Buying in the Dip
August 26, 2020
By Kendra Seymour
By now, it’s no secret that the fallout from the COVID-19 pandemic and the ensuing quarantine culture has had serious effects on transportation fuels markets as people are traveling by car and by plane much less frequently. These effects are likely to linger for some time, but eventually life will return to a new normal which echoes many norms of the past. This moment presents an opportunity for investors looking to “buy in the dip” in order to maximize future profit. So, what transportation fuels production assets are currently distressed but have the potential to be profitable in the near- to mid-term? A number of refiners and ethanol producers may be wise investments, though determining exactly which ones would top the list requires extensive due diligence. In this article, we examine the current transportation fuels market environment and offer insight into what investors should consider when attempting to buy in these turbulent times.
How long will this dip last?
The current dip will almost certainly last at least until the pandemic eases. Stillwater’s view is that gasoline demand will recover in 2021, but at about 90% of pre-COVID demand, and diesel demand will return to about 98% in 2021. Jet fuel, on the other hand, will struggle to recover, only returning to about 65% of the U.S. Energy Information Administration’s Annual Energy Outlook forecast for 2020. A little further out, Stillwater’s view is that 2022 will see increased improvements with gasoline demand destruction at just 5% compared to the pre-COVID period, diesel demand fully recovered to previously predicted levels, and jet demand destruction at 25%. It will be difficult for jet to rebound to pre-pandemic demand because even as the pandemic is controlled and the economy improves, air travel will continue to be a low priority for consumers through at least 2022. Importantly, we expect that renewable diesel (RD) demand will be on par with 2019 volumes by 2022 but petroleum diesel demand will drop appreciably as it is replaced by RD.
What are potential investors looking for?
Typically, the best “dip” investments are distressed assets with advantageous capabilities such as ethanol production facilities and refineries with rail and water access or options to upgrade with equipment that will reduce product CI to be competitive in GHG-regulated jurisdictions. Another forward-looking strategy is to acquire assets properly positioned to play into more sweeping GHG-reduction regulations which may be implemented in additional states or even at the national level in years to come. It is important for investors to review objective data on the sizes, technologies, ages, market conditions, ownership structure and other relevant information for any production facilities considered for investment or acquisition. It is also helpful to consult with industry experts in order to confidentially identify any special situations which may make specific assets particularly attractive.
How can Stillwater can help?
The transportation fuels industry is extremely competitive, and assets change hands often. Stillwater Associates offers solutions and support to energy companies in the mergers and acquisitions process which keeps companies moving forward. We help maximize return on investment while minimizing risk for our clients, and we achieve these goals by leveraging our industry expertise and financial modeling to screen and evaluate potential acquisitions. We can help integrated oil & gas companies and renewable fuels producers identify the right buyer for an underused property, find a strategic asset for a transportation energy start-up looking to expand, or assist an investment firm in acquiring a transportation energy company.
Our process is thorough and successful. We focus on a tailored matchmaking process – pairing the right buyer with the perfect asset. We have helped clients acquire pipeline, terminal, and refining assets all over the country. Throughout the acquisition process we study the asset, perform due diligence around its commercial and engineering aspects, and assure that our clients receive accurate valuations prior to purchase. Given our team’s deep expertise in state, regional, and federal greenhouse-gas-reduction programs, we are also uniquely positioned to advise on assets’ current and future value as the world seeks to reduce its carbon footprint. Finally, once we have guided clients through a successful acquisition, we remain on hand to help with the transition and can even assist in running the facility if required.
Are you an investor looking for an asset to acquire? Or are you interested in offloading a distressed asset? Contact us to learn how Stillwater can guide your merger or acquisition process.