Neste Oyj is a Finnish biofuel producer with good growth, margins and on the right side of the ESG and decarbonization trade. In 2010 the company began to transform from an oil refinery to a global leader in biofuels (diesel, jet fuel and petrochemicals). It is controlled by the Finnish state but acts, as far as I can tell, without much government intervention i.e. fuel price controls. See table and charts below
I came across this company from a comment in a recent oil sector analysis. The short-term driver, which is still a bit blurry, is that Biodiesel prices should jump in line with diesel price in EU. As you may have read and or experienced, there is a global shortage of diesel, while the invasion of Ukraine made this far worse in Europe, to the point of rationing. This has its knock off effect on transportation, consumer and industrial cost inputs i.e. inflation.
The main risk is in feed stock costs i.e. animal and vegetable waste oils. These are also in low supply and have increased in cost. The key to Neste’s short term driver is if diesel scarcity will lead to a similar jump in biodiesel prices that more than offset feed stock costs.
Looking past the next few quarters, Neste seems to be a buy and forget stock. It has pioneered technology in biofuels and has an aggressive expansion plan that nearly doubles capacity to 6m tons. The market for biofuels should increase on regulation, decarbonization and very likely, continued high oil prices. I estimate over 20% EBITDA growth in the next 3yrs.
Neste has low net debt and can fund much of its expansion with cashflow, despite a 50% dividend payout policy. This capacity increase is mostly in construction (Singapore, Holland, and USA/JV with Marathon). The key to growth is being able to source feed stock which, in many locations, is not a very large or organized market and is being created by the biofuels sector. Neste acquired sourcing companies and further integration with the scrap yard of bio waste is likely.
Neste is not an oil refining company and therefore the market prices or values its shares more like a growth stock in an environmental energy sector. I used 15x EV/EBITDA to price the shares, which provides over 20% upside.
