VeraSun Energy:Buyout Candidate, If Obama Wins 15 comments
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Last week, ethanol producer VeraSun Energy (VSE) announced it put itself up for sale after blowing its brains out in the corn market. The company's practice of not buying corn requirements far ahead of time hit a brick wall when the June Midwest floods caused a major whipsaw in grain commodity prices.
The company clearly panicked, went long corn during the upswing, and now is riding on an undetermined loss on commodity trading and corn inventories. In its now-cancelled equity offering prospectus filed on September 16, VeraSun estimated third quarter corn costs would be $6.75 to 7.00 per bushel, and the company would record a third quarter loss of $63 to $103 million based on input and output prices and various assumptions including a New York Harbor ethanol price of $2.35 to $2.45 per gallon.
Currently, NYH ethanol is trading 9 cents over $2.24, or about $2.33/gallon which was Chicago's close on September 22.
The question is, how big will VeraSun's loss be? Is the company in a liquidity crisis, and is the company an attractive buyout candidate? My answers are, probably over $100 million but not more than $200 million, No and Yes, but only after an Obama win on November 4th.
On point one: the company said in its September 16 prospectus that it is no longer hedged on corn and therefore future purchasing would be at market prices.
Assume VeraSun experiences level corn purchase prices at local discounts to $5.50 per bushel (Chicago December futures). This is conservative as a bumper crop of 12.3 billion bushels of corn could lower Q4 corn prices. Assume NYH ethanol prices continue to soften a little to $2.25 to $2.35. This is conservative as the disruption of oil refineries in the Gulf which reduced demand for ethanol, could be alleviating. I don't have a number for prices or consumption of natural gas, DDGS, urea, sulphuric acid and other production factors but they are much less material to this thesis than corn and ethanol.
VeraSun would then record an additional $35.5 million shortfall in pre-tax quarterly income according to their September 16 disclosure. I am going to add that to the top of the projected loss range of $103 million and forecast VeraSun loses about $140 million in the Q3 to be announced in mid-November (unless they were bought out).
On point two: The company is indeed in a tight cash situation, but not as bad as much smaller peer BioFuel Energy, which lost $46 million in the corn market , but only had two plants which were still experiencing hiccups in commission. VeraSun has fourteen plants with two more soon to start producing in Q4.
VeraSun had only $28 million in cash as of June 30, 2008. And it has ran up its unutilized credit facilities due to the corn market squeeze and delays in collecting receivables from the Gulf refiners. It needs to receive a $33 million tax refund in Q4 or it will have a liquidity problem. Hence the need to do a strategic "deal" now.
But the company has a large asset base which could support additional borrowing while it looks for a buyer or partner. And VeraSun has a strong advisor in Morgan Stanley (MS) which is still standing in spite of the tsunami that has hit Wall Street.
On point three: VeraSun has 16 state-of-the-art ethanol plants. The oldest is only 5 years old. I toured the Albert City facility last year and it is a corn crunching, ethanol producing machine.
These plants make money under normal circumstances with iron-willed discipline and good management. If you believe Americans will return to their vehicles and gasoline demand will increase as prices have come down from Hurricane peaks, you should believe in ethanol refining. The caveat being, the Republican presidential platform includes reducing subsidies to corn ethanol producers.
At nameplate capacity (most of the plants churn out more than nameplate with some tweaking), VeraSun will produce 1.64 billion gallons of anhydrous ethanol per annum. Overnight, an acquiring company could become the biggest ethanol producer in North American (VeraSun says they will be the biggest in the world by year-end).
Likely interested parties include the usual suspects, Archer Daniels Midland (ADM) and Cargill, although the latter company may have lost its taste for corn ethanol as it helped create Biofuel Energy.
More likely suitors could be two foreign multinationals, both already in the ethanol and biofuel business in the USA. These include Cilion, backed by Virgin Fuels, part of Richard Branson's Virgin Group, and Khosla Ventures. Cilion has two corn ethanol plants under development in New York State.
Another potential suitor is Hong-Kong based Noble Group, which is an international agriculture and commodity trader with 2007 revenues of $23 billion US and $19.9 billion US in the first half of 2008. Noble has interests in several ethanol plants and markets ethanol for ten plants across the US.
If an oil company were to decide to take the plunge into ethanol refining, it probably would be Marathon Oil (MRO). Marathon partnered with The Andersons, a well-run grain handling, rail transport and ethanol production company, to open ethanol plants in Ohio, Indiana and Illinois. The partnership might be interested in becoming a major ethanol producer with a VeraSun acquisition.
Competitors of VeraSun such as Poet, Aventine (AVR) and Hawkeye probably lack the deep pockets required to do a deal. They might hope for a bankruptcy sale of assets.
Valuation:
New ethanol plants cost over $2/gallon of production to build last year. But demand for new construction has disappeared. Yet steel, copper and concrete prices have not ameliorated. So the Verasun plants are worth something. What would be a reasonable price?
VeraSun bought three plants by acquiring ASAAlliances Biofuels for $2.07/gallon in August 2007. They then merged with US BioEnergy last spring valuing 5 operating and 3 almost completed plants, at $1.51/gallon.
Assuming VeraSun could do a deal at $1.25/gallon, their sixteen plants would be worth $2.05 billion. Netting out $1.51 billion in debt as of June 30, $140 million in losses subsequent to that date, and adding back $280 million in working capital, get's us to $680 million, or $4.30 per share.
That's a 139% gain over the current price of approximately $1.80. There were 15 million of 158 million shares short as of August 29. Possibly, some of those have covered since Wednesday's bad news.
As mentioned above, I would expect no company would move on VeraSun until after the 2008 Presidential election, and only after an Obama win. This is because the Illinois Senator is for more corn ethanol subsidies, whereas his opponent is not.
If you are cynical, you might bet on a President McCain continuing to back corn ethanol subsidies due to political pressure, and pick up VeraSun even cheaper. Of course, this is a risky bet. I made money on ethanol stocks in the past, but recognize a "crush" commodity refining business is inherently a low return, high risk endeavour as VeraSun has recently found out.
Disclaimer: long VeraSun, yesterday
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This article has 15 comments:
If you want to profitably make ethanol for fuel you must use a feedstock that is an ORDER OF MAGINITUDE cheaper than corn. Sugarcane works already, (just ask CZZ) and optimistic scientists seem to think wood chips or corn stover (corn stalks and husks) are only a "few years" from commercial viability. Time will tell what will work in the long term but the only reason it ever looked reasonable to turn grain into fuel was because of goverment crop subsidies that were as foolish as they were massive.
Toyota, Honda, and T.Boone Pickens look to have it just about right.
-y2kurtus
> jack
On the flip side, Obama may state that he supports continued subsidies for ethanol, but when it comes right down to it that support may waiver when and if we face an actual crop production disaster.
So far, as we head into harvest, production appears to be near or around average. The fear of a production downturn alone sent corn prices higher, to above $8.00 on the July 2009 futures. What do you believe would occur if a true production disruption were to take place?
The fact remains we need to find ways to support the plants currently in operation, but to believe that the corn based ethanol business will continue to grow is realistically impossible. The corn demand base for ethanol and other industrial products is close to its peak. It may not be long before we are forced to choose between using corn for ethanol or using it for livestock feed and exports.
As we stand right now 2009 could be a far more interesting year than 2008 in both the corn and soybean markets. We may not have enough tillable acres to cover the continued increase in demand. Coupled with an increase in demand and input costs on the farm, we could witness quite the downturn in corn production, or at least a significant downturn in ending stocks driving corn prices drastically higher.
To place VeraSun's survival solely on the back of an Obama presidency, as I said earlier, is quite the stretch. There are an awful lot of outside factors at play when looking at the future of VeraSun and other ethanol plants alike.
The VeraSun plants are in the midwest far from the biomass that the VRNM process would typically use, such as wood waste. So I don't think BP would be interested.
Add to the possible suitor list, Abengoa Bioenergy.
They want money but nobody is so stupid to believe.
I am a business student conducting a research report on a potential merger between ADM and VeraSun. I was wondering if you could contact me so that I can ask you a few specific questions.
Thank you,
Jim (jzografos1@babson.edu...
thank you
Maria Rodriguez
mrodriguezgudenus1@bab...
I note ADM will announce it's first quarter on November 4th so you can get a better appreciation of what the company's status and plans are. They say they are pursuing advanced biofuels with ConocoPhillips but don't give any detail.
Since writing the piece above, the Wall Street and major bank credit meltdown triggered the Paulson $750 billion "bailout" plan, and both stock markets and commodity prices have declined sharply. A number of deals have probably gone off the table due to fears of a global recession and/or lack of financing.
On the other hand, we have seen gross crush spreads on corn ethanol turn positive (before overhead, taxes and interest on debt). New crop corn is bid $3.55-70/bushel at VeraSun's plants which is almost half of what they said their cost would be for Q3. I think ethanol is seasonally weak this time of year as production overtakes the mandate, but should firm up when the 2009 10.5 billion gallon mandate kicks in for 2009.
November delivery at Chicago EtOH recently went higher than RBOB for the first time in over a year.
Tempering my enthusiasm for US ethanol is the fact the devaluation of the Brazilian real from 60 cents at the beginning of September to about 42.5 cents will give them a big incentive to export excess ethanol, especially through the Caribbean loophole.
On the positive side, Obama seems likely to get into the White House and there is also the possibility of a Democratic hat trick (President, House, fillibuster-proof Senate).
Which could mean corn ethanol producers and all the businesses they support will be coddled and protected like an overly-protected nephew or niece is supported by a rich relative.
The same assumption yields abundant green electrical power and with it the energy for plug-in hybrid vehicles, whether or not next-generation vehicles are alcohol or methane-powered.
Nevertheless, cellulosic gasoline, like that being developed by George Huber's group (www.nsf.gov/news/news_...) embodies the prospect of being a green transportation fuel that can spare cash-strapped automakers (and customers) the need to develop and field new (and more complex--read more expensive) hybrid automotive drivetrains.
Cellulosic methanol, by the way, probably not as hard an R&D task as the fuels mentioned above, is a convenient feedstock for making dimethyl ether, a green substitute for petroleum-based diesel fuel.
On Sep 25 10:56 AM paultaut wrote:
> What role does ethanol play in a TBoone world or an all electric
> concept?