Pacific Ethanol: 'Build-Ahead' is a Manufacturing Strategy

Pacific Ethanol (PEIX) has released preliminary 4Q07 earnings (loss of $14M), and so far a lot of reviews of their 8K has been negative.

Another perspective.

Q4 estimates numbers (released so far) are NOT the whole story:

1. Oregon was to come online in 1Q08 (law was passed, plant was built...). So PEIX started putting in storage enough ethanol to serve a brand new market. So their business incurred the cost of buying the corn, operating the new plant and not getting the revenue until the grand opening of the market in 1Q08. This only happens once. And it is a good thing.
2. Since ethanol price in 1Q08 is higher than 4Q07, even if there was no new market, would you not like to hold back on selling what you have for $1.97/gallon but rather sell 3 months later for $2.20-$2.30/gallon?

Come'on... everyone jumps on 4Q07 numbers without a single thought about market condition in 1Q08.

By the way, PEIX is not driving the U.S. Southeast market supply. But other companies will have to do the same thing (build-ahead) in order to develop these new markets. Are we going to punish these companies for a smaller margin during the quarter period where they build inventory in advance of opening a new market?

We used to say the Wall Street has short time horizon (not thinking 2 years down the line), but when we cannot look three months past the quarter...wow.

Build-ahead is an actual manufacturing strategy to maximize cash revenues when demand will be higher than projected capacity for the follow-on period. Stuff that we buy at year-end holiday sales are actually made months before. So too with ethanol for a new market - you have to fill the tanks!

We have outsourced so much of our manufacturing process, have we forgotten how to evaluate businesses?

Disclosure: Author has a long position in PEIX

Comments

[bottomfissure:]

I'm worried that the move to supplement oil with ethanol has all been handled wrong. 1) big oil is reluctant to add 10% - 85% to make their fuels flexible, because they would give market share to ethanol companies - shame on big oil. 2) we need to "switch" to switchgrass or other celluosic material as the feed source (instead of corn), which would make things more palletable, efficient, profitable for everyone. 3) Forget the stupid hybrids, they are so five minutes ago, the auto industry needs to switch to plug-in electric cars that can compete with current car technology (i.e. 300 miles to a charge, 0-60mph in 6 seconds). I know we have the technology, industry moves way to slow. 3) we should highly supplement coal, and other dirty energy with flexible fules (i.e. ethanol, natural gas, etc) to power the big electric generating plants. This would not be a win for ethanol, but everyone.

2008 Mar 27 02:44 PM

[bottomfissure:]

SEE CORRECTION:

I'm worried that the move to supplement oil with ethanol has all been handled wrong. 1) big oil is reluctant to add 10% - 85% to make their fuels flexible, because they would give market share to ethanol companies - shame on big oil. 2) we need to "switch" to switchgrass or other celluosic material as the feed source (instead of corn), which would make things more palletable, efficient, profitable for everyone. 3) Forget the stupid hybrids, they are so five minutes ago, the auto industry needs to switch to plug-in electric cars that can compete with current car technology (i.e. 300 miles to a charge, 0-60mph in 6 seconds). I know we have the technology, industry moves way to slow. 3) we should highly supplement coal, and other dirty energy with flexible fules (i.e. ethanol, natural gas, etc) to power the big electric generating plants. This would not ONLY be a win for ethanol, but everyone.

2008 Mar 27 02:47 PM

[ethanol bear:]

This article misses the whole point. Ethanol doesn't make money with ethanol, corn, natural gas, and distiller's grains (the co-product, bought for animal feed to replace corn) at their current prices. No matter how many "new markets" you open up, it loses money. PEIX has it even worse, because they sell "wet" distillers grains, which sell for a lot less than the "dry" distillers grains sold by the other major ethanol companies. The dry sells for about as much as corn, so you *almost* recover your corn costs. The wet sells for much less, which is one reason PEIX is losing more per gallon than the others. Also, they're now carrying close to $2 in debt per gallon capacity (if you include the new preferred shares, which pay 7% cumulative, as debt). They're not going to make enough to service the debt and pay off the preferreds, much less pay the common shareholders. Note that the headline numbers are a loss of $14 million, but if you read the statements the loss "available" to common shareholders is north of $18 million. These guys just keep digging deeper holes for themselves.

The article tries to tell a story but there are no numbers. That's because they're all bad, so bad. The bottom line is that these guys are burning (and mishandling) too much cash to explain away.

2008 Mar 28 01:36 PM

[IsThisRight:]

Build-ahead in a growth market works EVERYTIME!

Plus today, we learn that 1 of their plant had a few down days. This did not stop PEIX from showing 'better-than-expected' results, in a higher corn price environment.

My next prediction ( give it 60 days) is lower corn price - due mainly to WW supply from poorer countries around the world. An ear of corn is an ear of corn, when fed to the sows.

2008 May 19 06:48 PM