The Evolution of Alternative Fuel Technology

by: Christopher J. Hawkins

The EPA recently approved the use of E-15 fuel for vehicles that are 2007 or newer. The EPA is also doing further studies to see if 2001-2006 models would meet certain criteria. There are still several processes to take place before fuel stations can legally sell the E-15 fuel to cars and light trucks other than flex fuel vehicles. The ethanol industry is eagerly listening for hints to future biofuel policies, now that congress convened on Nov. 15th, 2010. The approval of E-15 is an affirmation of a mandate, in an energy bill, that was passed in 2007. The mandate calls for a yearly increase in biofuel consumption in the U.S.. The increase is supposed to be 36 billion gallons of biofuel by the year 2022. To meet the 36 billion gallons of biofuel would require an approximate blend of 27% ethanol to 63% gasoline or E-27.

Shortly after the E-15 ruling, the oil industry filed a lawsuit to overturn the EPA’s decision. The oil industry feels the tests were not thorough enough. As James Cartledge of BrighterEnergy.Org pointed out; outside of the courtroom the oil industry is concerned about the cost of their raw materials, inside of the courtroom they are apparently worried how E-15 will affect the reliability of American cars. The filing of this lawsuit is another indicator that the biofuel industry is a staple of the future.

Another catalyst to pay attention to is the expiration of the tax credit subsidies on Dec. 31st, 2010. In 1978, The U.S. Energy Tax Act was put in place to boost the American ethanol industry. Part of the Act is to incentivize the purchasing of ethanol through a tax credit of x amount of dollars per gallons. The company who purchases the already made ethanol receives a tax credit around .45 cents per gallon. To whom the tax credit is going to is an important distinction to make, although the makers of biofuel products are still receiving a trickle down effect from the subsidy. If subsidies are not renewed, there are a couple of companies in the ethanol industry that could actually benefit by making cost effective acquisitions.

Detractors of ethanol point out crops grown for fuel are taking away from the global food source. Most people are focusing on where biofuel technology is at today. The search for new carbon based fuels is in its infancy. Now that capital is being put to work in this field, improvements will surely follow. The technology will evolve, new discoveries will be uncovered, and processes will become more efficient. In an imperfect world, the alternative fuels we are using right now are a tangible solution to some pressing issues we face as Americans.

There are already a couple of solutions to the complaint of using edible sources for fuel. Brazil, the world’s leading producer of sugar cane ethanol, uses the sugar cane plant to produce much of its ethanol. The sugar is extracted from the plant then the waste is crushed and processed to produce the ethanol. According to the New York Times in an article Clock Ticking Down on U.S. Ethanol Subsidies, “there are about 10 million flex-fuel cars on Brazilian roads, and they account for about 90 percent of new car sales.” Flex-fuel cars in Brazil run on E-25 fuel, and there is already a distribution network in place. Another inedible fuel source, the Jatropha Curcas, is a perennial oil seed plant that is just now coming on to the alternative fuel scene.

In a press release on Dec. 11th, 2009, Mission New Energy Limited [ASX:MBT], the largest Jatropha grower in the world by acreage, announced a binding 5 year biodiesel supply agreement with Valero (NYSE:VLO). Valero is the largest independent crude-oil refiner and marketer in North America. If all the terms of the agreement are exercised to fruition, the agreement has the potential gross revenue for MBT of over $3.5 billion U.S.. MBT also has four subsidiaries that engage in manufacturing, consulting, trading, and acquisitions. On 11-7-2010 MBT closed at .20/share and traded 230,000 shares, with a three month average daily volume of 130,000 shares a day. Worth pointing out is the penny spread, on a stock showing support and consolidation at .20, for quite some time. Hopefully, if you are reading this article, you realize the risk in a .20 stock. Still, there are some interesting nuances about the story and the data that make MBT a stock worth watching. One of the negatives is the recently declining EPS, which was around -0.40 last earnings report. That could have something to do with there rapid expansion due to demand.

A second Jatropha play is the company Global Clean Energy Holdings (GCEH:OTC BB). What caught my eye about GCEH is a .03 stock showing a positive EPS. Although the EPS last reported was only .0087, many small ethanol companies are showing losses of .20 - .40 per share. GCEH is based in Long Beach, CA and mainly engages in plantation, cultivation, harvesting, and the processing of the Jatropha plant to produce bio-diesel and green diesel. The three month avg. daily vol. for GCEH has been around 137k. The farm properties in Yucatan, Belize, and Mexico, along with a positive EPS are telling me to put on a small long position.

One of my top picks in the ethanol space is Green Plains Renewable Energy (NGM: GPRE). GPRE is based out of Omaha, Neb and was founded in 2006. Their operations begin upstream with the agronomy and grain handling segment, then continue through the approximately 657 million gallons of corn ethanol production capacity per year and ends downstream with ethanol marketing, distribution and blending facilities. GPRE believes that owning and operating assets throughout the ethanol value chain enables them to mitigate the effects of fluctuations in commodity prices, which in turn affects the bottom line. Risk management strategy has also been a key ingredient to their success.

Being a vertically integrated company is one of several competitive advantages that GPRE enjoys in the ethanol world. Operational excellence, a strong management team, and scrutinizing margins are a definite plus for the corporation. Jim Stark, of Green Plains Renewable Energy, impressed me in our phone interview with his professionalism. Critical statistics were at his fingertips, and his ability to articulate the state of the company, reinforced my view of a strong management team. The biggest potential for growth in the near future, aside from legislation, will come from Green Plains’ ability to make acquisitions. On Oct. 22nd, 2010 Green Plains Renewable Energy, Inc. announced that it has completed the acquisition of Global Ethanol, LLC. GPRE now expects to market and distribute more than 1 billion gallons of ethanol on an annual basis. With all of the upstarts in the alternative fuel industry, there are plenty of takeover targets. As mentioned previously, the expiration of ethanol subsidies could be looked at in a positive light, when taking in to consideration the purchasing other companies.

Even more dramatic than GPRE’s competitive advantages, would have to be the trail of stats they are leaving in there wake. Let’s start with the EPS ttm of $1.99, for the $11.19 equity. That works out to a PE ttm of 5.6x versus an industry average of 5.4x. On Oct. 21st, 2010, GPRE reported Q3 earnings of .23/share. The 23 cents crushed the consensus estimates, of the 8 analysts covering GPRE, by ten cents. Earnings have grown for six straight quarters and GPRE expects to beat 4th quarter estimates. The alternative fuel company has also stated that they expect to remain profitable for 2011. Liquidity is another nice benefit to trading this stock, especially on a 400M market cap. Look for GPRE to break through the 200 DMA on strong volume. One price target for GPRE came in at $15.00/share and that is without legislative assistance or acquisition assistance. GPRE will be paying close attention to Congress with regards to blender pumps and flex-fuel vehicles, and so should you.

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In 2007, Tyson Foods (NYQ: TSN) announced a joint venture with Syntroleum (NASDAQ:SYNM), to construct a biofuel plant in Geismar, Louisiana. The 50/50 arrangement has Tyson providing the animal fats and greases, and Syntroleum providing the technology. The joint venture resulted in the company Dynamic Fuels, LLC. The Dynamic Fuels plant has recently become operational in October, and is getting passing grades on some important quality standards and environmental standards. In a November, 2010 RP news wire: To date, the Geismar plant has manufactured renewable diesel with a cloud point as low as minus 26 degrees Fahrenheit and cetane as high as 88, more than twice that of the ASTM petroleum diesel specification.

Gary Roth, CEO of SYNM, has also stated that the carbon footprint of their biodiesel is 75 percent less than that of petroleum diesel. The plant in La. is currently producing 2,500 barrels of biodiesel per day and hopes to produce 75 million gallons of fuel per year. Tyson expects an improved premium on their venture, compared to the approximate $17.00 per 100 pounds normally received for lower grade fats. Look for Dynamic Fuels, LLC to be an asset to Tyson’s future margins. TSN and SYNM are just two examples of the diversification and innovation in the alternative fuel industry.

Some other companies worth taking a look at in the alternative fuel industry are; Andersons (NASDAQ:ANDE), New Generation Biofuels (NGBF), MGP Ingredients (NASDAQ:MGPI), and Biofuel Energy Corporation (NASDAQ:BIOF). My apologies to the companies not mentioned in this article. The large integrated oil companies were overlooked for two reasons. There are many factors to consider other than the alternative fuel issue, which clouds the correlation of biofuel catalysts to overall profit margins. Alternative fuels are generally a small part in the big picture for large oil companies. The massive cash flows of these companies make it harder to move the needle on share price.

The free markets are priced from a forward looking perspective. Alternative fuel technology should be viewed through the same lens.

Disclosure: No positions

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