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Ethanol: as an Investment Sector

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Ethanol maker VeraSun hopes to shine in debut

Stocks in companies planning to make ethanol have been hot


Jun 4, 2006

NEW YORK (MarketWatch) -- When looking at the prospects for VeraSun as the first of a trio of ethanol makers going public this summer, consider the big move upward in shares of Pacific Ethanol.


Ethanol, an alcohol-based fuel made from corn and sugar cane, has been riding a wave of interest of late as an alternative to fossil fuels imported from the Middle East and elsewhere.

Pacific Ethanol (PEIX : .78, -1.23, -4.4%) last month raised $138 million in a stock offering as the ethanol sales and distribution company gets ready to become a producer of the fuel by completing five plants by the end of 2008. Shares of the firm have jumped to a high of $45 before settling down to the $30 level, triple its year-ago level of $10.


Other public firms riding the ethanol wave to higher stock prices of late include Green Plains Renewable Energy (GPRE : 0.00, 0.00, 0.0%) , which is now building a plant, and Xethanol Corp. (XTHN : 9.75, -0.05, -0.5%) , which has one small plant and recently purchased another with plans to grow on the East Coast.

MGP Ingredients (MGPI : 100.92-5.16-4.86%) and ANDE (100.92, -5.16, -4.9%) , an agribusiness company, plans to get into the ethanol production business as well.

Agricultural giant Archer Daniels Midland (ADM : 41.50, -0.84, -2.0%) has also waded into the business with more than 1 billion gallons a year of ethanol now in production, and plans to add another 550 million.


Meanwhile, efforts are underway in Washington to push for greater industrial production of flexible-fuel cars.


VeraSun will mark the first standalone company currently producing significant amounts of ethanol to debut its shares on Wall Street. Waiting in the wings are two large IPOs from Aventine Renewable and Hawkeye Holdings.

Dutton Associates analyst Paul Resnik said in an interview with MarketWatch that VeraSun will provide a test case in the IPO market.

"VeraSun will give guidance as how one should value ethanol companies," he said. "As more producing companies come to market, the market will be comfortable with how to do this. We're on at stage now where valuations are based on future production in a commodity that fluctuates in price."

Interest in VeraSun appears to be strong, as the IPO hiked its proceeds to $328 million from $150 million.


The company plans to offer 17.25 million shares at $18 to $20 a share with underwriters Morgan Stanley, Lehman Brothers and A.G. Edwards.

Although ethanol continues to build up steam as an alternative to imported oil to fuel automobiles, Resnik issued a cautionary note on the year-end price of the fuel, which he sees falling about $2.15 in the next year, about 35% below the current level.


In a recent note, Resnik cited a "land rush" mentality taking place in the ethanol business as producers and would-be producers "aggressively" raise equity.

The U.S. will need to invest about $7 billion in the ethanol business and import sugar cane from Brazil to significantly displace imported oil used in cars' gas tanks, according to a study by Bear Stearns.

U.S. corn ethanol production capacity will have to rise by 6.7 billion gallons per year to 11.4 billion gallons per year in order to displace 7% of gasoline from crude oil, the brokerage said.


While the U.S. faces land availability obstacles to growing more corn, in Brazil there are about 950 million acres of arable land, some 700 million of which are currently cultivated.

"In our view, if the renewable industry develops too aggressively, the oil industry may counteract by increasing production of oil and thus drive down the price" of gasoline, Bear Stearns said.

Tempting investors

VeraSun, Hawkeye Holdings and Aventine Renewable have recently emerged as a trio of ethanol makers poised to tempt investors as the U.S. pursues plans to add more pumps at service stations offering a mix of gas and alcohol.


@: http://www.marketwatch.com/News/Story/78bR...st=TNMostMailed

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An "Ethanol Glut" ?: They are now talking about this possibility on Bloomberg



Over $14 Billion has been invested in ethanol stocks in the last 12 months.

But there are now fears that production will be above the 8billion gallon demand target 3 years out.


Some notes:

+ MTBU, another oxygenate, has been banned, creating more demand for ethanol,

+ Ethanol prices have doubled to $3.58 per gallon

+ Corn prices are now falling. Down -6.7% in the last few days

Many US ethanol producers are using Corn as a feedstock rather than sugar or switch grass

+ VeraSun's float has gone well (symbol: ???)

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Some commentary on ethanol from the energy blog Energy Bulletin:




Mainly pointing out that the energy return on ethanol is at best only slightly positive (basically turning natural gas and diesel oil into ethanol via corn for political reasons). Plus, as the world gets closer and closer to a grain supply crisis, does it make sense to feed cars instead of people?


Er... no, I don't think it does. But maybe the sector nonetheless offers good investment. Such is the perversity of human demands.

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Behind in hybrid battle, Ford shifts to ethanol.


"Our strategy going forward is not to wed ourselves to a single technology, but to manage a more flexible approach to meet our goals for customer needs, environmental impact and shareholder interests," he wrote.


Environmentalists have questioned the motives of the automakers pushing for E85. Car companies receive a credit for each vehicle they produce that is capable of running on ethanol or a similar bio-fuel.


But Ford noted that there are also credits to the buyers of hybrid vehicles. "It's not a credit-driven thing," he said. "We get credit either way." More important, he said, was to spend money on technologies that could lessen the country's dependence on oil. "We need to keep a hand in everything so that when a break comes, we can move fast," he said.



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Marathon Oil, Andersons Plan to Build Ethanol Plants (Update3)

July 10 (Bloomberg) -- Marathon Oil Corp. announced the first ethanol investment by a major U.S. oil company in 26 years, saying it plans to build plants with grains marketer Andersons Inc. to meet rising demand for the fuel additive.


The joint venture's first ethanol plant, to be run by Andersons, would have annual production capacity of 110 million gallons, the companies said today in a statement. Ethanol plants of that size can cost as much as $195 million to build, said Linda Casey, a spokeswoman for Houston-based Marathon.


Demand for ethanol, distilled mostly from corn in the U.S., is rising as refiners replace methyl tertiary butyl ether, the additive known as MTBE. U.S. Energy Secretary Samuel Bodman in May said oil producers should invest more in renewable fuels such as ethanol, use of which will almost double by 2012 under legislation signed into law by President George W. Bush.


``We're going to see all the big refiners'' getting into ethanol production, said Gene Gillespie, an analyst at Howard Weil Inc. in New Orleans who rates Marathon shares at ``buy'' and doesn't own any. ``From both an opportunistic and a defensive point of view, it's almost a requirement.''


Marathon and Maumee, Ohio-based Andersons haven't decided on a site or target completion date for their first plant, the companies said. Formation of their 50-50 joint venture is pending approvals by the boards of both companies.


Shares of Marathon rose 10 cents to $85.83 at 12:47 p.m. in New York Stock Exchange composite trading. Andersons jumped $4.25, or 10 percent, to $44.85 on the Nasdaq Stock Market.


First Since 1980


Casey declined to comment on how many plants the venture may build. Marathon sees the venture as a means of ``ensuring reliability of supply,'' she said.


The last ethanol investment by a U.S. oil company was the former Texaco Inc.'s partnership in 1980 with CPC International. Texaco, now part of Chevron Corp., abandoned the project in 1995, when it sold the business to Williams Cos. of Tulsa, Oklahoma.


San Ramon, California-based Chevron is considering investing in ethanol plants, Chief Technology Officer Donald Paul said in May. Like Marathon, Chevron cited the need to ensure its own supplies of the additive, which reduces tailpipe emissions and improves engine performance.


U.S. Senators Tom Harkin and Evan Bayh last year urged the Energy Department to investigate why refiners weren't using more ethanol. The Consumers Federation of America accused oil companies of boycotting ethanol to keep fuel prices high.


Largest in the Midwest


The largest ethanol-producing region in the U.S. is the Midwest, where Marathon is the biggest refiner. Marathon has been blending ethanol into gasoline for more than 15 years, Gary Heminger, president of the company's refining and marketing arm, said in today's statement.


Marathon can refine 974,000 barrels of crude oil a day at its plants in Illinois, Ohio, Michigan, Kentucky, Minnesota, Texas and Louisiana. The company blended 550 million gallons of ethanol into gasoline last year and estimates it will need about 1 billion gallons a year as demand rises, Casey said.


Andersons will procure corn for the joint venture's plants and will provide risk management and marketing, the companies said.


U.S. ethanol makers Aventine Renewable Energy Holdings Inc., VeraSun Energy Corp. and Hawkeye Holdings Inc. have sold or plan to sell shares this year at least partly to pay for expanding production. Hawkeye, the third-largest U.S. ethanol producer, is controlled by Boston buyout firm Thomas H. Lee Partners LP.


Plant Conversion


Buyout firms Riverstone Holdings LLC and Carlyle Group plan to join with Canada's Blackstone Energy Inc. in converting a Collingwood, Ontario, starch plant to ethanol production.


The Carlyle/Riverstone Renewable Energy Infrastructure Fund I will buy a 77 percent stake in Collingwood Ethanol GP, which plans to start producing ethanol in mid-2007, Riverstone said today in a statement. The plant will have annual production capacity of 15 million gallons.


Archer Daniels Midland Co., the largest U.S. ethanol producer, has seven plants with combined annual capacity of 1.07 billion gallons.


@: http://www.bloomberg.com/apps/news?pid=206...&refer=home

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Process Cuts Corn To Ethanol Conversion Cost

A new process promises to cut the cost of producing ethanol from corn.


A Purdue University team led by professor Li-fu Chen and research assistant Qin Xu, both from the Purdue food science department, discovered a new method to create ethanol from corn. The method also produces biodegradable byproducts that could be safely eaten.


Existing methods of corn-to-ethanol conversion produce as much as 2.6 gallons of ethanol per bushel. The new Chen-Xu method produces 2.85 gallons for a 9.6% improvement. But this method also reduces energy use in the conversion process and produces less waste.


The Chen-Xu Method produces about 2.85 gallons of ethanol for every bushel of corn processed. That output is slightly higher than current methods, but the same process that creates the ethanol also creates other marketable products. Chen said the method also meets federal Clean Air Act standards, eliminating costs that other methods incur in meeting environmental regulations.


"One of the common methods of manufacturing ethanol, called dry milling, is often the cause of air pollutants by drying and storage of DDG, a byproduct of the process," Chen said. "Another method - wet milling - produces an odor because it requires the input of sulfur dioxide. The Chen-Xu Method eliminates both issues, and the only odor comes from the smell of the corn and yeast fermentation."


Using a machine originally designed to make plastics, the Chen-Xu Method grinds corn kernels and liquefies starch with high temperatures. The water input required by wet milling is reduced by 90 percent, Chen said. Wastewater output is cut by 95 percent, and electricity use is reduced by 47 percent.


"The total operating cost of a Chen-Xu Method ethanol plant should be much less than that of a wet-milling plant, and total equipment investment is less than half," Chen said. "And with proper planning and management, total equipment investment should be less than that of a dry-milling plant."


@: http://www.futurepundit.com/

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