Refiners rebuffed again on RIN price passthrough part 3 – does this wipe out 1/3 of small refiners’ value?

In Thursday’s denial of 36 petitions for small refinery exemptions to their Renewable Fuel Standard (RFS) obligations for the 2018 compliance year, EPA states it has determined that

any small refinery seeking an exemption from its RFS obligations must 1) demonstrate that any disproportionate economic hardship it claims to experience is caused by compliance with the RFS program and 2) reconcile any such showing with RIN cost passthrough.

from “April 2022 Denial of Petitions for RFS Small Refinery Exemptions”

The key points behind this position are the phenomena of RIN cost passthrough, which says,

all obligated parties recover the cost of acquiring RINs by selling the gasoline and diesel fuel they produce at the market price, which reflects these RIN costs.

and the RIN discount which says,

“blenders, in fact, discount their sales price for E10 by the market price of the RIN”

These two points follow from the laws of economics and have been previously confirmed to apply to the US fuels market as they operate today.

Implications for refining stocks — an example, Delek Refining

To me, this new EPA position implies it will be almost impossible for any refinery to get a small refinery exemption in the future because the probability is near zero any small refinery will be able to meet the two requirements stated above.

What is the potential impact on the stock prices of publicly-traded small refiners with a large stake in getting the small refiner exemptions? I did some simple math suggesting it is big.

For example, I believe Delek Refining (DK), has petitions for exemptions amounting to 200 million RINS per year for three years, 2019, 2020, and 2021. At a price of $1.50 per RIN, that is $900’s million, which is at least two year’s worth of annual EBITDA, and 1/3 of DK’s estimated enterprise value.

See last week’s post and previous posts for more on RIN price passthrough and the Big Biofuels Contradiction.

Recommendation

Anyone with a stake in RINs pricing and economics should get Hoekstra Research Report 10 which includes the Hoekstra ATTRACTOR spreadsheet spreadsheet that accurately calculates D4T, the theoretical RIN price, tracks it versus quoted market prices, and predicts how RIN prices will change with the variables that affect them. Why not send a purchase order today?

George Hoekstra [email protected] +1 630 330-8159

Anyone with a stake in RINs pricing and economics should get Hoekstra Research Report 10

George Hoekstra [email protected]