Ethanol Industry: Down but Not Out

Ethanol producers have been making the news again - this time a flurry of plant closings and fire sales is mixed in with new plant openings. Taken together, investors have to conclude the ethanol industry is down but not out.

Verenium Corporation (VRNM) has survived a delisting action by Nasdaq and is building its first commercial-scale cellulosic ethanol facility in Florida. The 365-million capacity plant is expected to cost between $250 million to $300 million to build. So far Verenium appears to have only $7 million from a State of Florida grant. The economics of Verenium’s proposed cellulose-based process have not been provided in detail, but we expect the feed-stock costs to be substantially lower than what VeraSun Energy Corp. (VSUNQ.PK) and other producers have been paying for corn.

VeraSun declared bankruptcy and will likely have to put its various corn processing facilities up for sale in the coming months to pay back creditors. Who would want to buy a costly ethanol plant? Poet Energy, Inc. (private) is one. Poet is majority owned by the Broin family that made its collective bones in the ethanol industry by buying up ethanol plants in the Midwest when the first wave of ethanol companies went bust in the ‘80s. Poet already has 26 plants in 7 states. A new plant in Scotland, South Dakota is now producing cellulosic ethanol at a pilot scale from corn cobs. Importantly, we note that the goods folks at Poet have been quietly developing an economical way to convert existing corn-based plants to the new process. We expect Jeff Broin, President of Poet, to use his previous successful experience to buy up plants may even some of those shuttered VeraSun facilities. Others are just as eager to start up new facilities. Canada-based Syntec Biofuel, Inc. is developing a thermo-chemical process to convert waste biomass to alcohol (ethanol, methanol and propanol). Syntec is targeting a wide range of materials from wood chips to corn stover (stalks and stems) to municipal solid waste as potential feed-stock. Syntec and all the other renewable energy aspirants will likely get a boost from the federal government. Obama’s stimulus package is expected to budget $25 billion for renewable energy projects.

One more note for investors taking another look at ethanol producers. Cellulosic processes may not be less expensive than that required for turning corn into ethanol. However, the input will not necessarily be linked to the commodities markets, making projections and estimates for feed-stock costs more reliable and manageable. That factor alone makes the cellulosic ethanol business model more attractive.

Disclosure: Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

Comments

[Perry B:]

Verenium is the leader in biogasse technology. However credit will probably go to Poet for the buisness aspects of getting the product to market. BP. is backing Verenium. So that might make the play easier for Verenium. The problem with Verenium is no cash. Verenium seems to be the shy scientists to bashful to toot their own horn where it counts. To raise funds. Which is public sentiment.
The use of waste products by extracting the sugars is an old idea with a modern twist due to the advancement of science.
Using waste worked for the Russians in world War two, when they were faced with an advancing German army and no fuel to run their trucks. The Russians rather quickly figured the process of breaking down sugars into fuel products.. A product whose time has come.again. I see the sugars in animal rendering plants, packing plants, Curbside waste such as leaves, construction debris. Every plant and animal has sugar.
If we are truly going to become energy efficient this fuel source has to happen. Think of all the jobs created in the recycling and satelite collection stations to deliver the product to the plants or even small digesters in each town? Who is the mother of invention ? Mother Earth needs our help being Good Stewards if nothing else.
Lets get the product to the pump.

Feb 03 10:34 AM

[Perry B:]

Its Cold outside So I was just thinking of the big picture with my small mind. I can see the need for a $300 million dollar plant to handle the farm waste , sugar cane and so on. However The Government seems to be in the mood to advance alternate energy. Why couldnt they offer cities that choose to participate in this type of fuel - tax and cash incentives. To build small scale treatment plants to be located at the local landfills. Garbage in fuel out.
Do you think big oil interests would favor this idea?

Feb 03 10:56 AM

[MikeT:]

If the alt. energy guys find a way to use garbage or corn cobs or ???, then there will soon be a commodity exchange for that feed stock.
It won't simply remain as "free" stuff.
Ethanol is a stupid waste of government (our tax) dollars. Subsidies like this should be eleiminated after a period of time when the market determines if a process/product is in demand or not.
Or the governments should offer huge tax rebates to buyers of alt fuel vehicles. Drive demand so that there are sufficient vehicles on the road to meet the break even/profit levels of consumption required.

Feb 04 09:18 AM

[orngcrush:]

Gas is in demand, but oil companies still get subsidies and tax breaks.

Feb 04 10:09 AM

[Perry B:]

to MikeT I agree ethanol is a waste and orangcrush is right about oil subsidies. The Government also subsidizes the potential fuel costs of garbage by subsidizing landfills. Therefore the commodity ( garbage ) is paid for. Just not utilized to it's full capacity. I could see Governmnet eventually hitting the sugar cane waste and the corn stalks and cobs. However by the time it becomes a commodity the market winners will be those of us reaping the benifits at the pump and the environment for future generations. The technology is their to make garbage a cost effective fuel. The oil companies are fearful.
An example : During the Presidential debates John McCaine expressly said he would not support any bill that helped Foreign Sugar cane producers. BP has the rights to major sugar cane fields in Foreign Countries. These rights, help BP interests in establishing Verenium as a major player in this Sugar cane waste fuel production. It struck me as odd that McCaine would specifically pontificate that fact on National Television. Call me a cynic or a loser in a spelling bee. But for some reason McCaine felt compelled to let the viewing audience ( oil interests) know,That he was firm in his commitment to keep the status quo in place. Vereniums number one source for sugar cane waste is of course Louisiana.. But the forward thinking combined efforts with BP are obviously having an impact on the political scene in Washington.

Feb 04 10:53 AM

[keithfeather:]

There is no sugar cane waste. The bagasse is used to fuel the plant boilers, generate electricity, and operate the refineries. Sugar production is likely one of the most vertically integrated agricultural processes in the world.

Feb 04 08:51 PM

[Perry B:]

to anyone interested in learning how Brazil has turned it's fuel into 50% renewables through Sugar cane check out a google search- I typed in(sugar cane production energy.) It is wikipedia's info on many issues concerning this type of fuel. As well as it's impact on Brazils environment and economy. Very good info. That may help with your trading decisions. As well as what is at stake environmentaly with this particular form of renewable energy.

Feb 05 02:26 PM