Thinking of RDX as an Oil Company
This is an analogy that I have been playing with that I believe helps put this company into context and illustrates the incredible potential value that will be unleashed if RDX is able to execute its business plan. After all, the primary revenue that RDX will generate will come from renewable biofuel sales.
Definition. RDX defines a blue dot facility as a geographically chosen facility that it will sell as a franchise. The facility is the water mining operation that extracts oils, grease, fats, etc. that will be refined into a biofuel. RDX franchises out the water mining operation but fully controls and owns the refinery. They are currently strategically placing 4 of these near customers. Each of these micro-refineries will have the capability to produce 4-6MM gallons/year.
Consider each blue dot facility as an oil well. That is the best way of thinking about it. A facility that produces 80,000 gallons/month is producing 64 barrels per day that can be refined into biofuel. Some will produce more, others less. However there are some incredibly important differences that work in RDXs favour.
1. Drilling oil wells is expensive and some are dry. RDX instead gets paid for each blue dot facility. That is an incredible difference. There really is no downside risk to RDX for each facility as they are paid up front for the equipment. Franchise operators are only buying into the program when they know they will be able to mine successfully as they are already dealing with waste water.
2. Oil well production declines over time. Blue dot performance should not. Another huge advantage for RDX. Each blue dot facility will simply add a consistent recurring revenue stream. Each blue dot facility may only produce ~64 barrels a day, but when you start adding them up and consider that they will not run dry over time, this business model looks extremely promising.
How much profit would an 64 barrel/day blue dot facility ("well") generate? Using $3.50/gallon as the average selling price, the information on RDXs website provides some insight into this. Production cost of refining the “oil” is ~$23/barrel or around $.55/gallon. RDX pays the franchise operator of the blue dot facility $.50/gallon.
Expenses
Refining Cost .55
Payment to francise for feedstock .50
Transportation cost .20
6% payment to franchisee .21
Franchise operating bonus .20
Refinery operating expenses .20
Total Cost $1.86
This results in a net profit of $1.64/gallon or net-back of $69/barrel for fuel sold at $3.50/gallon. $69 x 64 barrels/day x 30 days = $132k profit per month. Per blue dot facility. Is this a good deal for franchises? The answer from the blue dot video on RDXs website certainly seems so. Franchise operators will make considerable money as well. Importantly, most of their profit is fixed whereas RDXs profit is fully exposed to the volatility of the energy market. RDX has to manage the fuel sales (large contract sales) and manage production that may involve buying brown grease feedstock which I discuss shortly.
What are the current limitations on RDX?
First is getting the blue dot facilities manufactured, produced, installed, permitted, and running at capacity. This takes time.
Second, related to the first, is obtaining sufficient amount of mined feedstock. RDX makes a good profit when mined feedstock is used to produce biofuel. Even paying $.50/gallon plus production bonuses, both parties profit well. However, RDX is trying to sell as much biofuel as possible and contractual obligations may exceed their capacity to produce biofuel from mined wastewater. Instead they may have to buy brown grease on the open market. That dramatically reduces their profitability. Below I illustrate some rough calculations.
Expenses for production based on brown grease
Refining Cost .55
8.5lbs of brown grease @.25/lb 2.13
Transportation cost .20
Refinery operating expenses .20
Total Cost $3.08
So RDX would only make $.42/gallon when they have to buy brown grease. This will fluctuate as the price of brown grease is a commodity and more biofuel manufacturers are moving towards using it as it is cheaper than yellow grease, white grease, and definitely soybean oil. This results in a net-back of $17.62 per barrel. Much lower profit margin. It would be easy to lose profitability if transportation costs increase and/or feedstock becomes more expensive.
How many blue dot facilities does RDX need?
Carthage has the capability to produce 16MM gallons/year. That would require just under 17 blue dot facilities if each runs at 80k gallons/month. Not every one will be at that large capacity. So let’s be conservative and say 30. So the real story of RDX will be to increase fuel sales as they will soon have capacity for 32MM gallons/ year (Carthage plus the four micro-refineries). Then to make more profit they have to increase the number of blue dot wells that will provide the feedstock for these refineries. As there are a sufficient number of blue dot wells to accommodate all of the refineries, more refineries will be built near new customers, more blue dot well franchises sold, etc.
Each blue dot facility will provide a fairly consistent strong source of revenue with high margins. This business plan seems very solid and a winner. I now understand why Danzik is moving quickly. The goal is to lock up franchises into those 10-year contracts before someone else enters the market that RDX would have to compete against.