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Pacific Ethanol's Asset Sale Illustrates Its Challenges

Mar. 06, 2020 8:37 AM ETAlto Ingredients, Inc. (ALTO)GPRE15 Comments
Tristan R. Brown profile picture
Tristan R. Brown


  • Pacific Ethanol recently announced that it is selling a sizable fraction of its total ethanol production capacity for just under $53 million.
  • The company has been exploring "strategic initiatives" in response to a persistent low-margin production environment, and its share price jumped by more than 50% on the news.
  • The rally quickly dissipated, though, as investors realized that the sale price valued the assets for much less than the company had paid for the same capacity in 2015.
  • The asset sale buys Pacific Ethanol some much-needed time, but its underlying problems have not been mitigated.

The share price of U.S. ethanol producer Pacific Ethanol (PEIX) popped by more than 50% on March 3, although it quickly gave back all of its gains (see figure). The cause of the brief rally was the company's announcement that it has agreed to sell its 74% ownership stake in Pacific Aurora LLC to Aurora Cooperative Elevator for $52.8 million. The sale involves two Nebraska-based dry mill facilities, Pacific Ethanol - Aurora East and Pacific Ethanol Aurora West, that have a combined capacity of 145 million gallons, as well as associated logistical assets.

The immediate rally can be explained by the fact that the sale will provide Pacific Ethanol with a much-needed cash infusion. The company embarked upon an ill-timed expansion in 2015 that saw it greatly increase its ethanol production capacity, including the addition of the Aurora facilities, just as collapsing global fuel prices heralded the beginning of a long-term period of low ethanol production margins. The costs of that expansion came to a head in 2019 as Pacific Ethanol found itself with over $220 million in current liabilities and enough cash to cover only three quarters of interest expenses (see figure). The $53 million mixed cash-debt deal buys the company additional time.

The speed with which the rally dissipated, on the other hand, reflects the poor terms that Pacific Ethanol received on the sale. The company parted with an effective capacity of 107 million gallons (its 74% stake in the combined 145 million gallon capacity), resulting in a sales price of $0.49/gallon. To put this in perspective, its peer Green Plains, Inc. (GPRE) sold three facilities to Valero Energy (VLO) for an average of $1.08/gallon of nameplate capacity in Q4 2018. The Aurora facilities had previously been owned by

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Tristan R. Brown profile picture
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Comments (15)

You must feel like THEEEEEE biggest horse's ass out there. I bought 20k at the time of your article and sold at 10. I am now financially independent. THANKS!!
Looks like Trump admin will appeal the 10th circuit ruling on refinery waivers. I don’t think that makes sense politically, but I digress....

Do you think the lost demand as a result of the waivers can be replaced with E15 or exports? Why don’t we see more plants idle production in this margin environment?

I also think the west coast plants are more valuable. California LCFS credits pricing has been strong. Oregon Clean Fuels Program. Waste gas converted to CO2 at the Stockton plant will contribute $1MM in operating income annually.
Tristan R. Brown profile picture
"Do you think the lost demand as a result of the waivers can be replaced with E15 or exports?"

Not in the current fuel price environment. The RFS2 only mandates what is effectively a E10 blend, so the primary rationale for blending more than this outside of California/Oregon is when ethanol is cost-competitive with gasoline.

"Why don’t we see more plants idle production in this margin environment?"

Desperation. Q4 2019 was an excellent example. Enough production capacity was idled to push margins higher, at which point production rebounded and margins turned non-positive.
Always darkest before the dawn. I continue to believe letting this industry die is a politically untenable position.
Tristan R. Brown profile picture
I don't see the entire industry being allowed to die. I do think it possible that the Trump administration will allow enough of a demand reduction to occur that low-margin producers will struggle to be profitable, however.
Parsons1978 profile picture
Pre-sale capcaity was 605 million gallons, so if you take 145*0.74 away that becomes roughly 498. If you take away the whole 145 million gallons current capacity becomes 460.
I don't know which one is the correct calculation.
In a slightly better environment (Summertime, Covid under control...) could we say that the assets could be valued at least around 0.7$ x gallon?
In the best case of the remaining 498m gallons that would value the assets at around 350 million $.
Tristan R. Brown profile picture
You are correct, this should have stated 605 million gallons pre-sale. I have submitted a correction request.
Wouldn’t the west coast plants also have more value ? Less plants service the coast, and more onerous fuel requirements? Maybe they sold the easiest plants first bc of the existing partner?
Tristan R. Brown profile picture
That's debatable. On the one hand yes, the West Coast location provides higher gasoline prices and proximity to California's LCFS. On the other hand, it also means that those facilities have to ship their corn feedstock from the Midwest, which incurs financial and internalized environmental (under the LCFS) costs. Any LCFS benefits are also losing value annually due to the ramp-up in the carbon intensity reduction requirements. The Aventine acquisition was billed as giving Pacific Ethanol access to facilities with a more favorable corn basis.
Do you think the Kinergy marketing assets have any value? I guess one way to look at this is at .50cts the plants cover the debt , if Kinergy is worth 25-50mm that gives you pretty much where stock trades and with debt pushed back you have some time for something positive to happen as demand grows somewhat and older less efficient plants shut down??
Little, Einstein profile picture
Ok, maybe I'm wasting time, this company. I don't believe in many improvements in oil ... maybe WTI has a ceiling of 65US
Camlogry profile picture
I would have thought the Fagen ICM Pekin plants would carry a higher liquidation value than the Delta T's.
Tristan R. Brown profile picture
Thanks for the comment - I don't disagree. Where the comparison matters is in valuing Pacific Ethanol's total liquidation value, including its West Coast facilities (other Delta Ts that have to ship corn in from the Midwest).
goat21 profile picture
Why are Delta-T plants more valued?
Tristan R. Brown profile picture
In part to their efficiency, and in part due to the fact that the plant in question is relatively new (2012).
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