Good News at VeraSun Energy

VeraSun Energy (VSE) had a pair of news releases that I would categorize under good news, or at least neutral, and the stock was beaten up pretty good. First, the merger with U.S. BioEnergy (USBE) was approved. (See press release) . The dollar value of the merger has definitely fallen, but VeraSun picks up some significant assets.

U.S. Bioenergy had fallen to negative profitability (i.e. losses) by the last quarter results. VeraSun is still generating profits and I expect them to improve the efficiency and assets of the acquired plants.

The other press release announces the completion of an ethanol plant in Ohio that brings VeraSun’s annual production capacity over 1 billion gallons. For comparison, VSE shipped 353 million gallons in 2007. The company is still in a strong growth mode as far as production goes.

I also have a few points concerning the ongoing viability of corn ethanol as an alternative fuel. There has been a lot of press lately concerning the value of corn ethanol. In my opinion it is the only significant quantity, U.S. produced, non-oil, vehicle fuel that will be available for several years if not longer. On to my points:

• Almost all of the cars currently on the road, all built since 1999, are certified to run on ethanol blends of up to 10% (E10). Ethanol is the only current way to significantly reduce petroleum use for vehicles currently on the road.

• Many cities mandate E10 gasoline to lower carbon monoxide emissions to meet federal clean air standards. Since it was discovered that MTBE loves ground water, ethanol is currently the only gas additive that reduces emissions.

• Three states have mandated E10 minimum for all gasoline and others are considering similar regulations. In 2007 the California Air Resource Board [CARB] passed regulations that all gas sold in California will be E10 or greater by 2010. California will require at least 1.7 billion gallons of ethanol per year to meet the mandate.

I have written in the past that I believe VeraSun Energy will become a major producer of ethanol on a profitable basis. Their low cost structure allows them to be profitable even when crush spreads are tight and they will make a lot of money if/when the crush spread spreads.

Note: I currently do not have a position in VSE.

Comments

[AviGandhi]

While I agree that it is the only source of non-oil vehicular fuel RIGHT NOW, that doesn't mean it should be used. The purpose of turning away from oil is threefold (the order of importance is arguable): a) reduce greenhouse gas emissions, b) reduce dependence on foreign oil that supports terrorism and political violence, and c) reduce consumer exposure to volatile fuel prices.

Corn based ethanol does not fulfill any of these needs. In terms of reducing exposure to oil (b and c), it currently takes more energy (read: oil) to produce a gallon of ethanol than it does to produce a gallon of gasoline. Because oil is an important input into the farming of corn, corn prices absorb oil prices, leading to the volatility of not only a major ethanol input, but also a major foodstock. Furthermore, the need to use MORE oil to produce a gallon of gasoline equivalent of ethanol in no way reduces this country's dependence on foreign oil - it increases it.

Regarding GHG reductions, the carbon contained in the oil used to fertilize the cornfields will be released when the corn is processed or eaten, and when the ethanol is burned. This does nothing whatsoever to mitigate GHG emissions, and since more oil is used, it actually increases them.

So, just because corn-based ethanol is the only gasoline alternative at the moment doesn't mean it's worth using or investing in - and with the terrible press it's been getting, I doubt that it would be a good middle- to long-term investment. Cellulosic ethanol, however, is far more promising; companies like Bluefire Ethanol, who turn waste to fuel, are far greener and have technology that is far more promising, even if it will take 2-3 years before their production starts to come online. I'm willing to wait.

[nerfer]

There is some disagreement whether corn-based ethanol has a positive EROEI (energy returned on energy invested) or not, most leaning to the slightly positive side. And remember, the leftover material can still be used as a feedstock, probably healthier for the cows than the original (if not as good at 'beefing' them up).
But unless there's a clear decrease in oil usage, it's not worth ramping up, except to reduce CO emissions on those ozone action days.
Sugarcane-based ethanol is clearly better, and a price-competitive cellulosic ethanol is the holy grail, particularly if made from waste material. But in the short term, for an alternative-energy stock trader, VSE is one of the better stocks to keep an eye on.