How biofuel giant Neste turns American frying fat into clean diesel

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Almost every restaurant sink drains through a grease trap, which catches and collects the oil and grease from our beloved fried foods. A very active Burger King branch, for example, can generate 8,000 pounds of used cooking oil and grease per year – enough for Mahoney Environmental, a publicly traded division of Neste (Nasdaq: NESTE), to send a truck to aspirate it every three weeks.

“Nobody wants to send this material down the drain,” says Rick Sabol, president of the Mahoney division. And not just because fat globules can clog sewage systems – but because this fat is valuable – if you get enough of it. “We always thought he had many oil wells, scattered all over the country.”

Historically, the business plan was fairly straightforward: Mahoney provided a restaurant with fat collection equipment and picked it up once a month for a fee. In the past, fat and grease wastes were processed into feed for livestock or pets. More and more, it is becoming food for the trucks. A year ago, Neste, based in Helsinki, Finland ($ 12 billion in revenue in 2020), acquired Mahoney in order to monopolize its supply of grease, which it now exports from the United States to specialized refineries in Finland, Rotterdam and Singapore. There, Neste subjects the feedstock to “hydrotreatment” – which uses hydrogen to remove oxygen from triglyceride molecules – creating diesel. Neste then ships some of that renewable diesel to the United States, where it gets a federal blend tax credit of $ 1 per gallon.

With 1 billion gallons per year of production, Neste is the world‘s largest manufacturer of renewable diesel. And that has been there for a long time before the carbon transition was a sure thing. The biodiesel revolution began in the mid-2000s. When oil prices soared to $ 147 a barrel in mid-2008, even musician Willie Nelson started BioWillie, which, like so many fringe biodiesel manufacturers, s collapsed when oil prices fell.

In the United States, a powerful agricultural lobby has supported diesel made from soybean and rapeseed oil. While in Southeast Asia, palm oil has become the preferred raw material. “Palm oil was considered the great savior of biofuels,” says Jeremy Baines, president of Neste North America. Indeed, Neste built massive factories almost a decade ago to make fuel from palm oil in Singapore, in addition to what Baines says is a sustainable farm to supply it. “Others weren’t that responsible,” he says. Palm oil quickly became environmentally questionable because to expand their plantations, farmers razed virgin forest.

So, for Neste, the challenge became to find a new raw material. Any fat or organic fat would do: cooking oil, fish fat, corn oil, rapeseed, even tallow. In 2018, they bought the Dutch animal fat trader Demeter. Then, a year ago, Neste bought Mahoney; family business since 1953, they started selling fat in the pet food and glycerin markets. Mahoney grew up buying out smaller operations and has 40% of the market in Illinois and 8% nationwide. The purchase price for Neste was not disclosed. Baines says he plans to increase the business five-fold in the coming years.

Their most trusted customers are chains like Buffalo Wild Wings, Hooters, Burger King, which I think have a “fryer margin” of around 40%, which means that out of 100 pounds of fresh fryer oil, 40 pounds of it will end. soaked up in food, with 60 pounds left for Mahoney to come and get.

The economy is working well. You can buy cooking oil in the spot market for about 30 cents a pound (compared to 70 cents for fresh oil). It takes 7.5 pounds of used oil, worth about $ 2.25, to make a gallon of biodiesel. Regular diesel sells for around $ 2.50 before taxes. Current biodiesel subsidies include federal blending mandates and a $ 1 per gallon tax credit, which President Trump extended for five years before stepping down. In Europe, the increase is even better.

Neste, at 2.7 million gallons per day (65,000 bpd), is the world’s largest producer of renewable diesel and believes in a long-term market for fuel, which is advantaged over ethanol in this regard. that it is an alternative biofuel. , interchangeable with traditional diesel. Ethanol, on the other hand, does not mix happily or easily with gasoline. And since it looks like transportation electrification will start with smaller vehicles, they believe the demand for diesel will last longer.

Baines is now dedicated to finding buyers willing to pay a little more for certified biofuels and to participate in the circular carbon economy. In Oakland, Calif., For example, Neste collects restaurant grease and returns it as renewable diesel that powers the city’s truck fleet. In the Netherlands, McDonald’s supplies Neste with approximately 370,000 gallons of fryer oil per year; its logistics supplier then buys roughly the same amount of renewable diesel.

Although Neste is far from running out of used cooking oil, it is looking for other raw materials, with the goal of sourcing 100% from “waste and residue” by 2025. That means stuff like forest waste, algae and plastic pyrolysis. Pyrolysis is the thermal decomposition caused by exposing a material to high heat in the absence of oxygen, so that instead of burning, it transforms. In the case of the joint venture between Neste and Alterra Energy, pyrolysis will be used to transform 120 tonnes per day of recycled plastic into sludge similar to crude oil. Alterra already operates a 60-ton-per-day plant in Akron, Ohio. Together with Neste, he aims to build a duplicate in Europe, which will supply around 8 million gallons of this synthetic oil per year.

Fred Schmuck, CEO of Alterra, sees carbon circularity at work. “It was already refined. We break it down into its original form and then give it to refiners as a feedstock. While the European Union has the cost of carbon in law and the United States is probably not far behind, “liquefaction will score very high,” he says. Neste intends to boost this plastic-oil business of tens of millions more gallons per year – using thousands of tons per day of plastic waste.

As vast as it sounds, this is just the start. Last year, the United States consumed 1.9 billion gallons of biodiesel, but over 48 billion gallons of regular diesel. Worldwide, Cowen & Co. analyst Jason Gabelman sees total biodiesel production at 12 billion gallons in a total diesel market of 430 billion gallons. Gabelman, doubting Neste’s ability to sustain growth rates, has an underperformance rating on the stock. Analysts at Tudor, Pickering & Holt, meanwhile, believe any bad news has been taken into account and see it as a solid bet on decarbonization trends.

At $ 30 per ADR, Neste has a market cap of $ 45 billion and is trading at around 30 times 2020 earnings with a 1.2% dividend yield and zero net debt. Watch for quarterly results on April 29.

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