Ethanol Makers Still Trying to Catch a Break from Banks, Debt Holders

 |  Includes: PEIX, VRNM
by: The Burrill Report
A combination of lower oil prices and challenging financial markets continues to spell disaster for U.S. ethanol companies, with another 10 providers of this first-generation biofuel going belly up in the first five months of 2009. Among the latest was Pacific Ethanol (NASDAQ:PEIX), which saw its shares swoon 44 percent to 32 cents on May 19 when five of its six ethanol-producing units filed for Chapter 11 bankruptcy protection. The company had gone public in 2005 with shares debuting at $12.95.
Since the bankruptcy filing, Pacific Ethanol’s share price has been inching up, trading at 46 cents a share on June 4. But like many of its competitors, the Sacramento, California-based company, which reported sales of $700 million in 2008, has been struggling with a shortage of cash, high corn prices, and lower ethanol prices. At the end of October 2008, VeraSun had one of the first companies to go bust, leading to a succession of firms like Pacific Ethanol that have had trouble staying afloat.
Despite government subsidies and clean-fuel mandates, first-generation corn ethanol companies have had a bumpy ride. The Energy Independence and Security Act of 2007 paved the way for capital projects to ramp up ethanol production to meet the new mandate. But the initial euphoria evaporated when record-high spikes in energy and corn prices rocked the market.
The ethanol industry’s expansion had been an economic driver in 2008, according to industry research. A study commissioned by the Renewable Fuels Association said the industry spent $22 billion on materials and labor and another $2.5 billion on grain transportation services. The investment increased production capacity 34 percent to reach 12.5 billion gallons of ethanol a year, well above the federally mandated requirement of 10.6 billion gallons in the nation’s gasoline supply in 2009. The study also found the ethanol industry generated $21 billion in federal, state, and local tax revenue.
However, market volatility ended up spelling disaster for companies that had borrowed heavily to increase production capacity. Surging energy and feedstock prices, which reached their peak in June 2008, increased both the demand for ethanol and the cost of production. But as the price of oil plummeted, so did the demand for ethanol and the price it could command. Increased production capacity also depressed ethanol prices. At the same time, the economy took a nosedive, quickly landing many ethanol players in trouble. As capital dried up, plants were idled, production projects stalled, and many producers became unable to make payments on their huge debt loads. Production in 2008 ended up falling slightly short of the 9-billion gallon mandate.
Among some of this year’s other casualties, Aventine Renewable Energy Holdings [AVRNQ.PK] was de-listed from the New York Stock Exchange in March and filed a voluntary Chapter 11 petition two weeks later in April, saying it had had nearly $800 million of assets and nearly $491 million of debt at the end of 2008. Once a high flyer, the company's stock debuted at $39.27 in July of 2006. It has been trading around 15 cents a share in recent weeks.
“Ethanol demand has also been negatively affected by refiners and blenders using excess renewable identification numbers (RINs) to help meet their renewable fuels standard obligations instead of purchasing actual gallons of ethanol,” Avertine said in the April 8 statement announcing its Chapter 11 bankruptcy filing. The company also blamed operating margins and high gasoline prices as having negatively affected the ethanol industry. As part of Aventine’s bankruptcy filing, the company and certain holders of its 10 percent senior unsecured notes agreed to a first priority secured debtor-in-possession term loan totaling $30 million so the company could continue operating. However, at the end of May, Aventine began publicly soliciting potential investor interest in order to recapitalize or sell its business, setting a deadline of June 17the for submissions.
Then there is Cambridge, Massachusetts cellulosic ethanol and enzyme developer Verenium (NASDAQ:VRNM), an advanced biofuel company that has attracted a lot of investment, including an ongoing partnership with oil giant BP. The company opened a demonstration-scale cellulosic production facility in Jennings, Louisiana in May 2008 and has plans to build a 36-million gallon commercial facility in Florida in collaboration with BP.
In March, Verenium received a going concern qualification as part of its 10-K form filing with the U.S. Securities and Exchange Commission as result of doubt on behalf of the auditor that the company can continue to move forward under its heavy debt load and may ultimately need to file for bankruptcy. According to the filing, Verenium has had more than $300 million in net losses over the past three years and an accumulated deficit of $622.6 million as of the end of 2008. If the company is not able to raise additional capital, it will also be on the ropes. Although this has not yet happened, it is interesting to note that its shares went public in February 2003 at $103.88 and once traded as high as $149 a share. On June 4th, they were trading at 65 cents a share.
Even though President Barack Obama’s economic stimulus plan is focused on advanced biofuels development, which has not yet been commercialized, he has not forgotten first-generation biofuels producers, offering refinancing options to the industry. At the same time, the Environmental Protection Agency is considering a rule that would raise the amount of ethanol that must be blended into gasoline from 10 percent to 15 percent. Still, many first-generation biofuel producers continue to struggle to survive, trying to catch a break from banks and debt holders who are reluctant to sell valuable property at fire sale prices. At the same time, oil companies, private equity players, and big agribusinesses are hunting for bargains among the troubled companies. Oil refiner Valero (NYSE:VLO) paid $477 million in March for seven production facilities belonging to bankrupt VeraSun.
Recently, crude oil futures have been moving toward $70 a barrel, and a bullish oil price forecast to $85 a barrel, issued by Goldman Sachs in the past week, has boosted sentiment among energy investors. Observers might assume that should bode well for ethanol producers, but the recent business failures suggest they may be mistaken.
On a brighter note, not all first-generation ethanol producers are suffering. Privately held Poet, the largest U.S. producer of ethanol, has expressed interest in buying new plants, including ones from recently bankrupt companies, which it claims it can turn around, according to Chief executive Jeff Broin who spoke by telephone with attendees at a recent Reuters Global Energy Summit. The company has developed it own technology for distilling ethanol. Poet, which operates 26 plants in seven Midwest states, has managed to remain profitable even during these difficult economic times.