Low oil prices in 2015 has wreaked havoc in the industry and hurt many oil producers in the United States. One key analyst sees investment potential in ethanol producer Green Plains Inc. (NASDAQ: GPRE) going forward for the rest of this year and even into 2016.
In the view of Credit Suisse, Green Plains is considered a call option on the oil market rebalance over the course of 2016, and it has been successfully safeguarding the downside risk. The firm expects ethanol crush margins to remain depressed in the short term because of lower oil prices, while corn prices remain relatively stable and DDGS prices remain depressed due to China’s antidumping investigation into imports from the United States. However, there could be room for U.S. ethanol demand to rise with a recovery in car usage and E15 penetration. Moreover, global ethanol demand is also likely to rise, creating a case for U.S. ethanol exports.
Credit Suisse detailed in its report:
Green Plains has a strong cash balance of $494 million of cash as of the third quarter (including $157.9 million of net proceeds from the GPP IPO). We expect ethanol crush margins to remain depressed in the short term because of lower oil prices (we expect ~$54/bbl in 2016, $60/bbl by 2017), while corn prices remain relatively stable ($4.00-$4.20/bu in 2016/17) and DDGS prices remain depressed (~$150/bu in 2016) due to China’s anti-dumping investigation into imports from the United States. However, there could be room for U.S. ethanol demand to rise with a recovery in car usage and E15 penetration. Moreover, global ethanol demand is also likely to rise, creating a case for U.S. ethanol exports: (1) U.S. corn ethanol is cheaper than Brazilian cane; and (2) as countries try to replace MTBE or fulfil ethanol mandates, demand continues to grow. Management also has another source of potential value creation through its GPP MLP subsidiary.
As a result, the firm adjusted its 2015, 2016 and 2017 EPS estimates to $0.51, $0.01 and $1.00, respectively. Credit Suisse set its target price at $27. Green Plains would earn around $3 per share in earnings at the firm’s mid-cycle $65/bbl WTI oil and $4.00 to 4.20/bu corn in 2018. Credit Suisse believes the business would be worth $30 per share, but the firm applies a discount to reflect macro uncertainties. In Credit Suisse’s view, management has the assets and liquidity to manage the downturn, and as investors become more confident in the corn harvest and oil markets, the shares should recover.
Shares of Green Plains were trading at $19.61 Wednesday afternoon, with a consensus analyst price target of $26.71 and a 52-week trading range of $17.13 to $36.30.