Ethanol Is Oversold: Three Bounce Stocks - Barron's

Once-in-vogue ethanol stocks have taken a beating over the past year as investors went from wildly bullish to wildly bearish due to concerns about a production glut, and claims ethanol is a driving force behind rising food prices -- which could threaten its coveted government subsidies.

But Barron's Andrew Bary thinks the ethanol rally will resume. "The stocks are depressed, the businesses are profitable and the companies generally trade below the replacement cost of their ethanol plants."

Oil refiners get a $0.51/gallon credit when they blend ethanol with gasoline. Local ethanol producers are also helped by a $0.54/gallon tax on imported ethanol. The government mandates that 9B gallons of ethanol be used this year, 10.5B in 2009 and 15 billion by 2015. Critics say ethanol is an inefficient way to fuel automobiles, and that the industry would collapse without federal subsidies. They may be right, but with strong bipartisan support on Capitol Hill, that's unlikely to change. Then there's this: At current gasoline prices of $3.50+ per gallon, mixing in ethanol at $2.50 (or $2 after the subsidy) is making gas cheaper.

While capacity will rise from 9B gallons to 13B in early 2009, there's not much on deck after that. A once-feared glut now looks unlikely as plans for new plants fell apart amid tumbling valuations for ethanol producers and the credit crunch.

Shares of Verasun Energy (VSE), -61% this year, Aventine Renewable Energy (AVR) -59% and Pacific Ethanol (PEIX) -60% all trade at a discount to their book value.

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Hard Assets Investor asks: Are We at the Bottom of the Ethanol Barrel?

Recently, four times as many calls as puts are being scooped up by ethanol traders, yet another sign the market may be rethinking the sector.

Comments

[Charlie Peters]

What was the cause of death of Alexander Farrell, 46, expert on alternative fuels?

www.sfgate.com/cgi-bin...

[aoxomoxoa]

ETOH poisoning

[maverick]

First of all, these companies are NOT profitable. Most are losing money, nobody does better than break even, all hoping the price of corn will drop. Well, it won't. It is in fact headed higher, and a wet Spring in the midwest suggests a lot higher. Much of the corn has to be replanted, and for those that do, the yield won't be very good. Many will replant, but not with corn, they'll switch to soy. There probably aren't any shares left to borrow, but these stocks are headed for bankruptcy.

[Xyrus]

Ethanol from corn is a bad idea, as I've said before. Corn is harsh on the soil, has long growing season, and is much better as a fuel for humans than vehicles.

Once they use cellulosic sources (agri-waste, hemp, switch grass), things will be better. But corn gives a horrible yield. Perhaps people are just coming to realize that corn is not a good fuel source. It seems as if congress may finally be getting that clue.

~X~

[Itsonlymoney]

The addition of ethanol to gas may make the price cheaper but it also reduces the miles per gallon.

[Subsidy Eye]

The 51 cents per gallon blenders’ credit is only the tip of the iceberg. The industry is also being propped up by numerous other federal programs and various state and even local incentives and tax exemptions. Check out the studies by the Global Subsidies Initiative (available from globalsubsidies.org) for a more complete picture.

The purported savings from ethanol are marginal and localized. According to DTN Ethanol Center, the national average Fuel Ethanol Rack Price on 3 June was $2.81 per gallon. Adjusting for the lower energy content of ethanol compared with gasoline, that is around $4.00 per gallon of gasoline equivalent. The average gasoline price on 26 May (the latest date available) was $3.94. So, please explain how ethanol is making gas cheaper.

[paultaut]

I like Verasun for the simple reason that they have started building a Cellulostic ethanol plant and I think they have the ability to build more. They have licensed some private research which may make the difference in cellulose ethanol generation. Something to do with why algae disintegrates in water.

Don't remember where I read the article but have been following VSE for a few months because of it.
Don't own it Yet.

[User 52095]

If you want a good biofuel that does not use food stock take a look at NBF

[john s. gordon]

the corn ethics question - should corn be fed to cars or to humans that are starving all over the world?

the corn energy problem - it takes a lot of fertilizer to create a pound of corn. fertilizer is made from - guess what? - natural gas. so we are making gasoline from natural gas. they were doing this in new zealand in the 1970's, NG to methanol to gasoline via Mobil's process. hydrogen for fertilizer could be made from coal (TVA was doing in the 1960's) but i don't see any stampede in this direction developing. corn growing also requires a lot of water, and at the right tine in the growing cycle.
> jack

[prone_522]

Here are two companies (involved in a joint venture) that are in the process of making biofuel from algae:

GGRN
VCTPF

Once this technology is refined, the process creates roughly 10,000 gallons of usable vegetable oil feedstock per acre. This is in comparison to 48 gallons/acre for soybeans and 635 gallons/acre for palm oil.

[john s. gordon]

great way to convert CO2 and sunlight into liquid fuels. moon base/mars base here we come.
> jack

[wheels14]

Dear GSI,

What have we spent on the Iraq war? That is our oil subsidy, and it is only part of our military cost to protect oil. We spend 100X of our total farm subsidies on oil subsidies.

[wheels14]

Ethanol, evan without the subsidies cost less than gasoline right now! I use 90/10ethanol fuel and I get 33 mgp in my car. That is better mileage than I would get with regular but a little less than I get with straight premium. The 90/10 is cheaper than regular and I get better mileage!

Not all fertilizer is made from natural gas. Waste from animal feeding operations makes great fertilizer. And, using it helps our ground water quality here in farm country because it keeps it from being absorbed in dense concentrations at the feeding ground.

[wheels14]

Dear Maverick,
Verasun and Aventine are both profitable. Pacific Ethanol would have positive numbers if they had not spent $97 million on the purchase of partial ownership of Front Range Energy.

Please stop lying on this board! It detracts from the honest exchange of information and opinions!

[maverick]

Ethanol contains about 1/3 less energy than gasoline, it is impossible for your mileage to be greater on 90% ethanol. Grab any chemistry book. These companies are not profitable, that's why so many are being mothballed, closing, or being canceled, some substantially into construction. Just sell the shares before they are worthless. If you force me, I'll open my book and give you the exact energy content numbers. You didn't believe those cold fusion guys, did you?

[rickh]

Dear Maverick,

I spent three years as a chemistry major before I decided what I wanted to do for a living. Do you know what the flash point of gasoline is? Do you know what percentage of the gas you put in your car is actualy burned? You only burn approximatly 35% of the potential energy in gasoline because your engine cannot function at the temperature required to burn a higher percentage. The rest comes out of your tailpipe as particulate matter, we call it polution. You burn 98% of the potential enery in alcohol because it has a lower flash point temperature, that is why it burns cleaner. When you mix alcohol with gasoline the mixture has a lower flash point than does pure gasoline. It also helps that my car has very high compression and loves the higher octane. Imagine what the auto manufactures could do it they could count on higher octane at the pump.


I did get excited in 1988 when the University of Utah said they had success with cold fusion. I no longer believe anything comming out of Utah.

[Contrarian Profits]

According to Petroleum World, the US Postal Service has conducted studies proving that bio-fuels operate at 29% less efficiency than pure gasoline.

www.contrarianprofits....

[wheels14]

Murray, "biofuels" is a very broad group of fuels. Which biofuels did they test?

[Joe Lovshe]

How can these biofools be s stupid? If you take a finite supply (Corn/soy/wheat) and try to satisfty an infinite demand (fuel) you will see prices through the roof.

[Jim W]

Would sugar beets be a better alternative too corn? Would less land be required for the beets? I am just asking