Ethanol: Is it coming or going?

Ethanol: Is it coming or going?

August 20, 2008- Investorideas.com

Green Investor at Investorideas.com
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Column by Paulo Nery Exclusively for Investorideas.com


I’ve been an ethanol skeptic for quite some time now. The basic problem lies in the use of corn as the principal feedstock. Converting a large proportion of our food supplies into driving fuel tends to pressure the commodity market and increases the price. With corn being ubiquitous in processed foods (corn starch, dextrose, fructose, the list goes on) it increases costs across the board. But with the recent performance of Verasun Energy, perhaps I need to modify my view, or at least re-examine it.

Verasun (VSE) reported its quarterly numbers on August 12th and came in at 16 cents per share, well above analysts’ expectations of 2 cents. Its profits grew an impressive 58% due to higher production volumes and the higher prices they could charge in line with higher oil prices. While their raw material costs increased more than the prices they could charge for ethanol, they more than made up for that in increased volume of business.

According to Verasun’s CEO, Don Edres, part of what’s driving increased business for ethanol producers is the great economics of ethanol for marketers. The fact that they can earn margins of around 25 cents for ethanol-blended gasoline, compared to less than 10 cents per gallon for unleaded gasoline is a real incentive for marketers and blenders. Part of that difference is made up of a 51 cent blender’s credit and part from the higher per gallon margins on ethanol, which are around 70 cents now.

Another big player in ethanol is Aventine (AVR) reported its quarterly earnings on July 31st. While they experienced record sales, profits fell to a loss of 5 cents per share compared to a year ago figure of 30 cents profit per share. Discounting for its one-time loss connected with auction rate securities, the company would have earned 16 cents per share, which beat the expectations of 12 cents. They also cited higher corn costs as a factor in the lowered profits.

A third player in the market, Pacific Ethanol (PEIX) reported its quarterly earnings on August 11th and missed with a 23 cent per share loss compared to a 3 cent per share profit a year ago. The loss came in spite of a 74% increase in revenues and a 52% increase in sales volume versus the previous year. As with Aventine, higher corn costs were a factor. Pacific Ethanol had paid 67% more this quarter for their corn than the previous year. Their business model however places plants in locations like Colorado, Oregon and California which, while close to the end market, adds transport cost to the raw material.

All of this news and activity makes me wonder again about the longer-term viability of ethanol. It has many critics, but it has many strident supporters too. Once production can switch to non-food sources as raw material then the main problems evaporate. Hence, cellulosic ethanol looks like the story to follow. The potential of converting huge quantities of low value bio waste into fuel is simply fantastic. What’s more green than getting value out of rubbish and displacing something more toxic at the same time?

The Earth Policy Institute, which is a frequent critic of corn based ethanol, calculated in June 2005 that just one third of agricultural residues like stalks and straw would yield 14.5 billion gallons per year – more than twice current production.

Already a handful of companies are building cellulosic ethanol plants.

Range Fuels announced in March this year that they had completed $100 million in series B financing to complete the construction of a cellulosic plant in Soperton, Georgia. Plans are for the plant to be completed in 2009.

Poet LLC, announced recently that they will have a 20,000 gallon per year pilot plant operational by the end of the year. This will help them perfect their processes for the commercial plant they expect to be operational in Emmetsburg, Iowa by 2011.

Verenium (VRNM) has just agreed a venture with BP who will invest $90 million to develop technologies and refineries to produce cellulosic ethanol. Verenium had opened a $70 million demonstration plant in May which can produce 1.4 million gallons per year from switchgrass, wood products and other bio-mass. They’re now setting up a pilot plant and expect production to start in the fourth quarter of this year. They too plan for a commercially viable plant in operation by 2011 which should be capable of producing 30 million gallons per year.

Coskata, say they are building a 40,000 gallon demonstration facility near Pittsburgh. The company claims they will be able to produce cellulosic ethanol for less than $1 per gallon. They recently raised $19.5 million in a second round of funding for the project which is expected to begin delivering product in early 2009.

The Alternative Energy Technology Center, (AETE) has matched Coskata’s claim saying they too can market cellulosic ethanol for less than $1 per gallon – half the cost of corn ethanol. They announced in March that they are in the "completion phase" of designing and building a biorefining system that will make 20-100 tons of ethanol, gasoline, diesel and other products per day. That’s roughly 50,000-250,000 gallons per year.

Finally, BlueFire Ethanol (BFRE), having been granted permits in July, will soon begin construction on its first commercial plant next to a Southern California landfill. They expect to be delivering up to 3.2 million gallons per year of cellulosic ethanol, starting in June next year.

One of the big challenges with cellulosic ethanol is collecting and sorting the feedstock. In the case of agricultural waste like stalks, it’s typically left on the field. New systems and processes need to be developed to capture these materials for processing. Some of the easiest material to obtain now are corn cobs, which several companies are using to start up operations. BlueFire’s approach is to site next to landfill sites that already separate out bio-mass waste.

Many of the companies mentioned here are privately held. And those that are listed are Over-The-Counter listings that trade thinly. The safer investments in the ethanol space remain the larger players, most of whom have yet to say much at all about cellulosic ethanol.


Paulo J. Nery
Bio: http://www.investorideas.com/GI/pn.asp

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