Neste shares tumble 8% after €400m hit from hedges and writedowns

The company’s renewables division’s adjusted earnings showed a loss of €39 million for the July-September quarter

Finnish fuel producer Neste said on Thursday, October 27, that its renewables division’s adjusted earnings showed a loss of €39 million for the July-September quarter, compared with a profit of €490 million in the same period last year, as the company took a €400 million hit from hedging losses and inventory writedowns.

However, the company said it posted a 9% increase in comparable (unadjusted) earnings from its renewables division in the third quarter, as lower sales volumes offset the benefits of higher sales margins and a stronger US dollar because of logistical delays and a maintenance turnaround at its Singapore refinery.

Neste is one of the world’s biggest producers of renewable diesel (RD) and sustainable aviation fuel (SAF) and is also a major buyer of waste-based feedstock such as used cooking oil (UCO) and tallow, so the company’s comments on fundamentals are closely watched in the renewable fuels sector.

Renewable Products posted comparable (unadjusted) earnings (EBITDA) of €389 million in the third quarter, compared with €357 million for the July-September quarter in 2021 but down 28% from €538 million in the second quarter of 2022.

“Due to challenges in outbound logistics, part of the planned end-September product deliveries were postponed to October,” the company’s chief executive Matti Lehmus said in an earnings statement.

“Sales volumes were 698,000 metric tonnes (mt), impacted by the logistical delays and the scheduled maintenance turnaround at the Singapore refinery,” Lehmus added.

Q3 sales volumes were down almost 10% from 772,000 tonnes in the third quarter of last year, as shipping delays late in the third quarter for high-margin products meant this volume will be booked in the fourth quarter instead, executive vice president Carl Nyborg told an earnings call.

The company said that big drops in feedstock costs, such as UCO, and crop-based vegetable oils, had contributed to much bigger margins.

Prices for animal fat fell from almost $1,800 per tonne to just above $1,400 per tonne during the quarter, while prices for soybean oil fell from nearly $2,300 per tonne to below $1,400 per tonne during the July-September period, according to a slide in Neste’s earnings presentation.

“Comparable sales margin averaged $756 per tonne [up from $679 per tonne in Q3 2021], which was a good achievement considering the volatile product and feedstock markets, the negative impact of our margin hedging, and the delayed sales,” Lehmus added.

Compliance credits

The company also cited a big drop in compliance credit prices in California as a distinct negative trend in terms of revenue, with the LCFS credits sliding to $60 per tonne by the end of the third quarter, compared with almost $100 per tonne in early July and $176 pert tonne on average in the third quarter of 2021.

This impact was offset to some extent by rising prices for biomass-based diesel compliance credits (D4 RINs) in the US federal Renewable Fuel Standard, which gained from around 160 to 175 cents per gallon by the end of the third quarter.

As has become customary in Neste’s recent earnings reports, the company said it expects volatility in the oil products and renewable feedstock markets to remain high.

“Renewable Products’ fourth-quarter sales volumes are expected to be higher than in the previous quarter,” it said, adding that waste and residue markets are anticipated to remain tight and volatile as demand continues to be robust.

The Finnish company said its Q4 sales margin is currently expected to be within the $700-800 pet tonne range but that forecasting the quarterly margin would remain challenging due to high market volatility.

Risks

It added: “The segment’s fourth-quarter fixed costs are expected to be approximately EUR 55 million higher than in the previous quarter, reflecting the costs related to its Martinez Renewables joint operation [in the US] and the build-up of capabilities in anticipation of the Singapore expansion start-up.”

It also cited “regulatory changes on the European Union or individual member state level,” as a potential risk to growth.

The company also provided an update on the production schedule for the Martinez JV in California with Marathon Petroleum, adding that the company had finalized the transaction on the project that is expected to start production in early 2023, with pretreatment capabilities expected to come online in the second half of 2023. The facility itself is expected to be capable of producing 2.1 million tonnes per year by the end of 2023.

Shares tumble

Shares in Helsinki-listed Neste fell over 8% to €44.6 each on Thursday following the publication of the earnings report.

For the company as a whole, which includes fossil fuel refining, distribution, and retail, EBITDA in Q3 totaled €456 million, down from €735 million a year ago, as the company took a €400 million hit from write-offs and hedging losses.

Neste’s operating profit of €289 million was down from €579 million a year ago, lagging a €692 million forecast by nine analysts polled by Refinitiv, according to Reuters.

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