Executive Summary / Key Takeaways

• The Low-Carbon Ethanol Transformation: REX is executing a $220-230 million bet-the-company pivot toward carbon capture and sequestration at its One Earth facility, aiming to capture CO2 from ethanol production and qualify for lucrative Section 45Z tax credits extended through 2029. This positions REX to sell premium low-carbon ethanol in an industry facing increasing environmental scrutiny.

• Profitability Discipline in a Cyclical Commodity Business: REX has delivered 20 consecutive quarters of profitability—a streak that sets it apart from direct competitors like Green Plains (GPRE) and Alto Ingredients (ALTO), which have recently posted losses. This consistency reflects operational excellence and disciplined risk management in a business where margins can evaporate overnight from corn price spikes.

• Regulatory Tailwinds vs. Execution Headwinds: The One Big Beautiful Bill Act (OBBBA) preserved the $85/ton 45Q credit and extended 45Z through 2029, potentially adding $1+ per gallon in credits for low-carbon ethanol. However, REX still awaits EPA permit approval (now expected March 2026) and faces a $82.7 million IRS audit overhang from its discontinued refined coal business.

• Financial Strength Funding the Transition: With $310+ million in cash, no debt, and positive operating cash flow, REX is self-funding its transformation while returning capital through a 2-for-1 stock split and aggressive buybacks (6.8% of shares since December 2024). This balance sheet flexibility provides a critical cushion if the carbon capture timeline slips.

• Export Growth Offsetting Domestic EV Risk: U.S. ethanol exports are running 10% ahead of 2024's record pace, with new buyers in Britain and Japan emerging. This export tailwind helps offset the long-term threat from EV adoption, which could reduce U.S. gasoline demand and ethanol blending volumes by 20-30% by 2030.

Setting the Scene: The Ethanol Industry's Low-Carbon Inflexion Point

REX American Resources Corporation, founded in 1980 and headquartered in Dayton, Ohio, operates at the intersection of agricultural commodities and energy policy. The company produces ethanol and co-products—dried distillers grains (DDG), modified distillers grains, and distillers corn oil—through majority-owned plants in Illinois and South Dakota, plus a minority stake in Iowa-based Big River Resources. This is a pure-play ethanol model, contrasting with diversified agribusiness giants like Archer-Daniels-Midland (ADM), which processes ethanol alongside oilseeds and nutrition products.

The ethanol industry lives and dies by the "crush spread"—the difference between corn input costs and ethanol/distillers grains output prices. This spread is notoriously volatile, driven by weather-driven corn harvests, gasoline demand, export markets, and federal policy. The Renewable Fuel Standard (RFS) mandates blending volumes, while the Inflation Reduction Act (IRA) introduced Section 45Z credits offering $0.10 to $1.00 per gallon for fuels achieving 50% greenhouse gas reduction below baseline. The recently enacted OBBBA extended these credits through 2029 and removed climate-smart farming practice mandates, directly benefiting corn-based ethanol producers.

REX's strategic positioning rests on three pillars: operational efficiency that delivers consistent profitability where peers falter, a carbon capture project that could transform its ethanol into a premium low-carbon fuel, and a capital-light equity model that reduces fixed costs. The company owns 76.1% of One Earth Energy (Illinois) and 99.7% of NuGen Energy (South Dakota), accounting for its Big River investment via the equity method. This structure minimizes consolidated capex while still capturing operational upside.

Industry dynamics currently favor REX. U.S. ethanol exports hit a record 1.9 billion gallons in 2024, and 2025 is on pace to exceed that by 10% through June. Early estimates suggest a potential record U.S. corn harvest, with yields up 9.5 bushels per acre to 188.8, ensuring ample feedstock supply and likely pressuring corn prices lower—directly benefiting REX's cost structure. However, the long-term threat looms: EV adoption could reduce gasoline demand by 20-30% by 2030, potentially eroding the 15-billion-gallon RFS blending mandate.

History with Purpose: From Retail to Refined Coal to Low-Carbon Ethanol

REX's evolution explains its current risk profile and strategic focus. Originally REX Stores Corporation, the company pivoted in 2010 to focus exclusively on ethanol, selling its retail operations. This established the pure-play model that now defines its identity. The 2017 acquisition of a 95.35% stake in a refined coal facility represented a brief diversification into tax credit arbitrage, generating $58.2 million in production tax credits before operations ceased in November 2021. That facility was subsequently sold, but the IRS is now auditing those credits plus $24.5 million in research and experimentation credits from 2014-2022, indicating intent to deny them. REX plans to vigorously defend these credits, creating an $82.7 million contingent liability that hangs over the balance sheet.

This history reveals management's willingness to pursue tax-advantaged opportunities while maintaining operational discipline. The refined coal venture was a financial engineering play, not a core business, and REX exited cleanly when credits expired. The current carbon capture strategy is fundamentally different—it enhances the core ethanol business rather than diversifying away from it. The company learned from the refined coal experience: this time, it's investing in physical infrastructure that creates lasting competitive advantage, not just tax benefits.

The carbon capture project launched in October 2022 with EPA Class VI injection well permit applications for One Earth. By fiscal 2024, REX had substantially completed capture and compression facilities, securing land easements for a 6.5-mile pipeline and subsurface rights for injection wells with 15 years of capacity. This deliberate, methodical approach—spending $126.7 million through July 2025 while awaiting permits—contrasts with the rushed refined coal acquisition and reflects a more mature capital allocation strategy.

Technology and Strategic Differentiation: The Carbon Capture Moat

REX's carbon capture and sequestration (CCS) project at One Earth Energy represents the company's attempt to leapfrog from commodity ethanol producer to premium low-carbon fuel supplier. The technology itself is straightforward: capture CO2 from fermentation, compress it, and inject it underground. But the strategic implications are profound. If successful, REX could reduce its carbon intensity (CI) score below the 47.5 threshold needed to capture the full $1.00 per gallon 45Z credit, plus qualify for the $85 per ton 45Q credit.

The math underscores the potential impact. One Earth currently produces 150 million gallons annually, expanding to 175 million by February 2026 and potentially 200 million thereafter. At 175 million gallons, a $1.00 per gallon credit equals $175 million in annual tax benefits—more than double REX's current operating income. Even partial credits of $0.50-$0.75 per gallon would fundamentally transform the economics of the plant. The OBBBA's simplification of 45Z requirements, removing climate-smart farming mandates and limiting eligibility to USMCA feedstocks, makes corn-based ethanol more competitive against imported biofuels.

The project's design reflects strategic risk mitigation. REX located injection wells six miles from the Mahomet Sole Source Aquifer, anticipating Illinois Senate Bill 1723's prohibition on sequestration over/under aquifers. This proactive positioning, while increasing pipeline costs, eliminates regulatory rejection risk. The short 6.5-mile pipeline means construction takes only two months once permits arrive, enabling rapid commissioning. Management has invested in energy-efficient equipment capable of handling 200-220 million gallons, avoiding future retrofit costs if they expand beyond 200 million gallons.

Co-product optimization provides another differentiation layer. Corn oil revenue surged 46% in Q2 2025 and 22% in the first half, driven by 26% price increases and 14% volume gains. Management attributes this to "consistent and efficient operation of the overall plants," reflecting process improvements that competitors haven't matched. DDG revenue declined 17% in H1 2025 due to 18% price drops, with exports to Mexico weakening. This co-product mix shift toward higher-margin corn oil partially offsets ethanol margin pressure, demonstrating operational flexibility that pure ethanol players lack.

Financial Performance: Consistency Amidst Commodity Chaos

REX's Q2 2025 results illustrate the tension between revenue growth and margin compression. Net sales rose 7% to $158.6 million, driven by an 8% increase in ethanol gallons sold. Yet gross profit fell $5.5 million to $14.3 million, a 28% decline that squeezed operating margins. The culprit: dried distillers grains prices dropped 13% per ton while shipping costs rose, and natural gas expenses increased from 3% to 4% of cost of sales. Corn represented 74% of cost of sales at $106.5 million, down from 77% year-over-year due to lower corn prices—an operational tailwind that couldn't fully offset DDG weakness.

This performance demonstrates REX's ability to remain profitable while investing heavily in growth. The company posted net income of $7.1 million in Q2, its 20th consecutive profitable quarter. Compare this to Green Plains, which posted a $72 million loss in Q2 2025, or Alto Ingredients, which has struggled with profitability. REX's 13.2% gross margin and 7.9% net margin tower over GPRE's negative margins and ALTO's inconsistent performance. This consistency reflects what management calls "strength, discipline, and commitment"—code for rigorous hedging, plant-level cost control, and strategic market timing.

The balance sheet provides the foundation for the carbon capture gamble. REX ended Q2 with $310.5 million in cash and short-term investments, down from $359.1 million at year-end 2024 due to $28.9 million in capex and $32.7 million in share repurchases. The company has no bank debt, giving it complete flexibility to fund the remaining $93-103 million needed to complete the $220-230 million carbon capture and expansion budget. Working capital stands at a robust 10.5:1 current ratio, ensuring liquidity even if permit delays push commissioning into 2027.

Capital allocation reveals management's confidence. REX repurchased 822,000 shares in Q1 2025 at an average $39.80, reducing share count by 6.8% since December 2024. The board authorized a 2-for-1 stock split effective September 2025, a move management frames as "rewarding loyal shareholders" but which also increases liquidity and broadens the investor base. This buyback activity, funded by operating cash flow rather than debt, signals that management believes the stock is undervalued relative to the carbon capture project's long-term value.

Segment dynamics show a mixed but manageable picture. Ethanol revenue grew 5% in H1 2025 on 4% higher prices and 1% volume growth, capturing export market strength. Corn oil's 22% revenue surge demonstrates successful yield optimization. However, DDG's 17% revenue decline reflects both lower corn correlation pricing and reduced Mexican exports—a headwind that management acknowledges is "some concern." The company's ability to offset DDG weakness with corn oil strength illustrates operational agility that single-product competitors cannot replicate.

Outlook and Execution Risk: The Carbon Capture Tightrope

Management's guidance frames the second half of 2025 as improvement over H1, but with caveats. Q3 2025 is projected to outperform Q2 but will not match Q3 2024, which was the company's second-best quarter on record. The key drivers: favorable corn supply from the anticipated record harvest and continued export strength. Ethanol exports through June ran 10% ahead of 2024's pace, with Britain and Japan emerging as new buyers. If tariff negotiations resolve favorably, additional export upside could materialize, supporting margins through year-end.

The carbon capture timeline remains the critical execution variable. EPA now projects a final Class VI injection well permit decision by March 2026, moved forward from prior estimates of April 2026. The capture and compression facilities are "substantially complete," but pipeline and well construction cannot begin until permits arrive. Once Illinois Commerce Commission approval is secured, the 6.5-mile pipeline will take "about a couple of months" to build. This suggests a best-case commissioning in mid-2026, but any permit delay could push first injection into 2027.

The ethanol expansion timeline is more certain. The initial capacity increase to 175 million gallons is expected to be fully operational by February 2026, with equipment already capable of handling 200-220 million gallons. Management plans to apply for a second permit to reach 200 million gallons annually after the 175 million gallon target is achieved, requiring "no major additional construction or capital spending." This phased approach de-risks the expansion while preserving optionality for further growth.

Regulatory tailwinds have strengthened significantly. The OBBBA, signed July 2025, extended 45Z credits through 2029 and preserved the $85/ton 45Q credit. It also removed climate-smart farming practice mandates, which management estimates could improve their CI score by "four to six points," making it easier to qualify for credits without carbon capture. However, the Trump administration's stance on these credits creates uncertainty. As Stuart Rose noted, "it's going to be really hard to get 45Z without any regulations and without an EPA permit," suggesting near-term credit benefits may be limited until the permit is secured.

The IRS audit on refined coal credits remains an overhang. The IRS intends to deny $58.2 million in production tax credits and $24.5 million in R&E credits, totaling $82.7 million. REX plans to "vigorously defend" these credits, but a full disallowance would represent 1.4x annual net income—a material hit to book value and potentially to cash if the company must repay with interest. The audit's timing is uncertain, creating a contingent liability that could weigh on the stock until resolved.

Risks and Asymmetries: What Could Break the Thesis

The investment thesis hinges on three critical factors: successful carbon capture commissioning, sustained ethanol export growth, and resolution of the IRS audit. If any falters, the bull case collapses.

Commodity price volatility remains the ever-present risk. A spike in corn prices or collapse in ethanol pricing could erase margins faster than carbon capture can be completed. Management hedges this risk through forward contracts, but the market for future ethanol sales "generally lags the spot market" and extends "no more than four months," leaving REX exposed to crush spread compression beyond that horizon. The company's 74% cost exposure to corn means a $1 per bushel increase would raise costs by $50+ million annually, overwhelming potential tax credit benefits in the near term.

EV adoption represents the existential long-term threat. If U.S. gasoline demand falls 20-30% by 2030 as projected, the 15-billion-gallon RFS mandate could come under political pressure, reducing domestic ethanol demand. REX's export focus mitigates this, but a global shift toward electrification could eventually limit the addressable market. The company's carbon capture strategy is partly a defense against this—low-carbon ethanol may retain value in sustainable aviation fuel (SAF) markets even as road transport electrifies.

Regulatory uncertainty cuts both ways. While OBBBA extended 45Z, the EPA's recent ruling granting 63 full and 77 partial small refinery exemptions (SREs) totaling 5.3 billion credits could depress RIN values and ethanol pricing. Illinois Senate Bill 1289 imposes a moratorium on new CO2 pipeline certificates until federal safety standards are finalized or July 2026, potentially delaying NuGen's participation in Summit Carbon Solutions' pipeline. South Dakota's ban on eminent domain for CO2 pipelines further complicates NuGen's carbon capture prospects.

The carbon capture project itself carries execution risk. Despite $126.7 million already invested, the technology remains unproven at scale for REX. If injection wells underperform or seismic monitoring reveals unexpected issues, the entire $220-230 million investment could generate lower returns. Management's decision to build capacity for 200-220 million gallons suggests confidence, but also increases initial capex and extends the payback period.

Competitive Context: Execution as the Differentiator

REX competes in a fragmented industry where scale provides limited advantage. ADM's 1.65 billion gallons of capacity and integrated corn sourcing should dominate, yet its ethanol segment faces the same margin pressure as pure-plays. Green Plains' 1 billion gallons and 97% utilization rates haven't prevented recent losses. Alto Ingredients' West Coast focus and specialty alcohol diversification haven't yielded consistent profitability. Gevo (GEVO)'s advanced biofuels technology remains pre-commercial.

Execution consistency sets REX apart. The company's 20-quarter profitability streak, 13.2% gross margins, and 10.3% ROE compare favorably to GPRE's -8.4% profit margin and -22% ROE, ALTO's -5.4% margin, and GEVO's -37.3% margin. Even ADM's 1.4% profit margin and 5.2% ROE reflect the challenges of managing ethanol as a small segment within a massive conglomerate.

REX's equity model provides capital efficiency. By owning 76.1% of One Earth and 99.7% of NuGen while accounting for Big River as an equity investment, REX captures operational upside without consolidating all the capex. This structure generated $0.9 million in equity income from Big River in Q2 2025, down from $1.7 million year-over-year but still positive while GPRE's consolidated operations lost money.

The carbon capture project creates a potential moat that competitors cannot quickly replicate. Summit Carbon Solutions' pipeline partnership with NuGen gives REX access to shared infrastructure, while One Earth's dedicated injection wells provide control over the entire value chain. ADM and GPRE have announced carbon capture initiatives, but REX's lead in permit approval (targeting March 2026) and $126.7 million invested could create a first-mover advantage in low-carbon ethanol marketing.

Valuation Context: Paying for Quality and Optionality

At $33.56 per share, REX trades at 22.7x trailing earnings and 11.2x EV/EBITDA, with an enterprise value of $826 million. The price-to-sales ratio of 1.71x sits between GPRE's 0.32x (distressed) and GEVO's 4.57x (pre-revenue). The valuation reflects REX's quality—positive earnings, strong balance sheet, and growth optionality from carbon capture.

Cash flow metrics tell a more nuanced story. Price-to-operating cash flow of 15.6x is reasonable for a capital-intensive business, while price-to-free cash flow of 98.7x reflects the heavy capex cycle. The negative $7.1 million TTM free cash flow is entirely due to the carbon capture and expansion investments. Excluding these growth investments, maintenance free cash flow would be positive, supporting the dividend and buyback capacity.

Peer comparisons highlight REX's premium. GPRE trades at 0.46x EV/revenue but loses money. ALTO trades at 0.32x EV/revenue with negative margins. ADM trades at 0.45x EV/revenue but generates lower ethanol margins. REX's 1.27x EV/revenue multiple reflects its superior profitability and carbon capture optionality. The market is essentially paying for the right to participate in potential 45Z credits that could multiply earnings.

The balance sheet supports the valuation. With $310 million in cash, no debt, and a 10.5:1 current ratio, REX has the liquidity to complete its capex program without diluting shareholders. The 2-for-1 stock split, while mechanically neutral, signals management's confidence in the growth trajectory and desire to broaden the investor base. The ongoing buyback program, with 1.18 million shares remaining authorized, provides downside support if the carbon capture timeline disappoints.

Conclusion: A Transformation in Progress

REX American Resources stands at an inflection point, transitioning from a disciplined commodity ethanol producer to a potential leader in low-carbon fuel production. The company's 20-quarter profitability streak demonstrates operational excellence that peers cannot match, while its $220-230 million carbon capture investment represents a calculated bet on the future of sustainable fuels. The OBBBA's extension of 45Z credits through 2029 provides a clear path to monetization, but only if REX can secure its EPA permit and commission the project by 2026.

The investment thesis hinges on execution. If REX delivers on its March 2026 permit timeline and successfully reduces its CI score, the combination of expanded ethanol capacity (175-200 million gallons) and premium tax credits could more than double earnings power. If permits slip or carbon capture underperforms, the company still owns efficient ethanol assets that generate consistent profits and cash flow—unlike loss-making peers.

The key variables to monitor are permit approvals, corn price trends, export market strength, and IRS audit resolution. REX's strong balance sheet provides resilience against near-term setbacks, while its operational discipline ensures it can weather commodity cycles better than competitors. Trading at 22.7x earnings with a clear growth catalyst, REX offers a unique combination of quality, optionality, and value in a sector where most players are struggling to stay profitable. The carbon capture project may be a moonshot, but it's one funded by internally generated cash from a business that has proven it can make money in any environment—a bet worth watching.