10-Q: REX American Resources Q2 Earnings Dip, Carbon Capture Progresses

REX American Resources Corporation reported a 30% decrease in net income for the first six months of fiscal year 2025, while advancing its carbon sequestration and plant expansion projects.

Summary

• Net income attributable to REX common shareholders decreased by 30% to $15.8 million for the first six months of fiscal year 2025, compared to $22.6 million in the prior year.
• Basic net income per share fell to $0.95 for the first six months of fiscal year 2025, down from $1.29 in the same period last year.
• Gross profit declined by 16.3% to $28.7 million for the first six months of fiscal year 2025, primarily due to increased cost of sales.
• Net sales and revenue increased by 2.4% to $316.9 million for the first six months of fiscal year 2025, driven by higher ethanol and distillers corn oil sales.
• The One Earth carbon sequestration project is progressing, with an EPA draft permit expected by November 2025 and a final decision by March 2026, but faces state-level regulatory hurdles.
• The One Earth ethanol plant expansion received a permit to increase production from 150 million to 175 million gallons per year, with plans for further expansion to 200 million gallons.
• The company declared a two-for-one stock split, payable on September 15, 2025.
• The IRS intends to deny approximately $58.2 million in refined coal production tax credits and $24.5 million in research and experimentation tax credits, which the company plans to vigorously defend.

Sentiment

Score: 4

Explanation: While the company is making strategic investments in future growth areas like carbon capture and plant expansion, current financial performance shows a significant decline in net income and gross profit. The substantial IRS tax credit denials represent a material financial risk. Regulatory delays for key projects also temper enthusiasm, despite positive long-term potential from tax credits and increased production capacity.

Positives

• Net sales and revenue increased by 2.4% to $316.9 million for the first six months of fiscal year 2025.
• Ethanol gallons sold increased by 8% in the second quarter and 1% in the first six months of fiscal year 2025.
• Distillers corn oil revenue increased significantly by 46% in the second quarter and 22% in the first six months, driven by higher selling prices and volumes.
• Net cash provided by operating activities increased to $12.8 million for the first six months of fiscal year 2025, up from $5.7 million in the prior year.
• SG&A expenses decreased due to lower performance bonus and stock compensation expenses.
• The One Earth carbon sequestration project has completed construction of the capture and compression facility and secured land easements.
• The One Earth plant received an EPA permit to increase ethanol production from 150 million to 175 million gallons per year.
• The OBBBA extended the 45Z Clean Fuel Production Credit through 2029 and maintained the 45Q Carbon Capture Tax Credit at $85 per metric ton if wage requirements are met.
• A two-for-one stock split was declared, which can improve stock liquidity.
• USDA forecasts record high corn production of 16.7 billion bushels in 2025, up 13% from 2024, potentially lowering raw material costs.

Negatives

• Net income attributable to REX common shareholders decreased by 30% to $15.8 million for the first six months of fiscal year 2025.
• Basic net income per share decreased by 26.4% to $0.95 for the first six months of fiscal year 2025.
• Gross profit decreased by 16.3% to $28.7 million for the first six months of fiscal year 2025.
• Income before income taxes decreased by 27.5% to $25.7 million for the first six months of fiscal year 2025.
• Dried distillers grains revenue decreased by 17% in the first six months, primarily due to an 18% decrease in average selling price per ton.
• Equity in income of unconsolidated affiliates (Big River) decreased from $3.5 million to $1.9 million for the first six months.
• Interest and other income decreased by $2.4 million for the first six months due to lower cash balances and yields on investments.
• The IRS intends to deny $58.2 million in refined coal production tax credits and $24.5 million in research and experimentation tax credits, totaling $82.7 million.

Risks

• Operating results are highly dependent on volatile prices for corn, ethanol, distillers grains, distillers corn oil, and natural gas.
• A decline in the crush spread (difference between ethanol price and corn cost) could lead to negative or minimally positive operating margins, potentially requiring production reductions or shutdowns.
• No assurance of ultimate success or timing for the One Earth carbon sequestration project due to ongoing permit and approval processes with various government agencies (EPA, state, county).
• Illinois Senate Bill 1289 imposes additional safety and environmental requirements and a moratorium on new CO2 pipeline certificates until federal standards are finalized or July 1, 2026.
• Illinois Senate Bill 1723 prohibits carbon sequestration activities over/under/through aquifers, which could impact future project flexibility.
• South Dakota's ban on eminent domain for CO2 pipelines could make the NuGen facility's sequestration project more difficult to complete.
• The IRS intends to deny approximately $58.2 million in refined coal production tax credits and $24.5 million in research and experimentation tax credits, which could materially impact financial position if the company does not prevail.
• Ongoing legal challenges and EPA rulings on Small Refinery Exemptions (SREs) introduce uncertainty for RIN values and ethanol pricing.
• Proposed and enacted tariffs and counter-tariffs could affect future demand for ethanol and by-products.

Future Outlook

The company expects to receive a draft EPA permit for its One Earth carbon sequestration project by November 2025 and a final decision by March 2026. It plans to further expand the One Earth ethanol plant to 200 million gallons per year after reaching 175 million gallons. Total capital expenditures for the One Earth expansion and sequestration projects are budgeted at approximately $220 million to $230 million, to be paid from available cash. The company also intends to take advantage of extended 45Z and 45Q tax credits in future periods, which could materially impact its effective tax rate. Management continues to seek various investment opportunities in ethanol, energy, carbon sequestration, agriculture, or other ventures.

Management Comments

• "We plan to vigorously defend these credits." (Regarding IRS tax credit denials)
• "We continue to work with the various government agencies involved to obtain all required permits and approvals, with no assurance of the ultimate success or timing of the project." (Regarding One Earth carbon sequestration)
• "We continue to work to identify ways to reduce our CI score at the One Earth plant with the intention of maximizing tax credits available under the IRA."
• "We plan to pay for all expenditures from available cash." (Regarding One Earth projects)
• "We plan to seek and evaluate various investment opportunities including ethanol and/or energy related, carbon sequestration, agricultural or other ventures we believe fit our investment criteria."
• "We typically repurchase our common stock when our stock price is trading at a price we deem to be a discount to the underlying value of our net assets."

Industry Context

The ethanol industry continues to be shaped by commodity price volatility, particularly for corn and natural gas, and evolving regulatory frameworks like the Renewable Fuel Standard (RFS II) and new tax credits under the IRA and OBBBA. The EPA's recent rulings on Small Refinery Exemptions (SREs) and ongoing legal challenges introduce uncertainty for RIN values and ethanol pricing. However, the extension of clean fuel production credits (45Z) and enhanced carbon capture credits (45Q) provides significant incentives for companies like REX American Resources to invest in decarbonization and efficiency improvements. The USDA's forecast of record corn production in 2025 could alleviate raw material cost pressures, but trade policies and tariffs remain a concern for export markets.

Comparison to Industry Standards

• The company's focus on carbon intensity (CI) reduction and carbon sequestration aligns with broader industry trends towards decarbonization and sustainability, driven by incentives like the 45Z and 45Q tax credits. Many ethanol producers are exploring similar carbon capture and storage (CCS) projects to enhance their environmental profiles and financial viability.
• The challenges faced in permitting for CO2 pipelines and sequestration wells, such as the Illinois moratorium and South Dakota's eminent domain ban, are common hurdles for CCS projects across the U.S., as seen with other developers like Summit Carbon Solutions and Navigator CO2 Ventures.
• The company's ethanol yield of approximately 2.9 gallons per bushel of corn processed is a standard efficiency metric within the industry, comparable to other modern dry-mill ethanol plants.
• The volatility in crush spread and commodity prices is a systemic issue for all ethanol producers, making hedging strategies crucial, as employed by REX American Resources.

Legal Proceedings

• The company is currently undergoing a federal income tax examination for tax years 2014-2022 related to refined coal production tax credits (IRC Section 45) and research and experimentation credits (IRC Section 41). The IRS intends to deny these credits, totaling approximately $82.7 million. The company plans to vigorously defend these credits.
• The company is involved in various legal actions arising in the normal course of business, but management believes their outcome will not have a material adverse effect on the consolidated financial statements.

Related Party Transactions

• One Earth and NuGen purchased approximately $29.0 million of corn (and other supplies) from minority equity investors and board members of those affiliates during the second quarter of fiscal year 2025.
• Total purchases from related parties were approximately $53.9 million for the six months ended July 31, 2025.
• Amounts payable to related parties were approximately $1.8 million at July 31, 2025.

Stakeholder Impact

• Shareholders are impacted by decreased net income and EPS, but also by the two-for-one stock split which increases share count and liquidity, and the ongoing stock buyback program. Potential for future value creation from carbon capture and plant expansion projects, but also risk from IRS tax credit denials.
• Employees benefit from stock-based compensation, with some restricted stock awards unvested.
• Customers can expect continued supply of ethanol and by-products, with increased ethanol production capacity planned.
• Suppliers (Corn/Natural Gas) will continue to provide raw materials, with forward contracts used to manage price risk. Related parties are significant suppliers of corn.
• Regulatory Authorities are engaged with the company for EPA permits and IRS tax audits.

Next Steps

• Continue providing information to the EPA for the Class VI injection well permit application.
• Complete testing of the carbon capture and compression facility at One Earth.
• Obtain state and county permits for the sequestration site and pipeline.
• Begin construction of the CO2 pipeline and sequestration well once permits are secured.
• Apply for another EPA permit to increase One Earth ethanol production to 200 million gallons per year.
• Vigorously defend against IRS denial of refined coal and research & experimentation tax credits.
• Evaluate the tax and other provisions of the OBBBA and their potential effects.
• Seek and evaluate various investment opportunities.
• Spend $50 million to $60 million on capital projects during the remainder of fiscal year 2025.
• Repurchase common stock under the authorized buyback program.

Key Dates

Recommendation

While the company's financial performance for the first six months of fiscal year 2025 shows a significant decline in profitability, the underlying strategic investments in carbon capture and plant expansion offer long-term growth potential in the renewable fuels sector. The two-for-one stock split may improve liquidity. However, the substantial IRS tax credit denials and ongoing regulatory hurdles for key projects introduce considerable uncertainty and risk. The improved operating cash flow and strong cash position provide financial flexibility. Given the mixed financial results, the significant legal/tax overhang, and the long-term but uncertain nature of strategic projects, a 'hold' recommendation is appropriate as investors await clearer outcomes on these critical issues.

Keywords

Ethanol, Biofuel, Carbon Sequestration, Renewable Energy, SEC Filing, 10-Q, REX American Resources, Commodity Prices, Tax Credits, Clean Fuel, Distillers Grains, Distillers Corn Oil, RFS II, EPA, IRA, OBBBA