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  • Einhorn Has Confidence In BioFuel Energy Corp. 0 comments
    Mar 12, 2013 1:45 PM | about stocks: BIOF

    BioFuel Energy Corp. (NASDAQ: BIOF) recently announced that it will cut 40 full-time jobs at its ethanol plant in Fairmont, Minnesota. According to the company's Vice President and General Counsel Mark Zoelle, the adjacent grain storage facility will continue operating with 15 remaining employees. Prior to the job cuts, the company had about 135 employees. It stopped ethanol production in September amid high corn prices and lower prices for corn-based fuel additive. The original plan was to restart the plant on short notice. Given the current market conditions, it expects the plant to remain idle until the year's harvest season.

    Another plant is located near Wood River, Nebraska and is operating normally. At normalized levels, the company's ethanol facilities each require approximately 41 million bushels of corn per year to produce their undenatured nameplate capacity of 110 MMgy of ethanol.

    Will Ethanol Prices Pick Up Soon?

    While the current industry is experiencing a tough operating environment, there are some notable changes in market conditions since the beginning of the year. Based on the U.S. Environmental Protection Agency website, the value of corn ethanol production increased from $0.05/RIN on January 3 to $0.13/RIN for January 16. The increase in value is due to a number of significant changes in the operating environment for corn ethanol producers. In fact, the prices of corn and gasoline have already crossed above their one year lows. Aside from this, there is a decline of daily ethanol production to 784,000 bpd from 820,000 bpd. This means that the increase in RIN values will definitely provide support to producers until current operating environment improves.

    Recently, the government proposed increasing use of renewable fuels to reduce the amount of carbon emissions produced when gasoline and other oil-based fuels are used. Under the proposal, the mandate would increase 16.55 billion of renewable fuels, equivalent to 9.6 percent on all fuel used in 2013. This is an increase from the previous year's 8.9 percent.

    Then came David Einhorn

    Greenlight Capital RE, Ltd.'s David Einhorn has a track record of being a contrarian. He reportedly owns almost 14 percent of BIOF. This seems like a very good endorsement for BioFuel's management. This is also a bet that ethanol production will be higher moving forward.

    Bears have a reason to refute Einhorn. During the third quarter report, it BIOF posted a net loss of $11.3 million on revenues of $116.1 million. Management attributed the loss to the continued weak corn-ethanol spread. However, it expects an improved crush spread environment over the coming months. As of the recent quarter, the company has cash of $10.8 million. This provides enough assurance to investors that it could withstand significant headwinds going forward.

    The stock is not without risk but with the sector bouncing off from recent lows and government mandates keen on keeping sector viable, the rewards seem to outweigh the risks. This is probably the crux of Mr. Einhorn's thesis on Biofuels.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Stocks: BIOF
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