Ethanol: Industry Consolidation

 |  Includes: GPRE, PEIX, VLO, VSUNQ
by: Zacks Investment Research

By Jon Kolb

Following a period of optimism in the burgeoning ethanol industry and renewed interest in clean, green renewable energy and energy independence in the U.S., the rapid introduction of new ethanol plants is expected to continue its current phase of bankruptcies and consolidation.

So far in 2009, ten ethanol production plants filed bankruptcy, including those operated by Aventine Renewable Energy (AVRNQ) and Pacific Ethanol (NASDAQ:PEIX).

The failures of the ethanol business model were primarily caused by the combination of high corn prices and declining prices of oil and gasoline.

In early 2009, Valero (NYSE:VLO), the crude oil refining and marketing company, purchased seven VeraSun plants in an all-cash $477 million deal.

Now, in the most recent industry development, Green Plains Renewable Energy (NASDAQ:GPRE) purchased two ethanol plants previously owned by bankrupt VeraSun Energy (OTC:VSUNQ). The sites were purchased from a lending group led by AgStar Financial Services, which took ownership of the plants during the VeraSun bankruptcy. AgStar is partially financing the transaction with an interest bearing $16 million working capital loan.

Green Plains will pay interest on those loans. For a total purchase price of $123.5 million for the two plants, Green Plains will increase its annual ethanol output by approximately 45% to 480 million gallons a year. The deal is expected to close in June 2009 with the plants operating at full capacity by late July.

In a competitive industry characterized by thin margins and weak demand, Green Plains seeks to continue to acquire additional ethanol plants.

The under-followed GPRE stock, currently trading at $2.82 per share, has a Street analyst BUY recommendation with a $15.00 target price.

Founded in 2004, Omaha, Nebraska-based Green Plains Renewable Energy owns four ethanol plants in Iowa, Indiana, and Tennessee. The company both sells its own ethanol directly and markets ethanol for other producers. The company also owns grain storage facilities.