Corn ethanol's stock rises, as its stocks rise

October 8, 2010 |

The Biofuels Digest Index underperformed the S&P earlier this year, when the BP Gulf Oil leak weighed on prices, but has sharply rebounded and now leads the S&P by 5 percent for the year.

Conventional wisdom holds that first-generation ethanol is dead as a door-nail in terms of attracting viable investment, but events in recent months suggest that the conventional wisdom is off by some margin.

The Sacramento Business Journal reported yesterday that “shares of Pacific Ethanol Inc. climbed 3 percent in trading Thursday, after the ethanol-producer… raised $53.5 million in cash — a combination of selling $35 million in senior convertible notes and its minority interest in Front Range Energy LLC for $18.5 million.”  Consider the anguish and noise that surrounded Amyris’s multi-month effort to raise $80 million via its NASDAQ IPO.

Barron’s recently opined that “As world populations grow, they will require more food and fuel. With its portfolio of food ingredients, livestock feed and biofuels, Archer Daniels Midland may well be the company supplying them.” ADM had a good showing through the summer, but according to Barrons, “The stock trades at only 10.6 times forward earnings, below the 11.4 times for competitor Bunge (BG). Analysts argue ADM should fetch a premium to Bunge, based on its stronger average return on assets over the past three years.”

Archer Daniels Midland has been on a strong trajectory this year

The run up in ethanol stocks

Other ethanol players have been doing notably well on the public exchanges this year, with BioFuel Energy trading sharply up this month compared to three months ago, closing yesterday at $2.91 compared to $1.20 just three months ago.

Pacific Ethanol shares have recovered from a mid-year bubble and are on the march again

Not to mention the appearance of players like Valero, Sunoco and Murphy Oil on the scene, buying up stranded assets from VeraSun and Panda Ethanol among others. In one recent quarter the ethanol division of Valero was among the brightest financial stars in that company’s constellation of assets, and with the profits being generated by the until, the company may well pay off that investment over the next few years and find itself simply calculating the dimension of its ROI.

What’s the cause?

Is it simply a run-up in corn prices? That may help ADM, but that’s hardly good news for ethanol pure-plays like PEIX or BIOF. Is it simply a belief that E15 ethanol will open up a massive new market for ethanol and corn? Hardly – even the RFA is cautioning that the approval of E15 may involve only late-model cars and could result in virtually no additional pumps being installed by fueling stations to dole out both E10 and E15 to a confused public.

Further, though the advance has been most strongly felt in first-generation biofuels, the Biofuels Digest Index has outperformed the S&P 500 by 5 percent this year, and is up 10.3 percent for the year to date, reflecting a broad rise in renewables (especially considering the dragging effect that BP has had on the Index since April).

What seems to be happening, instead, is a solidifying of balance sheets (though many companies have far to go in repairing damages suffered during the debacle of 2008), and a return of confidence among investors that, whatever the fate of corn ethanol, for the time present it is here to stay, courtesy of the Renewable Fuel Standard and the absence of substitutes for corn in the feedstock mix. Ethanol futures through 2013 are trading in a narrow $1.93 to $1.98 range on the Chicago Board of Trade, and with 15 billion gallons of corn ethanol likely to be produced and distributed under the RFS (excluding the potential for exports), that creates a relatively stable $29 billion annual market for ethanol in the US.

Ethanol as a base for advanced biofuels and advanced profitability

More may be coming. Not in the form of E15 ethanol, but consider the potential of biobutanol. If ethanol blends at 10 percent without further approval needed for the broad vehicle market, biobutanol blends at 16 percent. At the same time, because biobutanol has higher BTUs, a 100 Mgy corn ethanol plant will produce around 80 Mgy of biobutanol, but generate the same income. It may well generate higher profits, because of savings on fuel transportation, but consider the opportunities for capacity expansion.

Our current fleet of US ethanol plants produces 13 billion gallons of ethanol that will blend into 130 billion gallons of gasoline – that’s the US demand right now, hence the term “the blend wall” – there’s little room for more ethanol unless more E30-E85 pumps are installed and become popular – both question marks.

But the same fleet of plants would produce about 10.4 billion gallons of biobutanol, which could blend into 65 billion gallons of gasoline. It would take twice as much production to hit the “biobutanol blend wall,” leaving our first-generation fleet of plants with some significant upside. Biobutanol conversion? It’s a bolt-on.

Is stability here, is it near, or is it a mirage?

What has been dreamed about for some time may well be here – a stable alternative to petroleum. Though the scale-up period in capacity had all the earmarks and downsides of a gold rush, resulting in a wipeout of a number of positions in the 2007-09 bear market for ethanol, we may well look at the 2010-2013 period as an oasis of relative calm, as long as the corn markets hold steady or the ethanol plants have executed effective hedging strategies to limit any fallout from price imbalances between corn and ethanol.

In our recently concluded series, the Bioenergy Project of the Future, we recommended that all advanced bioenergy projects commence with the acquisition of a first-generation facility. Corn ethanol has not proven to be a beloved fuel in many sections of the country – of course, how many lovers does gasoline have? But it has something special that every advanced bioenergy developer should covet. It is financeable.

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