Description

GPRE VIC Write Up

GPRE Transformation Strategy

Green Plains has accomplished a great deal since the company was last posted on VIC in March 2020. I will refer you to AtlanticD’s report from the depths of Covid for background on GPRE as a traditional ethanol company (additional background on the company can be found with the 2017 and 2019 VIC reports on GPRE). This write up will focus on the transformation strategy that has unfolded over the past two years at the company. Financial information above assumes fully diluted share count. 

Green Plains was primarily an ethanol company with 11 ethanol plants located throughout the Midwest and Central United States with capacity to produce ~1 billion gallons of ethanol. The ethanol industry has historically been capital intensive and value destructive as supply / demand imbalances drove significant crush margin volatility. In light of these industry characteristics, GPRE made the decision to truly diversify its business away from legacy ethanol production and into a diversified bio-refinery focused on agricultural co-products related to high protein feed ingredients, enhanced corn oil production, and clean sugar. This transformation was catalyzed by GPRE’s January 2020 acquisition of Fluid Quip Technologies where GPRE gained a portfolio of competitively disruptive AgTech IP (Fluid Quip overview: https://s201.q4cdn.com/120229500/files/doc_events/2021/01/About-Fluid-Quip-Final-web.pdf).

The AgTech portfolio focuses on high protein feed ingredients, increased corn oil production, and the generation of clean sugar ingredients.

Specific to each vertical Fluip Quip:

1. High Protein - enhances a portion of GPRE’s traditional dried distillers grains into a high protein feed ingredient (protein content of 48%-60%+) that can be sold into a variety of species including swine, poultry, pet, aqua for inclusion into feed programs. These high protein ingredients also have different yeast and amino acid profiles than traditional soy meal / corn gluten meal which can be attractive to different end markets for digestibility purposes.
   1. Once completely rolled out GPRE anticipates producing ~600k tons of high protein feed ingredients compared to none at the start of 2021.
2. Corn Oil – enhances GPRE corn oil production yield by ~50% (potentially even more). An ethanol facilities produces corn oil as part of the traditional ethanol process. Typically speaking, an ethanol facility produces ~0.8 pounds of corn oil per bushel of corn, with Fluid Quip’s IP, GPRE is now able to product ~1.2 pounds of corn oil per bushel of corn. This co-product has become very valuable as a critical / scarce feedstock for the renewable diesel industry.
   1. Once completely rolled out, GPRE anticipates producing ~400 million pounds of corn oil.
3. Clean Sugar - enables GPRE to generate industrial grade dextrose and glucose which has primarily been produced by the likes of ADM, Cargil, Tate & Lyle, and Ingredion. GPRE is on record saying they purchased Fluid Quip for clean sugar and got high protein and enhanced corn oil for free. The reason clean sugar is important to GPRE is it carries the highest margins of any co-product stream, while also eliminating ethanol production at facilities that receive clean sugar upgrades (which still producing high protein ingredients and enhanced corn oil).
   1. GPRE is currently building its first clean sugar facility at its Shenandoah plant with nameplate capacity of up to 200 million pounds with expansion opportunities to 500 million pounds.

These co-products are highly valuable, offer competitively disruptive opportunities, and provide significantly better financial performance (reliability, margins, profitability, and free cash flow generation) than GPRE’s historical legacy ethanol production.

GPRE has spent the past 24 months rolling out the AgTech enhancements (high protein and corn oil, while clean sugar is under construction at the Shenandoah facility) to half of its facilities (Shenandoah, Wood River, Central City, Obion, and Mount Vernon). The remainder of the platform is scheduled to be converted over the next ~18 months (including its Tharaldson JV located in North Dakota with ~175 million gallons of ethanol capacity). Q1 2023 will be the first quarter of reporting where half the platform has been running to planned production capacity.

GPRE Value

While GPRE made significant progress on its transformation during 2022, the volatile stock market and weak ethanol environment (record high corn basis and poor supply / demand dynamics) masked the company reaching its inflection point exiting the year. As the market digests the meaningful improvement in financial performance of GPRE during 2023 (given half of the platform being converted and the other half of the platform in various stages of completion) I anticipate shares of the Company to rerate materially over the next 12-24 months. Base case estimate for GPRE is ~$60-$65 or 70-80% (further details below) as the transformation is completed with several upside opportunities toward the back half of this decade including benefits from the recent Inflation Reduction Act, GPRE’s carbon sequestration opportunity, and the sustainable aviation fuel opportunity all of which are not included in this write up.

Additionally, I estimate GPRE to be a strategic asset for both big energy and big agriculture given the strategic nature of the company’s co-products and several recent precedent transactions in the renewable energy complex. To this point activist investor Ancora issued a public letter at the end of January pushing the board to explore fair value in the market today by hiring a banker and initiating a strategic review process (https://www.businesswire.com/news/home/20230131005451/en/Ancora-Sends-Letter-to-Green-Plains%E2%80%99-Board-of-Directors-Regarding-the-Need-to-Explore-a-Sale). Ancora estimates strategic acquires could pay $50 or more to acquire Green Plains and argue strategic acquirers are not beholden to the current financing markets.

There are multiple ways to win with an investment in GPRE at current levels (rerating as transformation is completed, offtake agreement for portion of corn oil production, or sale of the entire company). I suspect the next 12 months will be a catalyst rich period and believe the market rewards investors with a rerating of the stock price or the business is sold for a meaningful premium to where the stock is currently trading. Based on my estimates GPRE is trading at less than 5x year end 2023 run-rate EBITDA ~$450 million (between the range mgmt. has highlights over the past year as their guidance forecast of $400-$600 million of 2024 run-rate EBITDA) which ascribes no value to GPRE’s legacy ethanol production (more below). Below I expand on the various components of GPRE’s business and the value drivers I see at GPRE. Balance sheet is also in great shape with $500mm of cash. 

GPRE Individual Components

Green Plains can now be broken down by its co-products. The Company is still in the process of determining how to make actual disclosures better in their financial reporting, but breaking the business down by co-products helps highlight the meaningful discount of GPRE’s current stock price and its intrinsic value.

High Protein Ingredients

Green Plains will have ~600k tons of high protein ingredient production when the transformation is completed. These ingredients can be sold into a variety of different end market species including poultry, swine, cattle, pet, and aquaculture at significantly better economics that the company’s dried distillers grains. Currently, the majority of GPRE’s high protein ingredients have 48-54% protein content with the goal of increasing the penetration of its platform to 58-60%+ protein content over the next several years. This is important (as the chart below highlights) because the higher the protein content of the ingredient, the great the ASP GPRE can see the ingredients at (reference to the J-curve opportunity). The pinnacle for GPRE will be if it can consistently sell into the aquaculture end market given it has the highest margin potential of any species.

Source: Company Filings

GPRE’s high protein ingredients will be a major contributor to GPRE’s financial performance in 2023 as 58% of GPRE production capacity is now online and producing. Q1 2023 will be the first opportunity for shareholders to see a meaningful uplift in financial performance. Commentary around customer uptake, composition of end markets, and the continued evolution of the J-curve opportunity indicate GPRE is executing on driving increased penetration in higher value species. The Company will have ~330k tons of high protein ingredients to sell in 2023, while adding more capacity from additional facilities that are brought online and ramp to production in the back half of 2023 / early 2024.

Several quotes from GPRE CEO Todd Becker on the recent Q4 earnings call reinforce my belief that GPRE’s high protein opportunity is on track to drive meaningful value over the next several years.

• “From a commercial standpoint, we've been pointing to 2023 for a while now as we now have significant quantities of volume from our expanded MFC platform.”
• “For the year, we have contracted and sold nearly half of our anticipated production. And when combined with what we believe will be repeat customers, since we are in the ration and they expect us to keep volume available, we have approximately 250,000 tons or 75% of our capacity spoken for all intents and purposes.”
• “On our species focus for 2023, we expect based on sales we have made, and in customer process advancements, that approximately one-third of our production will go into global aqua and pet food customers, and we are even starting some of those negotiations at over 58% protein levels, which we are confident we can now make on demand at our facilities.”
• “And with new pricing levels, it helps cement long-term project returns. Rest assured, while we are seeing strong acceptance of our 50% protein product, we will continue to focus on developing and commercializing higher proteins at 60% and above.”
• “So, just to let you know, we're already focused on 2024, looking past 2023, at higher protein levels. So, we have to keep some back because the last half of the year is really when our sales team believes we're going to hit and aqua as well but more globally than domestically because we are already shipping volumes into global aqua players and they are in the rations today. So, we're holding some of those volumes back for the last half of the year.”
• “I mean, what we're seeing is truly game-changing from our perspective. And they are realizing there's something very special about this product that's very different than traditional proteins that they fed before. The amino acid profile is very, very different. The fact that they get 20% to 25% yeast in their product, very, very different than buying just corn good meal or just soybean meal.”
• “So that I will tell you one thing that is absolutely focused on, not just on 60 pro, but higher than 60 pro. They believe that they will have products that will go all the way up. And that's the thing we really need to start focusing on is that, yeah, we wanted to make sure we put base volumes in place.”

Corn Oil Production

Green Plains is one of the largest producers of renewable corn oil in the country. They will have ~400 million pounds of corn oil production in the next 12 months (enter 2023 with 300 million pounds of production). This co-product has become very valuable as the proliferation of the renewable diesel industry occurs. Corn oil is one of the lowest carbon intensity feedstocks (animal fats and tallow / used cooking oil being the other two) that renewable diesel producers can use for the production of renewable diesel (chart below). Using these low carbon intensity feedstocks enables renewable diesel producers to generate higher margins than competitors that used inferior feedstock bases.

These feedstocks are also in finite supply and have become a scarce resource as renewable diesel producers scramble to lock in supply of these feedstocks. Additionally, corn oil pricing has increased materially over the past three years given the amount of renewable diesel supply that has come online. I expect this trend to continue as Darling Ingredients (DAR) Diamond III facility just came online in Q4 2022, Marathon’s (MPC) Martinez project with 730 million gallons of capacity, and Philips 66’s (PSX) Rodeo project with ~800 million gallons of capacity, along with several other large projects come online over the next 12 months.

Source: Company Filings

I estimate this piece of GPRE’s business is worth more than the current fully diluted market cap of GPRE. There have been several precedent transactions in the renewable energy space that could be used as guardrails for the type of valuation GPRE’s corn oil business could be worth. Most notably are Darling Ingredients (DAR) acquisition of Valley Proteins in May 2022 for a rumored mid/high-teens EBITDA multiple and Neste’s (NESTE-FI) acquisition of Mahoney Environmental in March 2020 for a rumored high-teens EBITDA multiple. These businesses were feedstock aggregators and are representative of the type of value feedstock assets are worth to strategic acquirers. I believe GPRE’s corn oil business is more valuable than these two business because GPRE actually produces the corn oil. Additionally, Chevron (CVX) purchased Renewable Energy Group (REGI) in February 2022 for ~8x 2024 EBITDA.

All of this is to say GPRE’s corn oil production will continue to increase in value as the market for feedstock assets continues to tighten. Every $0.10 move in corn oil pricing drops through to GPRE EBITDA at $40 million. Lastly, I believe one of the upside levers to realizing value more quickly is through an offtake or supply agreement where GPRE would enter into an agreement to supply a renewable diesel producer with a portion of its feedstock production in turn for a large upfront cash contribution. I estimate GPRE would use the proceeds from such an agreement to initial a large tender offer or repurchase program to retire a meaningful amount of stock. Commentary from Q4 call suggests there are multiple parties that would find this type of arrangement compelling.

GPRE CEO Todd Becker Q4 Corn Oil Commentary

• “I think it's a bit of like we have been in negotiations and discussions with several parties on a potential partnership. The volume is the easy side, it's really how do we structure the pricing side of this, and really what's beneficial for our shareholders.”
• “But even more exciting for corn oil demand this year is look at the share volume of the potential renewable diesel production coming online this year. We're not talking like just a small amount. This is their big year where they don't just add a little bit. They potentially double this year in what they've been producing in the past, which means the demand for veg oils into that space doubles as well.”

Clean Sugar Production

As indicated above GPRE purchased Fluid Quip for the clean sugar opportunity and got high protein and corn oil for free. The clean sugar production represents GPRE’s highest margin initiative and is the most competitively disruptive co-product the company can produce. The magnitude of what clean sugar could represent for GPRE is significant given an ethanol plant outfitted with clean sugar technology would no longer produce ethanol as a co-product. Additionally, the industrial grade glucose and dextrose industry has been dominated by the wet milling oligopoly of ADM, Cargil, Tate & Lyle, and Ingredion without any meaningful competitive threat. Once GPRE commercializes its clean sugar ingredients the sheer volume of product will be a material threat to those companies, but GPRE will be able to produce its clean sugar at a 50% lower carbon intensity making it all the more valuable to customers.

GPRE is currently in progress of building out its first commercial scale clean sugar facility at its Shenandoah plant with an expected completion date of late 2023. Upon completion GPRE will begin producing nameplate capacity of 200 million pounds of clean sugar with expansion opportunities to upwards of 500 million pounds. The Company is also in discussions with customers for production contracts and potential co-location partners. This could prove to be an absolute game changer for GPRE and shareholders over the next 18 months.

Source: Company Filings

Commentary from Q4 call by GPRE CEO Todd Becker indicates enthusiasm of the opportunity as GPRE continues to execute on clean sugar:

• “We are deploying a truly game-changing technology from Fluid Quid where we own and control the IP and are on the path to be truly disruptive to an industry that hasn't seen a new entrant in a long time.”
• “The great thing is, once the CST facility begins, we will still produce protein, oils, and other animal feeds from each bushel of corn, just less ethanol. This is a game-changing technology that demonstrates why we invested in it and own a significant majority of Fluid Quid two years ago.”
• “Shenandoah is on track to build a facility capable of producing 200 million pounds, expanding to 500 million pounds of dextrose annually, and we believe, in the coming year, that investment opportunity will continue to expand this technology at Shenandoah or deploy it at additional locations.”
• “We've had customers call us across the United States that have basically been rationed and they are short supply and they need more dextrose. And you saw, you know, an announcement out of the one of the big four that they're going to expand some of their dextrose capacity.”
• “But we are anticipating and we are thinking about really this is the game-changing technology for Green Plains that could truly revolutionize our long-term margin structure above all else, above protein, above oil, even above carbon long term.”

GPRE Valuation and Intrinsic Value  

Based on my estimates GPRE is currently trading at less than 5x year end 2023 run-rate EBITDA of ~$450 million. I estimate GPRE is worth $60-$65 (+70-80%) over the next 12-18 months as the market recognizes the transformation at the company from both an operational and financial performance standpoint. My sum of the parts analysis illustrates the value of each co-product as the transformation is completed:

Base case assumptions include:

• 68.8mm shares outstanding (fully diluted share count)
• Current net cash of $286mm
• High protein - ~530k tons of high protein (GPRE facilities and ½ of Tharaldson JV production) with avg. ASP of ~$440 throughout the year
• Corn oil – 200mm pounds of incremental corn oil production with ~$0.85 / pounds pricing
• Clean Sugar – 55mm pounds of production at EBITDA margin of $0.67 / pound
• Specialty Alcohol – 65mm gallons of production at EBITDA margin of $0.35 / gallon
• Agribusiness - $20mm of EBITDA production per GPRE commentary
• Other - $60mm of corp. expenses, breakeven ethanol EBITDA contribution and $6mm of Green Plains partners EBITDA

GPRE has highlighted its EBITDA opportunity as $400-$600mm run-rate over the next 24 months as seen in the graphic below. We estimate our base case value and GPRE’s EBITDA estimates could be conservative if GPRE can achieve 58-60%+ protein content, corn oil pricing continues to increase as new renewable diesel supply comes online, or clean sugar is produced in larger quantities earlier in its lifecycle.

Source: Company Filings

Additional upside levers to base case

Green Plains has several upside levers that could produce results that are significantly higher than our base case estimates along with generating higher returns for shareholders. I mentioned a couple opportunities as it relates to high protein, corn oil, and clean sugar in the section above, but the truly transformational opportunities above GPRE’s ingredients production include the benefits of the recent passage of the Inflation Reduction Act (IRA Bill), the company’s carbon sequestration opportunity, and sustainable aviation fuel. These likely represent opportunities for GPRE to take advantage of beginning in 2025 and beyond with the sustainable aviation fuel component likely closer to 2028-2030 timeline.

The opportunities seem compelling and GPRE is already committed to the carbon sequestration initiatives through its participation as a volume supplier on the Summit Carbon Solutions Pipeline which will allow GPRE to decarbonize 8 of its facilities. They are in process of building the pipeline that will likely not be economically impactful until at least 2025. This will be an important step in the direction of capturing the sustainable aviation fuel opportunity to appears to be gaining momentum each passing day.

While it is hard to quantify the impact of these opportunities from a cost an EBITDA generation standpoint, I do believe GPRE will have the opportunity to execute on these initiatives over the next several years. Whether shareholders stick around for that is a question that remains to be seen. GPRE’s CEO mentioned some of the highlights on the Q4 earnings call.

GPRE CEO Todd Becker:

Inflation Reduction Act (IRA) / Carbon Sequestration / Sustainable Aviation Fuel (SAF)

• Inflation Reduction Act (IRA)
  • “Looking ahead, we remain optimistic about the potential of the Inflation Reduction Act to provide a meaningful uplift to our margins in 2025 and beyond. As I mentioned before, I told you – if I told you the potential forward EBITDA estimates from this program alone, you wouldn't believe me. But the math is easy, and I'll let you use your imagination. As you know, I'm adamant that all roads lead to alcohol to jet sustainable aviation fuel which is the future of this industry.”
•  Sustainable Aviation Fuel (SAF)
  • “We also just announced a sustainable aviation fuel partnership with Tallgrass, PNNL and United Airlines to develop a new alcohol-to-jet technology. United's offtake for this product demonstrates the urgency of developing pathways to decarbonize aviation fuel and we believe the use of decarbonized ethanol as a low carbon feedstock, which Green Plains has a supply agreement into the joint venture as well, could be transformational not only for our company and our shareholders, but also for the whole industry.”
  • “United Airlines is certainly committed in our joint venture. And, remember, this is not just a offtake agreement. Those are a dime a dozen, quite frankly. This is a very important structural partnership that we have with Tallgrass, an infrastructure player who moves molecules every day who brought forth this, what we believe is a efficient technology, and United Airlines, which is saying, we don't just want to buy the fuel, we want to own the process and invest in the technology and have a real stake in the ground on this one.”

Risks 

• Continued headwinds from weak ethanol environment (corn basis and supply / demand dynamics) masking the progress on the tranformation initiatives. 
• Transformation delays being kicked to the right. 
• Political risks as we head toward next election cycle 

Catalyst

• Company continues to trend towards completion of transformation and market rerating shares accordingly 
• Corn oil offtake agreement with large share repurchase program 
• Sale of the entire Company
• Further activist pressure