Whatever Happened to Those Ethanol Companies? 65 comments
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By Brad Zigler
Sometimes it's nice to revisit your old hangouts and reminisce. Investors in first-generation corn ethanol producers, however, just wish they could revisit their money.
The three publicly traded refiners we've been tracking over the past 18 months are moribund. Two—VeraSun Energy Corp. (Pink Sheets: VSUNQ) and Aventine Renewable Energy Holdings, Inc. (Pink Sheets: AVRNQ)—are bankrupt. The other, Pacific Ethanol, Inc. (Nasdaq: PEIX), is solvent in name only; its four operating subsidiaries have all filed Chapter 11 petitions, while the holding company stares at the prospect of standing before the bankruptcy bench itself. So what happened?
Margins Improving, Revenues Still Falling
It's ironic that one of the major factors leading to these companies' woes has improved over the past six months. Since May, the gross dollar yield obtained from the conversion of corn into fuel has risen fourfold, but it's too little, too late.
That's because the margins were so thin at the outset. Crushing corn into ethanol yielded only 37 cents a bushel[1] at the beginning of May, when corn was contracted at $4.14 a bushel, leading to a gross margin of just under 9 percent. But the price of ethanol has since risen 28 percent, while corn's price has fallen six percent, so margins have improved. At last look, the gross yield was $1.88 per bushel, or 48 percent.
Ethanol Vs. Corn
But although margins may be wider now (yet still nowhere near the spreads obtained when these refiners first came online), much of those revenues aren't being realized, due to production shutdowns or asset sales.
For example, seven of VeraSun's ethanol plants are now cranking out blending components for Valero Energy Corp. (NYSE: VLO). In a deal that closed this May, the nation's largest oil refiner swooped in to snatch the ethanol plants from VeraSun's bankruptcy estate.
Valero's not the first of the oil majors to embrace biofuels; big oil has been looking at adding integrative ethanol components to its operations for some time. For example, Royal Dutch Shell plc (NYSE: RDS-B) stepped into the biofuels arena back in 2002 with an investment in a Canadian company that brewed ethanol from plant waste. Chevron Corp. (NYSE: CVX) has partnered up with a forest products company to make fuel out of wood waste. Although ethanol currently represents about 9 percent of the nation's liquid fuel supply, that share is bound to expand in future years, due to federal mandates.
There's a fair amount of caution exercised in these deals, however, especially for projects devoted to so-called conventional ethanol made from corn. Corn-based fuel is energy inefficient, in part because it corrodes pipelines and therefore must be trucked to be blended with gasoline for motor fuel use. Valero, for its part, believes the former VeraSun facilities can be converted to accommodate the production of newer ethanol blends, including those made from feedstocks other than corn.
The Cellulosic Competition
In essence, first-generation refiners like VeraSun, Aventine and Pacific Ethanol were pitched three strikes: In the rush to meet production commitments in the pre-crash environment, they overpaid for plants and facilities; rising corn costs and sluggish ethanol prices squeezed their margins; and now, they're being marginalized by newer, more efficient technologies, such as cellulosic ethanol.
An example of the competition is South Dakota-based POET Ethanol Products, the nation's largest producer of corn-based ethanol, which recently announced that it nearly halved the cost of producing cellulosic ethanol from corncobs. By slashing capital costs and utilizing an improved enzyme mix at its pilot plant, privately held POET says it reduced the per-gallon cost of making ethanol from $4.13 to $2.35.
What's more, the company now predicts it will be able to compete head-to-head with gasoline in just two years.
Ethanol Refiners: Where Are They Now?
So, what does all this mean for these first-generation ethanol firms? Well, look fast; they're not likely to be around much longer:
VeraSun Energy Corp. (Pink Sheets: VSUNQ), which last traded at $0.005, recently won approval from the U.S. Bankruptcy Court to liquidate the company under Chapter 11. All 158 million shares of the outstanding common stock will be cancelled, and shareholders will not receive any distribution, property or other securities. Several class action lawsuits have been filed against VeraSun executives, claiming they misrepresented the company's financial condition to investors.
Pacific Ethanol, Inc. (Nasdaq: PEIX), which last traded at $0.3825, faces delisting from Nasdaq for failing to comply with the marketplace's $1 bid requirement. Subsidiaries of the Sacramento-based company, which house its four production facilities, filed for bankruptcy protection back in May. A $1.9 million judgment payment, due this month from Pacific, could wipe out what remains of the company's liquidity.
Even Aventine Renewable Energy Holdings, Inc. (Pink Sheets: AVRNQ) has seen better days. The company, which last traded at $0.47, filed a voluntary Chapter 11 petition for reorganization in April.
Endnote
1. Ethanol refiners may realize yields deviating from those depicted here. For the sake of simplicity, revenue from the sale of co-products, such as distillers' grains and the receipt of subsidies, are not reflected in these figures. Co-product revenues may constitute 20-25 percent of the cost of delivered corn.
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On Nov 24 03:11 AM sako shooter wrote:
> Government loves green energy, the market does not. So, at the
> central planner’s behest, we shocked grain markets, drove the price
> of food higher, funneled scarce resources into ethanol production
> capability, and the ethanol refiners are declaring bankruptcy.
> Central planning at its finest. The Obama administration tells us
> we need more central energy planning. Wonder how long it will take
> windmills to go the way of ethanol?
It's a lose-lose situation no matter how you look at it.
The government and GM told us that we could continue to drive our monster SUVs, with two movie theaters in the back, to the suburbs every day. All we had to do was to put this Ethanol substance in the gas tank, and we don't need that imported oil.
This is all so that they don't really have to make an energy policy. We all know that you can't get reelected when you tell the people that they can't drive their SUVs at 75 miles per hour any more, that they are going to have to ride that crowded train to work every day.
I hear the same phrases I heard since 1972. "Energy Independence", "Reduce our dependence on foreign oil"... It makes me sick. Energy policy - hah - we get "Cap and Trade". What good does it do to have a Department of Energy for anyway.
Your article points out that we have to look under the hood of high flying initiatives to make sure things like solar, wind, and "Clean" coal energy aren't driven by a squirrel in an exercise cage.
In general, one should understand the science before commenting on technolgy trends and companies. If we accept the curious juxtaposition of the two quoted lines from Zigler's writing, we might be led to foolishly believe that cellulosic derived ethanol had some marvelous further properties beyond corn derived ethanol, properties whereby it was somehow not corrosive to steel pipelines. Nothing could be further from the truth... ethanol is ethanol, always corrosive to steel pipe regardless of origin! And yes, cellulosic feedstocks have clearly always been the greatest hope for widespread adoption of ethanol fuel, a vast resource of switchgrass and woodchips awaiting improvements in enzyme technology to be efficiently converted to ethanol for fuel!
As then, there are a number of reasons besides cheap oil. However, two of the biggest reasons never get discussed. We don't really have a market for ethanol. I know about flex fuel cars and E85 pumps all over Minnesota and Iowa, and the oil companies that blend alcohol into gasoline to boost octane. That's not much of a market.
Besides some prototype engines [from SAAB, Caterpillar, MIT, Ford, Ricardo, DELPHI….] there aren’t cars for dedicated ethanol use, and that is a shame. There have been decades [literally since the age of lamplight] of criticism against ethanol, and what has been lost to all but the engineers who design motors are the benefits it offers.
Ethanol is cleaner and cooler burning, less toxic, higher octane, less sensitive to mixture, has lower airflow requirements. Ethanol engines are as efficient as diesel engines, but cleaner, in a lighter, quieter, cheaper engine.
We don’t have cars like that, which is tragic, really. Only race car builders and some engineers will ever know what an engine designed for ethanol fuel can do, but that is politics and PR and, to some extent, technological progress and economics.
We may be really close to another, maybe our last, oil crisis, but I don’t think that alcohol engines will be built for that crisis. Technology is making electric cars the better choice in too many ways for alcohol to gain a foothold, except as a component in a new generation of ‘gasoline’. Since gasoline is a generic name, and not a specific chemical compound, it can be made from a blend of alcohols, without petroleum.
The big boys are investing too!
*I realize that in colder climates you have to make modifications to handle dual fuels (normal diesel and SVO) and may have to heat the SVO to run due to temperature related viscosity issues. I just mean to point out that these are relatively inexpensive and minor modifications to enable running SVO as a realistic green alternative fuel in any diesel engine. The major hurdle is, it has always been, the creation of a distribution network for any from of alternative fuel.
With six billion mouths to feed on earth, there will never be enough land, water or fertilizer to grow food and fuel at the same time.
DougT......The mutual fund guy
www.mutualfundwealth.com/
On Nov 24 03:11 AM sako shooter wrote:
> Government loves green energy, the market does not. So, at the central
> planner’s behest, we shocked grain markets, drove the price of food
> higher, funneled scarce resources into ethanol production capability,
> and the ethanol refiners are declaring bankruptcy. Central planning
> at its finest. The Obama administration tells us we need more central
> energy planning. Wonder how long it will take windmills to go the
> way of ethanol?
>Ethanol was heavily promoted by BUSH. I'll grant you Obama did not "kill" it, >being from a corn state, but put the blame where it belongs.
Tom, please give us a link to any writings about "heavy promotion" of ethanol by the Bush administration. As I remember, ethanol was indeed promoted during the Bush years, but not heavily, nor particularly by the administration. Rather, it was by the agribusiness firms who were looking to drive the markets. Of course Obama didn't kill ethanol. During the run-up to the Iowa primary, he was being carried around on a corporate aircraft thoughtfully provided by Archer Daniels Midland. Where do you think he stood on ethanol? Obama was bought and paid for by the corn ethanol interests, but the realities of production and demand have greatly reduced its use.
On Nov 24 12:14 PM zapman59 wrote:
> all the more reason to go electric. you don't need to burn something
> to make the wheels go round and round and fueling up at your home
> with an extendion cord is about as simple as it can get.