5 Must-Read Stories in Oil and Alternative Energy

1. GM investment may hit ethanol stocks. General Motors (GM) announced that it has purchased an equity stake in ethanol producer Coskata. GM CEO Rick Wagoner says that Coskata has three competitive advantages over corn-based ethanol producers: (1) Coskata can produce ethanol from renewable sources like garbage and crop waste, (2) those materials are available anywhere in the U.S., a crital advantage as corn-based ethanol cannot be transported from the corn belt to areas of gasoline demand in existing pipelines; and (3) its production requires less electricity and natural gas, and therefore generates less carbon than production of corn-based ethanol and can hit a cost below $1 a gallon. This isn't necessarily a positive catalyst for GM's stock, as it didn't disclose the size of its equity stake, Coskata hasn't begun commercial production, and GM arguably should focus on its core competency of building cars. The implications for ethanol stocks, however, are clearer: this deal will reinforce concerns that corn-based ethanol is not economically or environmentally viable, and points to greater competition for today's ethanol producers. Bottom line: net negative for the (largely corn-based) ethanol "story" stocks, such as Aventine Renewable Energy (AVR), Cosan Ltd. (CZZ), Andersons Inc. (ANDE), Archer-Daniels-Midland Co. (ADM), Pacific Ethanol (PEIX) and VeraSun (VSE) .

2. China's energy price freeze will raise demand for oil. The Chinese government raised gasoline prices by 10% in November. Why? Because Chinese refineries cut production due to rising oil prices combined with caps on the price of their own output. Now, after growing public anxiety about inflation, the Chinese government has announced that it will once again freeze energy prices. Zig zag, zig zag... Keeping energy prices below market rates increases demand for energy and oil, while sudden step increases in the price of gasoline keep the refineries committed to maximum production. The net effect is to raise demand for energy from China's manufacturers, even those that are uncompetitive. What a mess. Unless you own the oil ETFs, that is.

3. A $420 billion solar plan. The current issue of Scientific American features a grand plan for massive U.S. spending on solar energy, in a bid to supply 69% of the country's electricity and 35% of its total energy by 2050. The authors advocate hundreds of square miles of solar farms in the Southwest, the construction of underground caverns to store energy as compressed air, and the creation of a new transmission network to get the power to urban areas in the rest of the country. The cost? $420 billion.

4. Solar stocks at risk. Markos Kaminis says that hype over solar has reached a crescendo, and the solar stocks are ripe for a correction. After the huge run up in 2007, he thinks investors may sell the stocks now that the tax year is over. And econonic weakness in the U.S. is driving down the price of oil, weaking the case for solar energy. The stocks at risk of "a momentary eclipse", he says, are First Solar (FSLR), Trina Solar (TSL), Evergreen Solar (ESLR), JA Solar (JASO), Suntech Power (STP), and LDK Solar (LDK).

5. IBM, the alternative energy stock? A research project by the Pacific Northwest National Laboratory of the Energy Department equipped 112 homes in the Olympic Peninsula, west of Seattle, with digital thermometers and controllers attached to water heaters and clothes dryers. Pulling real time electricity prices from a live marketplace whose software and analytics were designed by IBM (IBM), the homeowners were able to monitor the cost of electicity at different times of day and choose their usage levels. The result: peak load electricity demand was cut by 15%. Perhaps software will provide a greater role in solving energy and climate change problems than green investors realize.

Have you seen any off-the-beaten track news stories that I should include in the next edition of 5 Must-Read Stories in Oil and Alterntive Energy? If so, please leave a comment below. Full disclosure: no position in any stocks mentioned.

Comments

[David White]

LDK has already corrected due to its recent adverse publicity, which now appears to have be undeserved. My estimate for its 2009 based PE is 6-10. Its FPE (for 2008 earnings) is 24. It has a PEG of .35. These are very good numbers for a fast grower. Why would you say it is ripe for a pullback? It has already had a sharp one.

[Long-ShortGuy]

The GM investment may actually be perceived as positive for the ethanol stocks, as this is another endorsement of ethanol generally. Don't overestimate how sophisticated the market is.

[gabby]

Cosan produces sugar based ethanol and is even running some of their production equipment on cellulosic ethanol made from the sugar cane leaves. Sugar base ethanol is much more efficient than corn base and unlike Coskata, CZZ's product is available right now. When CZZ IPO'ed on NYSE they listed as Bermuda based which also provides some advantage in terms of avoiding the 54 cent/gallon tariff on Brazilian ethanol imports to the US.

[Geral]

Important CORRECTION!

Cosan Ltd. (CZZ) IS CANE BASED ETHANOL

[DavidJackson]

Gabby and Geral, thanks for clarifying that Cosan isn't a corn-based ethanol producer.

Questions for you: In your view, how do the economics of sugar based ethanol compare to corn-based ethanol? Don't you think that both will drive up the price of the underlying commodity? And given that the transport problems are the same, how much do you think the difference between corn and sugar matters?

[VinceSanchez]

You should include LDK Solar as the world leader in Polysilicon.

On the other hand, I don't see the relation between a recession and the increase in polysilicon demand. A recession will bring a decrease in energy demand and consequently a decrease in energy bill, bringing energy prices down.
Thus, under a "recession mode" there will be no driving forces to impulse an increase in the supply/demand of high cost solar panels.
Solar energy will have better penetration opportunities as technology reduces costs, energy policies facilitates the deployment and final customers contribute -voluntarily- to take a green move.

[CharliePeters]

Will corn ethanol policy increase oil use and oil profit?

* Some folks think so

* Clean Air Performance Professionals

[gabby]

David -- Sugar has been the commodity under performer. There has been a vast global sugar surplus which has held down costs. Brazil is the largest sugar producer but India is close to over- taking Brazil. Thailand has also ramped up production. CZZ's CEO - Lutz, announced that given 1 year notice they could export 10 billion litres of ethanol within 1 year. Currently the geographic planting area of CZZ's plantations equal the size of Germany. That said, lots of funds and speculators are betting on sugar increasing this year, ethanol could be a factor, decreased production, weather. Transport costs matter to both corn and sugar, but corn is needed for livestock as well as people. Sugar isn't as vital a foodstuff. Also corn has to be planted annually, while a sugar cane plant will re-generate for up to 10 years, so that's another efficiency. Within Brazil the introduction of flex fuel cars has been a resounding success and up to 20% of the fuel is ethanol. Brazil is booming, more people buying cars. FWIW, Goldman Sachs has a 17% stake in a Brazilian sugar co. - Santelisa.

GL,
gabby

[DavidJackson]

Gabby -- really interesting; thank you! What's the key transportation problem: moving the raw material (in this case sugar or corn), or moving the ethanol?

Also, any idea whether there are differences in plant building costs for corn versus sugar based ethanol production?

[gabby]

David, I have no idea on the plant building cost differences. Transportation, is however, the area that CZZ will be addressing and improving. Currently, the infrastruture, (railroads, etc.) is not in place, so the ethanol is transported via truck (least efficient method). In terms of shipping from port, the tankers that can be used for ethanol transport are smaller than those used for grains, so that is another inefficiency.

The following link from the story below has a good overview & strategy discussion w/the CZZ CCO.

ethanolstatistics.com/...

GL, gabby
(openPR) - Brazil’s largest ethanol producer Cosan is actively looking to start producing ethanol in the United States. That’s what Marcos Lutz, Chief Commercial Officer told Ethanol Statistics in a interview this week.

In September this year, Cosan’s Chief Financial Officer Paulo Diniz was quoted saying that Cosan would start taking its first international steps. At the time, three options were presented. The first would be to invest in an ethanol dehydration plant in the Caribbean, following in the steps of companies like Brazil's Crystalsev and U.S. giant Cargill. The second option would be to install a distillery in Mexico, which has free access to the U.S. market through NAFTA (North American Free Trade Agreement) from January 2008. The third and last option would be to invest directly in the United States.

Mr. Lutz confirms all three options as viable but doesn’t consider investments in CBI countries as Cosan’s first international step. “CBI is a minor investment, which involves about 10 million dollars. What were talking about is actually having a plant or two in the United States. To have domestic supply there as well”.

Mr. Lutz made his comments in an interview with Ethanol Statistics on the strategy of Cosan in the next few years. Besides Cosan’s plans to enter the U.S. market, Mr. Lutz also discussed the attractiveness of greenfields and brownfields versus acquisitions, its involvement in the construction of a dedicated ethanol pipeline and possible plans to expand to other regions than the United States.

The entire interview, titled ‘Cosan’s Strategy for Future Growth’, can be found on

ethanolstatistics.com/...

[gabby]

PS -- On page 2 of the article, there is discussion on the ethanol "pipeline".

[punkin611]

Check out ELON it's a leader in NEGWATTS. punkin611

[DavidJackson]

Gabby, Great info. Thank you.

Punkin611, Please tell us more about the stock. What do you like about it? What's the upside, and what are the downside risks?

[Willy]

I'm interested in a cellulostic ethanol producer, Verenium (VRNM). I've been watching the price and it seems to be languishing even though oil keeps going up. Any one have thoughts as to why this or similar companies stock's are not performing well? Everytime I think I should buy some it keeps going down further. Should I wait or jump in now?

[gabby]

Willy,

Coincidence, but I just received this story that mentions Verenium. I think it might be worth doing some DD on CZZ instead.

GL - gabby

Associated Press
Sector Snap: Ethanol Shares Mostly Fall
Associated Press 01.18.08, 1:05 PM ET

NEW YORK -
Ethanol stocks mostly fell Friday after BioFuel Energy Corp. reported delays in the start up of its first two ethanol plants and investors remained concerned about the sector's near-term outlook.

Profits at producers of corn-based ethanol have come under stress, as commodity costs surged and ethanol prices became depressed because the sector expanded production too rapidly. Margins have increased recently as ethanol prices improved, though there are still concerns that tight corn supplies will support prices for the alternative fuel's main feedstock.

BioFuel's stock fell 24 cents, or 3.6 percent, to $6.42 after the company said late Thursday that construction problems would delay its plant startups by about three months.

Citigroup (nyse: C - news - people ) analyst David Driscoll said the delay does not have a material effect on his outlook for the company. He reiterated a "Buy" rating on BioFuel's shares in a note Thursday.

"Our positive thesis on BioFuel Energy (nasdaq: BIOF - news - people ) remains intact as ethanol industry profitability has begun to improve over the past three months on the back of strengthening industry fundamentals," he wrote.

Brazil-based Cosan Ltd. bucked the sell-off, after Bear Stearns (nyse: BSC - news - people ) analyst Marc McCarthy initiated coverage of the sugarcane ethanol maker's shares at "Outperform."...

"Cosan, having bounced from its lows, is unmatched in size, liquidity, management strength, and corporate structure," McCarthy wrote in a note Friday. Its shares rose 12 cents to $13.29 in afternoon trading. They have risen fairly steadily since reaching a 52-week low of $9.53 in November.

Elsewhere in the sector, Verasun Energy Corp. rose 9 cents to $10.11 after receiving an upgrade from Broadpoint Capital analyst Ron Oster to "Neutral" from "Underperform.&qu... Oster cited the stock's "attractive valuation" following a recent sell-off, as well as moderate risk due to its scale.

Shares of Verenium Corp. (nasdaq: VRNM - news - people ), which makes ethanol from plant matter rather than corn, fell 11 cents, or 2.8 percent, to $3.83 in afternoon trading.

Aventine Renewable Energy Holdings (nyse: AVR - news - people ) Inc. fell 47 cents, or 5 percent, to $8.95, and Pacific Ethanol (nasdaq: PEIX - news - people ) Inc. fell 4 cents to $5.48. US BioEnergy Corp. (nasdaq: USBE - news - people ) rose 8 cents to $7.83.

Copyright 2007 Associated Press. All rights reserved. This material may not be published broadcast, rewritten, or redistributed