Aventine Renewable Energy: Beyond a Fad

As American consumers continue to feel pain every time they pull up to a gasoline pump, renewable energy remains a popular talking point. The question is when will there be more action than talk, and when will investors in companies making such alternative fuels as ethanol reap a bumper crop of benefits in share price.

Ethanol obviously has grown beyond a fad as an energy source, and Aventine Renewable Energy Holdings Inc. (NYSE: AVR) is one of the biggest producers and marketers in the United States. The company was established in 1981, giving it a marketing strength absent from many of its recently arriving competitors. Little goes to waste at Aventine: while its strength is ethanol, the company also produces and markets biodiesel and such byproducts as corn gluten feed and meal, distillers products, carbon dioxide and brewers’ yeast.

With plants in its hometown of Pekin, Ill., and another in Aurora, Neb., the company’s annual production capacity is around 207 million gallons. Planning for another plant in Indiana, along the Ohio River, is under way, and will bring the eastern Corn Belt into the company’s domain in late 2008 or early 2009.

Including its marketing alliances, the company marketed and distributed 697 million gallons of ethanol in 2006, or nearly 13% of the total volume sold last year in the United States. Customers include Royal Dutch Shell plc (NYSE: RDS.A), Marathon Oil Corporation’s (NYSE: MRO) Marathon Petroleum, BP plc (NYSE: BP), ConocoPhillips NYSE: COP), Valero Energy Corp. (NYSE: VLO), Exxon Mobil Corp. (NYSE: XOM) and Chevron Corp. (NYSE: CVX).

Since its July 2006 initial public stock offering, Aventine Renewable Energy’s shares have fluctuated substantially, following the ebb and flow of negative and positive news reports about alternative fuels. Other than for a few days after its IPO priced at $43, investors haven’t seen the stock trading anywhere near that level, with shares most recently idling in the $13-$16 range. During its first quarter as a public company, Aventine’s board authorized a $50 million share-repurchase plan.

Ethanol producers face a two-pronged problem: the yin/yang situation is more corn production brings down their costs, but that can result in an oversupply of ethanol. Striking that happy balance is tricky, to say the least.

Ahead of the Labor Day holiday, the last big driving weekend of the summer, analysts delivered some cautiously optimistic opinion about Aventine and the ethanol industry in general. While the analysts were less ebullient about ethanol’s prospects than the rosy picture portrayed in news reports a few months ago – when farmers were planting record corn acreage to meet the demand – they have remained positive.

On August 30, Lehman Brothers analyst Mansi Singhal increased his opinion of Aventine from “equal weight” to “overweight,” while lifting his general industry outlook from “neutral” to “positive.” In a note to investors, Singhal cited prospects for passage of the Renewable Fuel Standard (RFS) at 55% before the 110th Congress ends next year. The legislation establishes the minimum volume of renewable fuel use.

“Impending legislation in the Congress could provide potential meaningful upside surprise to the stocks,” Singhal explained in his upgrade of Aventine and VeraSun Energy Corp. (NYSE: VSR), another ethanol producer, also to overweight. Singhal has a $20 price target on Aventine; the recent median target price of analysts surveyed by Thomson Financial is $19.50, compared with Tuesday's close at $14.49.

“We think the downside risk may be limited to only 10% to 15%, while the upside potential could be as high as 30% to 50% over the next three months,” Singhal wrote.

Aventine’s chief financial officer, Ajay Sabherwal, is scheduled to make a presentation at the Lehman Brothers CEO Energy/Power Conference on Thursday.

The Lehman note followed an August 8 upgrade by analyst Heather Jones at BB&T Capital Markets, who boosted Aventine to a “buy” from “hold,” and set a price target of $19 per share, indicating that she believed the stock could rise about 25% in value by next June. The report triggered a nearly 8% one-day rise in Aventine’s share price.

In her note to clients, Jones cited Aventine’s strong distribution network and said its Illinois River location makes it easy for the company to ship ethanol to other markets. The new Indiana facility along the Ohio River “will offer eastern Corn Belt presence, as well as more efficient accessibility to the East and Southeast markets,” Jones wrote.

Jones also wrote about how the ethanol producers are likely to benefit from this year’s large corn crop, which should keep prices low. Aventine’s shares also climbed 2% on August 31, thanks to a positive report from Raymond James & Associates analyst Pavel Molchanov, who initiated coverage on another ethanol producer, BioFuel Energy Corp. (Nasdaq: BIOF), at “outperform.” While not even producing ethanol yet, BioFuel “compares favorably” with more established companies because of its growth prospects, the research note said.

For the quarter ending in September, 13 analysts polled by Thomson Financial are looking for earnings of just $0.15 per share, less than half what the company reported a year ago, $0.33. Revenue is expected to decline 8%, with the consensus estimate at $375 million, compared with $407 million in the 2006 quarter.

For all of 2007, analysts are expecting revenue to remain flat at around $1.6 billion, while the Thomson consensus estimate of full-year earnings per share is calling for $0.94, down from $1.64 in 2006.

Amid rising corn costs, Aventine reported for the quarter ended June 30 that net income fell to $12.6 million, or $0.30 per share, from $24.7 million, or $0.70 per share in the 2006 quarter. Net sales dropped to $395 million from $443 million in the same period last year. Still, the results beat consensus estimates in the Thomson survey, which called for $0.27 EPS.

During an Aug. 1 conference call with analysts, Aventine’s president and chief executive, Ron Miller, attempted to assuage the fear of an ethanol glut while noting the expected increase in production capacity over the next few years.

“The general concern of investors and analysts is that the supply will come online faster than new demand will be created, thereby reducing ethanol prices and margins,” Miller said. “We believe that the U.S. is destined to achieve 10% ethanol blending nationally. This blend rate will be achieved either through an increased standard (the RFS legislation) or from additional discretionary blending.”

He indicated that Congress in part holds the company’s future in its hands, as it continues debate on the Renewable Fuel Standard, which has cleared the Senate but must be taken up by the House.

Now that it's a public company, Aventine Renewable Energy must listen to many more voices than is had to for the first 25 years of its existence. So far, with expansion plans in place and a strong network of marketing alliances, most analysts who track the company apparently think it is gaining traction for the long term -- especially with petroleum prices soaring and the nation looking for ways to trim its dependence on fossil fuel.