Can Ethanol’s Comeback Last? (PEIX, STKL, CZZ, GPRE, KMP, VLO, SUN, BFRE)

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Toward the end of 2008 (and even sooner), ethanol may have seemed like a fad that came and went.  Then came the dull year of 2009 that seemed as though it would yield little.  Yet ethanol stocks recovered sharply in the stock market rally of 2009 and in recent weeks funding announcements almost make seem as though ethanol is back as a viable fuel alternative.  Despite all the problems of its cost and despite many instances of its carbon footprint not adding up, the sector has seen its share of positive endorsements in recent days and weeks.

We wanted to look to see if the revival of ethanol and biofuel would be a return to the boom for the surviving players or if this was just a fad-trade.  There used to be old notions that it would take $100 oil or more to make ethanol a viable fuel, but that may no longer be the case now that larger players have entered the market often by gobbling up assets from troubled small players.  In this effort we took a look at Pacific Ethanol, Inc. (NASDAQ: PEIX), SunOpta Inc. (NASDAQ: STKL), Cosan Ltd. (NYSE: CZZ), Green Plains Renewable Energy, Inc. (NASDAQ: GPRE), Kinder Morgan Energy Partners LP (NYSE: KMP), Valero Energy Corp. (NYSE: VLO), Sunoco Inc. (NYSE: SUN), and BlueFire Ethanol Fuels, Inc. (OTCBB: BFRE).

Pacific Ethanol, Inc. (NASDAQ: PEIX) has been the biggest catalyst seen in trading in the last two weeks now that shares have effectively tripled since the end of 2009.  While there has been reporting on it since, the big catalyst here was the early January announcement that it was restarting its production at a plant in Idaho.  Shares are up over 10% today and have traded north of $2.40; the 52-week range is $0.20 to $2.75. The highs last week were the 52-week highs and trading volume has been through the roof for the last eight trading sessions.  Meanwhile, not all of its unit operations are out of the woods yet and some projects remain mothballed.

Kinder Morgan Energy Partners LP (NYSE: KMP), according to many, can almost do no wrong when it comes to making money.  The group has increased its renewable fuel operations in an agreement over an ethanol terminal joint venture with U.S. Development Group.  Kinder Morgan will acquire three ethanol terminals for about $195 million.  This will give it a large distribution network of ethanol facilities, which will effectively connect the company with access to many major markets.

Cosan Ltd. (NYSE: CZZ) has come back from the dead in the production and sale of sugar and ethanol in Brazil and internationally.  The company recently was on a blacklist over work conditions in Brazil to the point that Wal-Mart even stopped doing business with it.  Yet the stock was raised to ‘Overweight’ at JPMorgan at the end of December with a $10 price target.  Elsewhere in Brazil and not related to Cosan is news that General Electric Co. (NYSE: GE) and Petrobras (NYSE: PBR) are using sugarcane-based ethanol to produce electricity.

Green Plains Renewable Energy, Inc. (NASDAQ: GPRE) has been flat since it announced the opening of Blendstar’s biofuels blending terminal in Collins, Mississippi on January 6.  Yet shares are around $15.18 its 52-week range is $1.12 to $16.40.  As revenues have grown it seems to have adequate capital under the current climate.

Valero Energy Corp. (NYSE: VLO) may be hard to call a winner in anything because of how the shares have fared in 2009 and because it can’t maintain its refining margins.  Yet it has grown its ethanol operations and won the auction for seven ethanol plants formerly owned by VeraSun last year out of bankruptcy for some $477 million.  Now it won the Renew Energy ethanol plant in Jefferson, Wisconsin for some $72 million in recent weeks and closed on two plants which are idle and will be re-started in three-months to six-months.

Sunoco Inc. (NYSE: SUN) also gave a recent update on its New York ethanol plant, with renovations starting and the facility is supposed to be operational at some point in mid-2010.  The belief is that this project alone may eventually account for about 25% of its own ethanol production needs.

BlueFire Ethanol Fuels, Inc. (OTCBB: BFRE) noted back in December that the Department of Energy increased funding to $81.1 million dollars for the second phase of construction of its cellulosic ethanol biorefinery in addition to the previously announced Phase I funding for development of the Fulton plant of about $7 million dollars.

SunOpta Inc. (NASDAQ: STKL) also recently announced that its SunOpta BioProcess was awarded $5.5 million in Canada (in Canadian Dollars) in funding from Sustainable Development Technology Canada to assist it and partners in the designing and to build and operate an integrated cellulosic ethanol plant and co-located xylitol production facility to be located in the Greater Toronto area.  With shares at $3.17 today, its 52-week range is $0.79 to $4.40.

Much of the hype around ethanol has been part on commodities and part on how much the administration of today is keeping with at least some of the policies of the administration of yesterday.  China is supposed to be unloading some 360,000 metric tons from its reserves this week after sales in December.  Weather-related issues in Brazil have sent prices higher and higher.  The U.S. Department of Agriculture said in a report last week that the fall corn harvest came to a record of 13.151 billion bushels, and it further noted that the soybean crop was also at a record of 3.361 billion bushels.  Cold weather in the U.S. may create revised data in March, but the supply is deemed more than ample for now.

Ethanol and biofuels in general have proven to be a boom-bust scenario in the risk and reward equation.  Many of these have run higher, and some may return to lower share prices.  Chasing this sector endlessly may be fine for momentum traders in stocks, but buying blindly on any biofuels or ethanol news may leave many new shareholders in a situation that they wish the avoided.

JON C. OGG

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