It’s pretty hard to believe that Valero actually wants to buy these facilities. We’ll know soon, though. Bids for these and other VeraSun properties are due March 13th.

Paul Ausick
February 9, 2009

Like VeraSun and Aventine, Pacific is stuck in the deadly cycle of highfeedstock costs, low prices, and falling demand for gasoline.Each of these companies invested heavily in capacity, only to seedemand fall as consumers drove less in reaction to high gasolineprices. VeraSun is currently in Chapter 11, and its stock has beentaken off the NYSE. Aventine and Pacific are off 52-week highs by about80%.

The glow of corn ethanol was strong when the federal governmentmandated renewable-fuel standards, but what we’ve got here is anexample of the market hammering an industry regardless of federalbacking.

Politically, ethanol’s a winner. It benefits farmers, it reduces carbonemissions, and it replaces foreign oil. That’s why politicians loveit–there’s something for nearlyeverybody.

But the market treats corn ethanol just as it would any other product:does the demand mesh with the supply? The answer appears to be "no."Federal mandates for 11.1 billion gallons of ethanol production by theend of 2009 will certainly be met. But if consumers stop driving,where’s that ethanol going to be sold?

One thing that could happen is that Congress could mandate wider use of85% ethanol (E85). But that would mean a significant change to the USautomobile fleet and to wider distribution of E85. Neither of thosethings will happen quickly enough to save VeraSun or Aventine orPacific Ethanol.

There is some evidence that sharply lower gasoline prices have putdrivers back on the road. And reduced production from OPEC could sendthe price of gasoline back up. That might help prop up ethanol prices abit, but it’s not going to be enough. Corn ethanol was always a poorsolution to low farm prices, improved emissions reduction, and lowerdependence on foreign oil. That simply will not change.

Pacific Ethanol shares are down over 7% at $1.00 on over 300,000shares.  Its 52-week trading range is $0.62 to $9.88 and its averagedaily trading volume is about 800,000 shares.

Paul Ausick
November 10, 2008

Where ADM did not do so well was in its corn processing operations. Operating profit in the division was down by $135 million,with biofuel products off nearly 62% and sweeteners and starches down61%. Revenue was $2.24 billion, a rise of about 47%, thoughvolumes were up just 3%. Mark-to-market losses on corn hedgescontributed to higher feedstock costs and higher energy costs alsodampened profits. Investors liked the news as ADM shares are up nearly18% this morning.

VeraSun (NYSE:VSE), a pure-play ethanol company, didn’t have a backstop and the company is now in Chapter 11 and may be a new net-zero for shareholders.

After the market closed yesterday, Anadarko (NYSE:APC) reportedquarterly earnings of $2.165 billion, or $4.62 per share. Anon-cash gain of $2.193 billion on derivatives and other adjustmentsboosted revenues significantly. Discretionary cash flow (non-GAAP) grewfrom $736 million in the same period a year ago to $1.132 billion thisyear.

Anadarko’s realized prices for both crude oil and natural gas were upabout 58% and 92%, respectively. The company’s share price is up morethan 5% in early trading today.

At the other end of the energy pipeline, refiner Holly Corporation(NYSE:HOC), this morning reported EPS of $1.00 on revenue of $1.72billion. Analysts had been expecting EPS of $0.87 and revenues of $1.71billion.

Net income was down more than 14% from the same period a year ago, andEPS was off nearly 6%. Refining margins were up 18% year-over-year, butreduced throughput and higher costs caused the decline in net income.Holly has $225 million in cash, no debt, and a credit facility for$175, none of which is outstanding. But the drop in net income isrolling over the good news. Holly’s share price is off about 1.2% thismorning.

With pure-play ethanol companies watching their margins and shareprices dive, it’s not unreasonable to wonder what could happen ifPacific Ethanol (NASDAQ:PEIX) or Aventine (NYSE:AVR) will followVeraSun down the Chapter 11 path.

ADM hasn’t shown any interest so far in picking up one of these guys,but it might not be a bad idea. Until another gasoline additive (notMTBE) can be found to help keep wintertime air clean, ethanol is stillthe only game in town to meet federal and state mandates for emissions.

For that matter, even a crude refiner like Holly might be interested inan ethanol play. On second thought, that’s not likely at all.

Paul Ausick
November 4, 2008

Verasun Energy (VSE) Chapter 11. Sells down to $.20 from 52-week high of $17.75.

Atricure (ATRC) Department of Justice probe. Roth Capital downgrade. The daily double. Drops to $3 from 52-week high of $14.38.

Candela (CLZR) Looking at strategic alternatives and posted poor earnings.

Douglas A. McIntyre

The agricultural products used to make most food jumped up so much that the normal consumer could not get a loaf of bread for under $50.

Apparently, all of that has changed.

According to Bloomberg, "Industrial raw materials measured by the Journal of Commerce fell at an annual rate of as much as 56 percent last week, the most since 1949 and worse than the declines before every recession since then." Prices might get more stable if businesses and consumers were in an expansive mood, but no one is buying anything. A consumer recession has lead to deflation in commodities prices and with joblessness rising, there is no reason to believe that will change.

The data is another piece of information encouraging economists to believe that deflation is the worst factor facing the economy. Adding the present recession to the overall picture makes it look like Japan in the 1980s and 1990s. It is called an "L-shaped" downturn because it drops quickly and runs along its bottom for a long time. No one has said, but that must be in contrast to better "U-shaped" or "V-shaped" tough economic times.

Referring to the alphabet is no cure. Commodities prices were supposed to stay high because nations like China were going to suck up supply for their incredible factory production. Now that the West is importing fewer of their goods, that theory is starting to get leaky.

The trouble with stagflation is that no one has come up with a sure fire formula to fight it. Bringing interest rates down to zero does not help much if demand for the things that money can buy is undermined by job losses and cautious businesses. Creating a government system to buy commodities from cooper to corn worldwide would cost trillions of dollars. That available capital is already going to underwrite aid to banks to cut off a liquidity crisis.

Commodities are driven up by two things. One is robust consumer demand and the other is war.

Making tanks and war ships available at zero rate financing probably will not do the trick

Douglas A. McIntyre.

When oil was at $147 a barrel, ethanol was a savior for car and truck drivers everywhere.

The ethanol industry built tremendous production and transportation infrastructure. It was a "if we build it, the will come" strategy. Then, the world fell apart. Prices for gas at the pump are back down well below $3 instead of being headed toward $5 as they were in August.

Verasun says it will keep operating, but common shareholders have been crushed to death. The stock was at nearly $18 late last year. Now it is under $.40.

The next companies that stockholders need to be concerned about are Pacific Ethanol (PEIX), which has dropped from a one-year high of almost $10 to $.90 and ADM (ADM), which is too big to fail but could get nicked by the industry fallout.

Until oil moves back above $100, ethanol companies are in a coma.

Douglas A. McIntyre

Recent rumors put VeraSun as potentially being toast, andyesterday’s earnings release from Aventine will do nothing butcontribute to that endless slide. Aventine reported EPS of $0.06against analysts’ expectations of $0.12, and revenue of $599.5 millionagainst estimates of $716.37 million. Excluding non-cash gains of $18.4million, the company managed only to break even.

Aventine also noted that it will delay the opening of its Aurora Westplant in Nebraska by three months and is considering delayingconstruction of another new plant. About two-thirds of Aventine’s cash,$60 million, resulted from tapping its revolving credit line.

Six weeks ago VeraSun was trading around $5.00/share. Then it announcedthat it was expecting to report a loss in the third quarter. The stockpromptly dropped from $5.22 to $1.41, and it closed yesterday at$0.44/share. Pacific Ethanol is equally awful, falling from a 52-weekhigh of $9.88 to close at just $0.86 yesterday.

As gasoline prices fall, and US drivers start to hit the road again,demand for ethanol will certainly increase. But then so will feedstock(corn) prices, and profits will be stifled again.

Here’s something to ponder, but skeptically: could the ethanol producers be too small tofail? If automakers can get a piece of the federal government’s $700billion rescue package, what’s to stop ethanol producers from gettingin line for a handout. After all, ethanol helps farmers, reduces ourdependence on foreign energy supplies, and is less harmful to theenvironment.  Even though we think it a waste of capital, in thesecrazy times of big hand outs and with an unknown White House policy beyond 2008 it seems anything could happen.

As you will see the chart from BigCharts.com over the last two years, these stocks would have been the best way to burn money that you could some up with.

Paul Ausick
October 31, 2008

Williams-Sonoma (WSM) Who can afford to decorate a home? Earnings fall. Sells off to $7.26 from 52-week high of $31.88.

Pilgrim’s Pride (PPC) Lenders extend debt, but market is still nervous. Down to $1.10 from 52-week high of $30.15.

McKesson (MCK) Weak guidance. Slips to $35.50 from 52-week high of $68.43.

Vistaprint (VPRT) Bad forecast and downgrades. Daily double. Plunges to $16 from 52-week high of $48.60.

Clean Energy Fuels (CLNE) Plan to raise money hurts shares. Falls to $6.62 from 52-week high of $19.95.

Douglas A. McIntyre

Google’s  latest foray into burning cash is to help improve the energy grid and cut the cost of electricity. According to The New York Times, "Google is now considering large investments in projects that generate electricity from renewable sources."

The sharp drop in Google’s shares can be placed at the feet of concerns that the company spends too much money and that its margins will be compressed by any slowdown in the advertising business unless it cut costs. That has helped push the search company’s stock to a level where it has not traded since late 2005.

If the management at Google is anything, it is smart. Perhaps that is university smart and not intelligence based on practical experience

Ethanol and solar stocks have been wounded by falling oil prices, dropping government subsidies, and rising commodities prices. Shares in solar giant Suntech (STP) are down from a 52-week high of $90 to about $12. Biofuels operator Verasun (VSE) has fallen from $17.75 to $.70.

Doing good has some limits when the shareholder’s money is involved. The two founders of Google and its CEO have billions of dollars in personal wealth. Let them put up the capital to make the world "green".

Douglas A. McIntyre

But Xethanol has bigger problems. It’s stock is trading virtually atits 52-week low even with today’s gains, off about 85% from its high.Operating cash flow is negative and its gotten no traction amonginstitutional investors.

Still, Xethanol’s share performance is better than either PacificEthanol (NASDAQ:PEIX) or VeraSun (NYSE:VSE), which are both off about90% from 52-week highs. Ethanol companies can’t seem to thrive, evenwith a $0.51/gallon federal subsidy. It’s hard to see how the ethanolbusiness gets better going forward.

Xethanol shares are up almost 18% today.  Still, at $0.20, it is hard to get excited here.

Paul Ausick
October 9, 2008