Ethanol Stocks: The Good News and the Bad

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 (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.

Comments

[john s. gordon:]

i have been a chemist for the last 60 yrs & never knew C2H5OH was corrosive. of course everybody knows water is corrosive to iron when air or oxygen is present. in your house do you have copper pipe or plastic pipe ?
> jack

2008 Sep 18 08:15 AM

[TexasDriller:]

I believe that you have confused your companies, or at least the symbols, of two companies in this post titled "Good News."

You say Kinder Morgan Energy Partners (EPL)will test run ethanol through a pipeline. Kinder Morgan (correct symbol=KMP) is based in Houston and operates numerous pipelines in the US.

New Orleans based Energy Partners (Symbol=EPL) is an exploration and production company with operations primarily in the Gulf of Mexico.

2008 Sep 18 08:22 AM

[nakedjaybird:]

Gee gollies - I wonder how corrosive home grown biodiesel would be.......................

2008 Sep 18 11:16 AM

[rhj123:]

It seems that biodiesel has a much better future than ethanol. There is too much government involved in ethanol.

2008 Sep 18 12:01 PM

[SubsidyEye:]

"It seems that biodiesel has a much better future than ethanol. There is too much government involved in ethanol." -- bobjou

You need to read up on biofuel policy, bobjou. Federal support for biodiesel is as heavy as for ethanol, granting it $1.00 per gallon in tax credits, compared with $0.51 per gallon for corn ethanol. In addition, most producers benefit from a $0.10 per gallon Small Producers Credit on the first 15 million gallons they produce in any given year. Producers in Kentucky get an additional $1.00 per gallon, and producers in Pennsylvania $0.75 per gallon.

First-generation biodiesel would have no future (except as a botique fuel made from waste cooking oil) were it not for these subsidies. The price of feedstock accounts for 80% or more of the cost of producing biodiesel, and that cost is today almost 3x what it was three years ago.

Biodiesel from algae may have a bright future ... eventually. But it is still in the pilot and demonstration stage.

2008 Sep 19 06:04 PM