline isn’t going to stop the company’s investments. “Policies do move around and prices like this move around, and we’re prepared to weather through it and continue our strategy,” he says.
The impact has been harder on renewable natural gas, which is more dependent than diesel on the credits. RNG, which is mostly made of methane, is captured from landfills, sewage, and animal manure and can be piped around the country like the traditional product. There are 281 RNG facilities operating in North America, but the industry makes up less than 1% of U.S. natural-gas production. BP bought landfill-gas producer Archaea Energy last year, with plans to quintuple its capacity. While big companies are expected to continue their expansion projects, some smaller producers say that low credit prices in California have slowed their development.
Normally, one oversaturated market wouldn’t sink an industry. But biofuels producers have limited options. Oregon and Washington recently started up their own low-carbon programs, and British Columbia has one, too, but none are as substantial as California. Federal renewable credits have been helpful but can’t on their own support the industry, analysts say.
To help bridge the gap, some senators have discussed the possibility of a national low-carbon standard. Sen. Tom Carper, a Democrat from Delaware, said at a February hearing that a federal standard “can provide certainty, predictability, and flexibility for all stakeholders while also spurring innovation.” But Republicans disagreed, with Sen. Shelley Capito, a Republican from West Virginia, warning that a federal standard could cause gasoline and diesel prices to rise. Analysts say that the extra compliance costs for refiners can end up trickling down to consumers, and are one reason California’s gasoline prices are higher than elsewhere.
“I doubt my state and many others, particularly in rural America, will want to import the West Coast’s policies,” Capito said.
Given the disagreement, and growing concerns about inflation, analysts doubt a low-carbon standard could pass at the federal level. “I don’t see how the U.S. government is going to develop a national LCFS,” says Megan Boutwell, president of transportation fuels consulting firm Stillwater Associates. But she does expect state proposals to do better. New York, New Mexico, Illinois, and other states are considering their own low-carbon standards to meet their own net-zero goals. A patchwork of state benefits could support the industry’s expansion goals.
New state programs are just one reason that analysts are becoming more optimistic about the industry. “I would say that the industry is going through a much-needed reckoning,” says Matthew Blair, an analyst at Tudor, Pickering, Holt who covers biofuels. The days of “growth at all costs” are over, Blair says. “The companies are behaving more as regular businesses.”
The California Air Resources Board is planning to tighten standards by next year. Analysts expect credit prices to rise considerably—if not back to their 2020 highs above $200, at least to well above $100. Since the board held a meeting on the program in February, prices are already up, from $62 to a recent $82. The EPA is also expected to shift its rules in a way that boosts the value of credits known as renewable identification numbers, or RINs, Opal Fuels co-CEO Jon Maurer said in a recent interview.
Maurer thinks the best sign that the industry will bounce back is that bigger players have moved in. Both BP and Shell (SHEL) have announced multibillion-dollar acquisitions of RNG companies in the past year. “This is a big groundswell of support in our industry,” he says.
Blair thinks Opal itself could be “an attractive takeout candidate,” which is one reason he rates it at Buy. He also likes Darling Ingredients.
Another source of optimism on biofuels is the emergence of a new market for cleaner aviation fuel. Oils from beef, soybeans, and other sources can be refined in such a way to make them viable replacements for jet fuel, a market that’s a major contributor to climate change. The biggest U.S. airlines have committed to use much more of the cleaner stuff, known as sustainable aviation fuel, over the next decade, with United Airlines and others even pledging $100 million to projects that can jump-start the industry.
The Inflation Reduction Act also included extra subsidies for the air fuel, as have states including Illinois. Calumet Specialty Products Partners (CLMT), the biggest U.S. producer of the fuel, just started making 1,000 barrels a day at a repurposed Montana refinery it owns. That’s a minuscule portion of the seven million barrels of jet fuel used around the world every day, but it’s expected to ramp quickly. “We’re at the infantile stage of what we think is going to be an explosive growth story,” says Calumet CEO Todd Borgmann. The Montana site gives Calumet access to cheap feedstocks and end markets including Canada and California that are willing to pay up for clean jet fuel. After a decade of losses, analysts expect Calumet to swing to a profit this year, and quadruple earnings by 2026.
Raymond James analyst Pavel Molchanov thinks it’s worth buying Clean Energy Fuels on expectations that credits will rise, though he also issued a warning to investors. “This stock’s always-volatile attributes—it is emphatically not a buy-and-hold name—makes it essential to be tactical, and that means short-term trading calls,” he wrote.
McAfee, the Aemetis CEO, says the industry may not appeal to fearful investors. “This is a time for sophisticated investors to make an amazing amount of money, because the market’s just simply wrong,” he says.
For now, a bet on these companies is dependent on supportive political policy and tech advancements coming together at the same time. If those two forces do meet, the stocks could rise like a jet, regardless of what’s powering the engine.