benjamin salisbury . 703.469.1052 . [email protected] fbr ......benjamin salisbury 703.469.1052...

Benjamin Salisbury 703.469.1052 [email protected] December 9, 2013

Energy & Natural Resources Policy

1

FBR CAPITAL MARKETS & CO.

Benjamin Salisbury . 703.469.1052 . [email protected]

mailto:[email protected]

Benjamin Salisbury 703.469.1052 [email protected] December 9, 2013 2

Disclosures

Important disclosures can be found at the end of this presentation.

**Not to be used in lieu of full research report**

This document was prepared on December 9, 2013.

This document is provided on a confidential basis for the sole use of the recipient and may not be modified or forwarded without the approval of FBR. The information is provided for illustration purposes only and does not represent a recommendation or solicitation to buy or sell any security or an endorsement of any particular investment strategy.

Research is provided by FBR Capital Markets & Co. Please see complete FBR Research reports concerning the subject issuers.

All graphics/tables/photos/charts from company Web sites, FBR Research, and various Web sites.



Biography RESEARCH

Benjamin Salisbury is charged with analyzing and forecasting

domestic and global political and policy trends likely to affect

energy and natural resource sector investments, including crude oil,

alternative energy, climate change, and environmental regulation.

Mr. Salisbury previously served as senior advisor for policy and

international affairs at the U.S. Department of Energy, where he

focused on climate change, economic analysis, and African and

Middle Eastern affairs.

Before joining the DOE, Mr. Salisbury spent three years as energy

policy analyst at Lehman Brothers, where he analyzed the impact

of policy trends and geopolitical developments on the capital

markets and advised institutional investors on the probability, timing,

and impact of events. His portfolio included the energy and natural

resource sectors, national security, transportation, and agriculture

in addition to campaigns and elections. He also served as a

legislative assistant to two members of Congress focusing on

natural resources, agriculture, financial services, and taxation. Mr.

Salisbury holds a B.A. in government from Georgetown University.

Benjamin Salisbury

Senior Research

Analyst, SVP

703.469.1052

[email protected]

3




Renewable Fuel Standard Increasing Volumes

Source: FBR Research and EIA

Biofuels

0

5

10

15

20

25

30

35

40

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Conventional (Corn) Other Advanced Cellulosic Advanced

10% (2007) 10% (2013)

Renewable Mandate (Billion Gallons)



RFS Requirements are “Nested”


Total Renewable Mandate

Cellulosic Biodiesel

Advanced

Biofuels



RIN Lifecycle


Buy Liquid Biofuel Purchase RIN on

open market

Use Banked RIN

Biofuels



Three Components of Change in Gasoline Demand


• Fuel Economy • Vehicle Miles Traveled • Biofuels

70,000

80,000

90,000

100,000

110,000

120,000

130,000

140,000

150,000

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Historical Gasoline Consumption (Incl Ethanol) Gasoline incl Ethanol (EIA)

Gasoline Demand (Thousand Gallons/Year)

Biofuels



Declining Expectation for Biofuels


Projected availability of RFS Credits in AEO 2012 vs AEO 2013

Biofuels



Blend Wall Takes Center Stage


Biofuels

0

5

10

15

20

25

30

35

40

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Conventional (Corn) Other Advanced Cellulosic Advanced

10% (2007) 10% (2013)




Blend Wall Takes Center Stage


Biofuels

2013

Statute

2013

Final

2014

Statute

2014

Proposed

Cellulosic biofuel 1.0 0.006 1.75 0.017

Biomass-based

diesel (billion gallons)

≥1.0 1.28 ≥1.0 1.28

Advanced biofuel 2.75 2.75 3.75 2.2

Renewable fuel 16.55 16.55 18.15 15.21

Legislated & EPA-proposed volumes of renewable fuel (billion ethanol-gallon equivalents)



EPA Elects to Waive Volumes


Projected availability of RFS Credits in AEO 2012 vs AEO 2013

Oil

0

5

10

15

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252

01

3

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Sta

tute

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tute

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BW

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Wai

ver

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Wai

ver

Bill

ion

Gal

lon

s

Banked RINs

Waiver

E85

Other Advanced

Cellulosic

Biodiesel (RIN)

Conventional (E10)



Renewable Fuel Standard

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Ethanol

Year

Total

Renewables Cap on Corn

Total non-

Corn

(Advanced) Cellulosic Biodiesel Other

2009 11.1 10.5 0.6 0 0 0.1

2010 12.95 12 0.95 0.0065 1.15 0.2

2011 13.95 12.6 1.35 0.00600 0.8 0.3

2012 15.2 13.2 2 0.01045 1 0.5

2013 16.55 13.8 2.75 .00600 1.28 0.75

2014 18.15 14.4 3.75 1.75 1+ 1

2015 20.5 15 5.5 3 1+ 1.5

2016 22.25 15 7.25 4.25 1+ 2

2017 24 15 9 5.5 1+ 2.5

2018 26 15 11 7 1+ 3

2019 28 15 13 8.5 1+ 3.5

2020 30 15 15 10.5 1+ 3.5

2021 33 15 18 13.5 1+ 3.5

2022 36 15 21 16 1+ 4

12

Source: FBR Research, EIA




Blend Wall Approach Leaves Market Oversupplied RINs.

13

Ethanol

Source: FBR Research, EIA, DOE, OMB Bloomberg

Projected 2014 RIN Deficit Under Various Scenarios

2013 2014 Statute 2015

Statute

2014 Blend Wall

Approach

2015 Blend Wall

Approach

2014 -1.7B Cellulosic; +E85 600 +Biod 333 Scenario

2015 -2.9B Cellulosic; +E85 1.021 +Biod 710 Scenario

EIA 8/6/13 STEO Scenario

Gasoline Forecast 133.17 132.95 130.29 132.95 130.29 132.35 129.27

E10 Ethanol 13.05 13.29 13.03 13.29 13.03 13.23 12.93

Cellulosic Adjustment (1.73) (2.97) (1.73) (2.97)

Total RFS2 16.55 18.15 20.50 15.21 15.53 16.42 17.53

Biodiesel (Gallons) 1.29 1+ 1+ 1.29 1.29 1.70 2.00

Advanced Volumes 3.75 5.50 2.20 2.53 2.02 2.53

Biodiesel (1.5 Ethanol Equiv RINs) 1.94 1.94 1.94 1.94 1.94 2.55 3.00

Total Ethanol Call 14.61 16.21 18.56 13.28 13.03 13.87 14.53

Cellulosic 1.75 3.00 0.02 0.03 0.02 0.03

Other Advanced (Sugar) 0.06 0.56 0.25 0.57 - -

Blend Wall (Corn) 13.22 12.90

Undifferentiated Call (Corn) 14.40 15.00 13.01 13.00 13.85 14.50

Corn Deficit (0.63) (1.57)

E85 (74% Ethanol Content) 0.44 0.76

Actual Corn Ethanol Consumed 13.01 13.00 13.66 13.68

RIN Balance

Annual RIN Surplus (Shortfall) (1.56) (2.92) (5.53) - - (0.19) (0.82)

Previous Year RIN Carryover 2.59 1.03 (1.88) 1.03 1.03 1.03 0.84

Year End Rin Carryover 1.03 (1.88) (7.42) 1.03 1.03 0.84 0.03



Pricing Implied High Blend Competitiveness

14

Ethanol

Source: FBR Research, EIA, Bloomberg

$2.77

$2.54

$2.29

$2.13

$1.97

$1.81

$1.65

$1.49

$2.56 $2.54 $2.52 $2.51 $2.50 $2.48 $2.47 $2.46

$- $0.37 $0.75 $1.00 $1.25 $1.50 $1.75 $2.00

E85 In E10 Equivalent Price E15 In E10 Equivalent Price E10 Break Even (77%)

Energy Equivalent Retail Pricing By RIN Value Scenarios ($2. 63Rbob/$2.81CBOT Ethanol)



E85 Becoming More Competitive

15

E85



Legislative and regulatory agendas are subject to change at the discretion of leadership or as dictated

by events. The future course of domestic and international supply and demand and the prices of energy

commodities may substantially differ from those included in this report. Domestic and international

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variables are likely to interact with one another and to create outcomes that may cause future prices to

differ substantially from our forecasts.

Risks



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Risks

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Rating FBR Research Distribution1 FBR Banking Services in the past 12 months1

18

Disclosures



Rating FBR Research Distribution1 FBR Banking Services in the past 12 months1

BUY [Outperform] 47.84% 17.65%

HOLD [Market Perform] 49.13% 4.41%

SELL [Underperform] 3.03% 0.00%

(1) As of midnight on the business day immediately prior to the date of this publication.

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