Ethanol Stocks: The Good News and the Bad

by: Konrad Imielinski

Good News:

As many of you already know, a major problem with ethanol is that it cannot be transported through existing pipelines because it is highly corrosive and water soluble. It seems, though, that several companies have recently been working to fix this problem. The article states that Houston-based Kinder Morgan Energy Partners (NYSE:EPL) plans to run a test batch of ethanol this month through its 105-mile long underground gasoline pipeline.  If successful, the pipeline could be transporting ethanol on a commercial scale by year's end.

In addition, The Association of Oil Pipe Lines, which represents about 50 pipeline companies, has been evaluating ways that ethanol can be safely transported in existing pipelines. If a solution is made, we will be able to avoid building a separate pipeline strictly for ethanol which industry experts estimate to be $1 million per mile! In Brazil, Cosan announced it will invest $1 billion in a new 386-mile ethanol pipeline which is scheduled to start operations by the first half of 2011. Brazil currently exports 3.5Bl/y of ethanol. With the pipeline, Brazil is expected to export over 14Bl/y.

Ethanol futures followed crude oil as October ethanol rose a meager 3.7 cents to $2.177 a gallon

Bad News:

Wow! Shares of VeraSun plummeted 73% ($3.81) Wednesday to an all-time low of $1.41 a share as the company warned of a larger-than-expected loss for the third quarter. In a statement filed after Tuesday's close, VeraSun reported that it expects a net loss in the range of 40 cents ($63 million) to 65 cents ($103 million) a share. Analysts had estimated a net loss of only (in comparison) 2 cents a share.

The reason for the larger-than-expected loss: VeraSun was unsuccessful in hedging against high corn costs - due to what has recently been an extremely volatile market - and as a result expects its corn costs to be in the $6.75 - $7 range (ABSURD!!!). Aventine also had a dreadful day as its shares fell 22.5% ($1.14) to $3.93 on news that, "it could seek to issue new debt and shares or delay construction of some plants in a bid to shore up its cash position." Pacific Ethanol followed the flow as it fell 11.95% ($.19) to $1.40 a share.

December corn on the CBOT shot up 21.75 cents Wednesday to $5.54 a bushel due to broad base buying in the commodity market. Crude oil jumped $6 a barrel while gold futures shot up $82 an ounce as the U.S. dollar fell.