The upcoming and near-certain death of struggling BioFuel Energy (BIOF) shouldn't come as a surprise. In my last article 5 Reasons JBI May Rise Again, Like A Phoenix From The Ashes, I touched upon the failure of most green energy technologies, including ethanol, and BIOF is no exception. I struggle to even come up with a potential bull case, except that, as with any short position, there's a risk of a temporary pop in share price that could leave a short position with potentially unlimited losses.
As an example, in September 2012, the share price tripled very briefly due to news that billionaire David Einhorn had increased his stake. As it turns out, that increased stake was merely free shares awarded to Mr. Einhorn due to company performance failure per a previous agreement. Einhorn didn't buy any more shares, but it's perhaps also a risk to be short BIOF in that he could take pity on the company and throw them another lifeline similar to what he did in 2010. I wouldn't hold my breath though. The buzzards are circling over BIOF because they smell near-certain death for good reasons.
In BIOF's most recent conference call, which was filled almost entirely with bad news, a rather gloomy warning was issued in the beginning:
The most significant occurrence of the third quarter was our operating subsidiaries not making their principal or interest payments at the end of September. This event of default will likely have significant consequence to the company and its shareholders.
Nearly three months later, not a peep out of the company on anything, let alone any update on refinancing attempts. Its latest 10Q filing showed nearly $200 million in mostly current liabilities and only $42 million left in current assets along with "a Notice of Default on September 28, 2012 from First National Bank of Omaha." For the last three quarters, management has kept operations going in part from depleting cash and inventories, both of which are running low and can't be used forever. One of its two ethanol plants was shut down in September just after one of their notices of default which only makes any farfetched hope of a turnaround all that much more unlikely and little motive for a savior financier to come to the rescue.
What hope could BIOF possibly have? Last quarter it had a gross loss on sales of $8 million which means for each gallon of ethanol produced the company burns more cash it can't afford. The industry itself isn't helping either as the word "challenging" was used five times in the conference call. Management said in addition to their troubles, there is industry-wide low ethanol prices, tight corn supply, an associated weak crush spread (which is making it impossible to make any profits on any level), and the summer drought throughout the country. Add to that an increase in competition from imported Brazilian sugar ethanol. The 10Q warns that any further weakness in the crush spread, and it may shut down operations altogether for that reason alone before the creditors even have a chance to do it for them.
One short term hope is October and November tend to be the best seasonal months for BIOF in terms pf lower cash prices paid for corn (historically corn prices is 84% of their operating costs.) I wouldn't bet on much relief though. At best, it probably means slightly less gross losses out of BIOF and slightly slower cash burn, but still very unhappy creditors and a very bleak future. Nothing seems to be going well for BIOF. I see death as a question of when, not if. I plan to short BIOF ahead of its earnings report.