“But I won’t cry for yesterday”: The re-making of the US ethanol industry
The migration from first-gen to next-gen biofuels is becoming less ‘Invisible’ — and the new landscape is not, by anyone’s estimation, an ‘Ordinary World’.
If Aemetis’ latest earnings hadn’t rocked your world quite enough, here are 10 hot strategies being pursued right now to morph the old into new.
If you remained glued to the television during the blow-out originally advertised as Super Bowl XLVIII last February, you may have jumped to be one of the 3.1 million people to snag a free download of the hot new single from U2, Invisible, which Bank of America was sponsoring.
In which case you may have heard Bono channeling a cross between Joy Division and Duran Duran, 2014-style, while a crowd chanted in the background, “there is only us, there is no them”. Bono sang:
“I finally found my real name /
I won’t be me when you see me again…
I’m more than you know / I’m more than you see here.”
It may not have occurred to you, in the midst of football revelry, that here is a pretty good way to think about the state of play in the modern ethanol business. Earnings exploding, business models morphing at the speed of light. The distinction between first-gen and second-gen technologies disappearing faster than the polar ice sheets.
There used to be them first-gen guys or next-gen guys; them fuel technologies, or chems. Now there appears to only be an “us”. And the good economic times have been rolling.
As Raymond James senior VP Pavel Molchanov commented earlier this week:
“Over the past six months, the corn ethanol industry has enjoyed some of its best margins in years. A typical ethanol plant in the Midwest’s Corn Belt currently enjoys EBITDA margins of around $0.56 per gallon. Margins in recent months have been the highest over the past two years and, in certain cases, since the 2008-2009 meltdown.”
“Other than a short-lived spike in March, ethanol has been trading almost continuously at a discount to gasoline: the industry’s margin strength is mainly attributable to the cost side. Amid encouraging crop data, corn prices collapsed in late 2013, and they continue to bounce near their lowest levels since 2010. Put the two sides of the equation together – relatively stable ethanol and much cheaper corn – and the result is a crush spread that is at very robust levels.”
Profits flowing
Perfect evidence of the trend arrived Friday, when in California, Aemetis announced that revenues reached a record $60.7M for Q1 2014, compared to $19.4M for Q1 2013. Operating income for the Q1 2014 was a record $12.7M, compared to an operating loss of $4.2M for Q1 2013. Earnings reached $0.38 per share.
Strong cash flow resulted in cash and cash equivalents of $7.3 million as of March 31, 2014 and allowed for principal and interest payments of approximately $12.2 million during the first quarter of 2014.
“These results build upon the very strong results we posted in Q4 of 2013,” said Eric McAfee, Chairman and CEO of Aemetis. “With available capacity and attractive international markets for our India products, the company is well positioned for additional growth in the remainder of 2014.”
What happened?
In Aemetis’ case, there are three factors.
1. The afore-mentioned boom times in the sector, owing to increased crush-spreads. Here’s the math on that bushel, according to Molchanov:
2. Operationally, the increases in revenues and gross profit were attributable to a full quarter of operations during Q1 2014, compared to Q1 2013 when the Keyes plant was idle.
3. We’ve noted before that another factor driving Aemetis’ forward is a migration towards next-gen strategy. In this case, the company has switched to biogas (in place of natural gas) and to grain sorghum as a feedstock, thereby accessing advanced biofuels (D5) RINs of higher value.
It’s become a common-tale, though no two companies are going about their migration in exactly the same manner. Because of the proliferation of strategies, no one company or model has been standing out in the mad rush to new platforms and opportunities. Hiding in plain sight, as it were.
As Bono explained in talking to BBC Radio 1’s Zane Lowe about Invisible, which was inspired by the band’s first impressions of landing in the über-paced, punk-driven London music scene on the late 1970s:
“There were really wild, extraordinary people and then you feel deeply not extraordinary. You feel invisible and you’re screaming to be seen and you’ve got your band and this is your whole life. It’s that feeling of getting out of town.”
Or as Duran Duran opined in Ordinary World:
What has happened to it all? / Crazy, some are saying
Where is the life that I recognize? / Gone away
But I won’t cry for yesterday / There’s an ordinary world
Somehow I have to find / And as I try to make my way
To the ordinary world / I will learn to survive
Following the economic shellacking of the late 2000s, it’s clear that ethanol producers — those who survived the ordeal — have learned to survive in a landscape that was difficult to recognize.
The Top 10 Strategies in the Race for Change
Their strategies? Migration to advanced feedstocks, technologies, distribution strategies and product mixes. Here’s are the top 10 models being pursued by ethanol producers now in the race for change (in no particular rank of order):
1. The sorghum-biogas route to advanced biofuels
This is the Aemetis approach we outlined above. More on Aemetis and its strategy here.
2. Get deeper into biobased chemicals and advanced fermentation.
Consider what ADM’s been up to. More about their Rennovia deal here and their Solazyme collab here.
3. Invest in Algae as a CO2 monetization strategy.
This is route opted for by Green Plains Renewable Energy, which formed the BioProcess Algae JV. More on that here.
4. Get acquired by an isobutanol producer, or join an isobutanol Early Adopters group
The 21 million gallon Agri-Energy plant at Luverne, Minnesota went this route when it was acquired by Gevo. Platinum Ethanol and other members of the Butamax users group have opted for this one. More on that here.
5. Opt for n-butanol instead of isobutanol, and sign an LOI to be acquired
Green Biologics announced in July of last year that an asset purchase agreement was executed and approved by Central MN Ethanol Co-op shareholders. The aim is to retrofit the 23 Mgy plant to produce renewable n-butanol and acetone in 2016. Previously, Green Biologics announced a collaboration and planned investment in facilities with Iowa’s Easy Energy Systems. The collaboration will result in the modification of Easy Energy’s ethanol demonstration plant in Emmetsburg, IA to produce renewable n-butanol and acetone. In mid-2012 GBL successfully produced butanol and acetone from corn mash at the Emmetsburg facility in Iowa at a 40,000 liter fermentation scale. More on that here.
6. Get into direct distribution of E85
The Andersons and Absolute Energy have been among those who have taken to blending gasoline into ethanol to make an E85 blend, and get lower-prices E85 into the market as a means of breaking the blendwall and saving the RFS. More on that here.
7. Invest in a portfolio of next-gen technologies
How about Valero. Invested in Diamond Green Diesel, Enerkem, and Mascoma — just to name a few. More on their portfolio of investments here.
8. Head directly for add-on cellulosic ethanol
POET not only developed its Voila corn oil extraction — it went forward and invested in POET-DSM cellulosic ethanol. Abengoa has headed down that road as well with its signature development in Hugoton, KS. Both plants ready to come online later this year. More on POET-DSM here and Abengoa here.
9. Add on cellulosic sugar streams
This is the route which Frontline Energy and others have opted for, striking long-terms with Sweetwater Energy and it’s expected supply of low-cost cellulosic sugars made from locally-aggregated agricultural residues. More on that model here.
10. Head for the biojet market
Byogy Renewables has been making major strides towards certification of the fuels produced by its ATJ ethanol-to-biojet technology — the promise to ethanol producers? A market beyond road transport when expansion opportunities into the road transport market dry up. Some are skeptical, suggesting that biojet can’t work because ethanol opportunities are simply too lucrative. The other way of looking at that? At saturation points, all new markets start to lok better than ruinous over-supply.
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