NEW YORK, Jan 29 (Reuters) - Philadelphia Energy Solutions faces a potential short squeeze in the niche renewable fuel credit market if a U.S. bankruptcy judge denies the refiners request to shed some $350 million in outstanding compliance obligations, experts say.
PES, which owns the largest and oldest refiner on the U.S. East Coast, filed for Chapter 11 bankruptcy protection on Jan. 22, blaming the cost of complying with the U.S. Renewable Fuel Standard for its financial woes.
Under the RFS, refiners must either blend biofuels like ethanol into their fuel pool or, like PES, buy credits from those who do. Refiners have so far been unsuccessful in convincing the administration of President Donald Trump to reform the program.
The PES bankruptcy is a prepackaged deal with near-unanimous support from lenders that could be resolved as early as late February, but the preferred exit plan rests largely on a judge ruling the company does not need to purchase some $180 million worth of compliance credits.
Without that, according to a bankruptcy filing, the company would have to purchase the same amount of credits it typically buys over a year in a matter of weeks.
PES had actually been selling credits in recent months, driving prices down, brokers said. If they aggressively get back into the market, it will drive prices up, brokers said.
If they are going to the market, everyone will know, and it will not be pretty," Ed Hirs, energy economist at the University of Houston, said.
A source familiar with the company's plans said PES has a plan to buy the credits without triggering a spike in prices, however.
The U.S. Environmental Protection Agency has agreed to extend the deadline for PES to comply with its biofuel credit obligation by 30 days, until May 1, according to a court filing. In exchange, PES agreed to slow down the bankruptcy proceedings.
PES declined to comment publicly to Reuters.
PES delayed full compliance of its 2016 obligation last March. It is not permitted to delay compliance in two consecutive years, the source familiar with operations said.
If the bankruptcy judge denies its request to shed some outstanding obligations, PES would be forced to tap a $120 million debtor-in-possession loan to help pay for the needed renewable fuel credits, the source said.
That, in effect, would mean using borrowed money for daily expenses, the source added. (Reporting By Jarrett Renshaw; Editing by Tom Brown)