Ethanol Stocks: Xethanol -- Not Much To Justify High Stock Price (XNL)

Apr.21.06 | About: Xethanol Corporation (XNL)

Story: Xethanol is in the R&D stage of trying to develop and commercialize processes for creation of ethanol from non-corn based cellulosic sources. That makes if a bit different than the other players we have highlighted. Cellulosic ethanol, as far as story goes, is a much better idea than corn, in that the raw materials for ethanol production are scrap yard waste and other woody type products, as opposed to relatively expensive corn.

The sourcing of these waste products allows for a more distributed ethanol production infrastructure, since corn proximity is unimportant, and demands smaller production plants, since woody waste production is often of a smaller caliber than corn. They state that those two properties will allow them to charge premium prices for ethanol, but I think it's just the opposite - they will be able to undercut the corn-based market price.

But that is all pie-in-the-sky until they actually have some products, which they do not. They have a fairly rounded newer management team, although it seems to me that the cellulosic ethanol problem is an enzyme issue, and thus they need some greater chemical and/or bioengineering expertise in-house, rather than only through their research agreements. The Board of Directors seems first rate. Otherwise their website is fairly devoid of content.

Their big move is to begin production of plants the use a beetle derived product discovered by the USDA to assist the fermentation of woody-products.

They seem to have some internal control issues, as it has been necessary for them to repeatedly issue amended corrections to their previous SEC filings, although in the cases that I have looked into, the corrections are generally insignificant. Their latest annual report for year end 2005, issued 7 Apr 2006, shows that they 'came public' in Feb 2005 by reverse-merging into a defunct shell company, which is cheap and doesn't require an investor road show. That puts them in a potentially lower quality tier. They claim to be a "biotechnology-driven company", which is true in theory for their future, but is not true of their current production capabilities, nor apparently of their in-house capabilities. They currently have a refurbished candy-to-ethanol processing plant that has been around for about 10 years and has a capacity of 1.6M gal/year of ethanol, and another bankruptcy acquired mostly corn based plant that they have refurbished for 6M gal/year ethanol production capacity.

Small potatoes, neither cutting edge, nor novel.

Their corporate history is scary (annual report "Corporate History and Recent Developments", pg 3). Basically a bunch of junk companies with no relation to ethanol ( -> -> Xethanol -> Zen -> Xethanol), that kept changing their names and business plans until settling on the current one. Also, I've never seen anything quite like this front-and-center in an annual report (pg. 5-6), but they have what looks to me like a legally binding pump-and-dump incentive with Fusion Capital, whereby they can force them to buy more stock dollar volume on a daily basis as their stock price rises. Fishy.

They hope to be able to ramp the candy plant up to 4M gal/year in cellulosic ethanol production.

They plan to co-locate smaller cellulosic plants at waste-stream producers (like paper pulp mills or lumber processors).

Any technology that they do hold has come from UTEK, a university technology transfer company. Here's a sad general truth: most university research is, frankly, useless crap. It takes 99% junk to find the one gem. The average science paper costs $10-20K in R&D, and what tiny fraction of those do you think ever lead to a useful market product? So, just having some university based research in your pocket is no where near a viable business. Put another way, if the stuff they bought from UTEK is so great, why didn't UTEK sell it to ADM for 100-1000 times more? Answer: because it's utility is far far from assured.

That doesn't stop them from planting little nuggets like "So, if you look in terms of what the company is going to look like in three year's time, hopefully you'll see about 300 million, 400 million gallons of capacity in the marketplace." How about a single co-location licensing agreement today?

Company: They have almost no business, they are all R&D story and hope. For 2005, they had $11M in losses on $4.3M in sales. Given their corporate history, and their recent performance, they are junk. They have no disclosed licensing agreements for their on-site cellulosic ethanol production plants. All story. Big fat Dog.

Stock: Given all that, take at look at XNL recently. No volume, sitting around at $4 (which was already too high but was held there by the agreement with Fusion Capital). Then suddenly millions of shares changing hands, and the price has quadrupled.

I've read every one of their press reports for 2006, prior to and during the recent rise, and other than yet another new business organization, there is absolutely nothing there. They did just receive $34M in private equity funding, but private capital gets pissed away on bad ideas or poor execution all the time. That alone as a validator is not sufficient.

XNL 1-yr chart: