Nearly every sink in a restaurant flows through a grease trap, which captures and collects oil and grease from our beloved deep fried food. A busy Burger King branch, for example, can generate 8,000 pounds of used cooking oil and grease per year — enough that Mahoney Environmental, a division of publicly traded Neste (Nasdaq: NESTE), sends a truck to suck it out every three weeks.
“Nobody wants to send that material down the drain,” says Rick Sabol, president of the Mahoney division. And not just because fat globules can clog up sewer systems — but because that grease is valuable — if you gather up enough of it. “We always thought of it as owning a lot of oil wells, sprinkled around the country.”
Historically, the business plan was pretty simple: Mahoney would supply a restaurant with grease trap equipment, and come fetch it once a month for a fee. Used to be that waste fat and grease was made into cattle feed or pet food. Increasingly, it’s becoming food for trucks. A year ago Helsinki, Finland-based Neste ($12 billion in 2020 revenues) acquired Mahoney in order to monopolize its supply of grease, which it now exports from the U.S. to specialized refineries in Finland, Rotterdam and Singapore. There Neste subjects the feedstock to “hydrotreating” — which uses hydrogen to remove oxygen from triglyceride molecules — creating diesel. Neste then ships some of this renewable diesel back to the U.S., where it fetches a $1 per gallon federal blending tax credit.
With 1 billion gallons per year of production, Neste is the world’s biggest maker of renewable diesel. And it’s been at it since long before the carbon transition was a sure thing. The biodiesel revolution got underway in the mid-2000s. When oil prices spiked to $147 a barrel in mid 2008, even musician Willie Nelson launched BioWillie, which like so many marginal biodiesel makers went belly up when oil prices fell.
In the U.S. a strong agriculture lobby supported diesel made from soy and rapeseed oils. While in Southeast Asia palm oil became the preferred feedstock. “Palm oil was thought to be the big biofuel savior,” says Jeremy Baines, president of Neste North America. Indeed, Neste nearly a decade ago built massive plants to make fuel out of palm oil in Singapore, plus what Baines says was a sustainable farming operation to supply it. “Others were not so responsible,” he says. Soon palm oil became environmentally questionable because in order to expand their plantations farmers were razing virgin rainforest.
So for Neste, the challenge became sourcing new feedstock. Any organic fat or grease would do: cooking oil, fish fat, corn oil, rapeseed, even tallow. In 2018 they bought Dutch animal fat trader Demeter. Then a year ago Neste bought Mahoney; a family-owned company since 1953, they started off selling grease into pet food and glycerine markets. Mahoney grew by buying up smaller operations, and have 40% of the market in Illinois, and 8% nationwide. Neste’s purchase price was undisclosed. Baines says he intends to grow the business five-fold in coming years.
Their most reliable customers are the chains like Buffalo Wild Wings, Hooters, Burger King, which I’m told experience a “fryer margin” of about 40%, meaning that out of 100 pounds of fresh fryer oil, 40 pounds of it will end up absorbed into food, with 60 pounds left over for Mahoney to come pick up.
The economics work OK. You can buy cooking oil on the spot market for about 30 cents a pound (versus 70 cents for fresh oil). It takes 7.5 pounds of used oil, about $2.25 worth, to make a gallon of biodiesel. Regular diesel sells for about $2.50 before taxes. Today’s biodiesel subsidies include federal blending mandates and a $1 per gallon tax credit, which President Trump extended for five years before leaving office. In Europe the uplift is even better.
Neste, at 2.7 million gallons per day (65,000 bbl/d), is the world’s biggest producer of renewable diesel, and believes in a long-term market for the fuel, which is advantaged over ethanol in that it is a drop-in biofuel, interchangable with traditional diesel. Ethanol, in contrast, does not mix happily or easily with gasoline. And as it appears the electrification of transportation will begin with smaller vehicles, they feel demand for diesel will endure longer.
Baines is dedicated now to finding buyers who are willing to pay a little extra for certified biofuels, and to participate in the circular carbon economy. In Oakland, Calif., for example, Neste gathers up restaurant grease and returns it as renewable diesel that fuels the city’s truck fleet. While in the Netherlands, McDonald’s supplies Neste with about 370,000 gallons of fryer oil a year; its logistics supplier then buys about the same amount of renewable diesel.
Though Neste is far from running out of used cooking oil, it’s looking for other feedstocks, with an eye toward sourcing 100% of its feed from “wastes and residues” by 2025. This means stuff like forest scraps, algae, and plastic pyrolysis. Pyrolysis is the thermal decomposition brought about by exposing a material to high heat in the absence of oxygen, so that instead of burning, it transforms. In the case of Neste’s joint venture with Alterra Energy, pyrolysis will be used to turn 120 tons per day of recycled plastic into sludge similar to crude oil. Alterra already operates a 60 ton per day plant in Akron, Ohio. With Neste it aims to build one double that size in Europe, which will supply about 8 million gallons of this synthetic oil per year.
Alterra CEO Fred Schmuck sees the carbon circularity at work. “It was refined already. We’re breaking it back into its original form, then we give it to refiners as a raw material.” With the European Union writing the cost of carbon into law and the U.S. likely not far behind, “liquefaction is going to score very high,” he says. Neste has an eye toward boosting this plastics-to-oil business by tens of millions more gallons per year — using up thousands of tons per day of waste plastic.
As vast as that sounds, it’s just a start. Last year the United States consumed 1.9 billion gallons of biodiesel, but more than 48 billion gallons of regular diesel. Worldwide, analyst Jason Gabelman at Cowen & Co. sees total biodiesel production at 12 billion gallons out of a total diesel market of 430 billion gallons. Gabelman, doubting Neste’s ability to keep up growth rates, has an underperform rating on the stock. Analysts at Tudor, Pickering & Holt meanwhile think any bad news is priced in, and consider it a solid bet on decarbonization trends.
At $30 per ADR, Neste has a $45 billion market cap and trades at about 30 times 2020 earnings with a 1.2% dividend yield and zero net debt. Watch for quarterly results April 29.