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Pacific Ethanol Plants Declare Bankruptcy

I don’t actually enjoy posting “I told you so” stories, especially when the news is negative. This means someone has failed, and I don’t enjoy seeing people fail. But when I put a spotlight on a company, naturally I am going to follow that company. If it does fail, then that will be reported upon, as has been the case previously with Xethanol and later on with algal biofuel producer GreenFuel. If a company that I have cast doubts on goes on to success, I will highlight that as well, but I don’t believe that has happened yet. If Coskata proves me wrong, or Vinod Khosla goes on to great success as a biofuel magnate, I will write about it.

Today Pacific Ethanol (PEIX), one of the companies that I have tracked the longest, declared bankruptcy for Pacific Ethanol, Inc. This is not bankruptcy for the entire company, but it is bankruptcy for the ethanol plants themselves, which apparently leaves the marketing branches (Kinergy Marketing LLC and Pacific Ag. Products LLC) intact. I state that as a matter of fact, not with any smug satisfaction.* I recognize the people who work at these plants are hard-working people with families to support, and I don’t delight at seeing anyone out of work. As I told someone recently (in fact, we were talking about Pacific Ethanol and Coskata) “This is never personal. I am just stating my opinions.” With that preface, I offer my sincere condolences to all the people impacted by this development.

It was in July 2006, in the wake of a very positive article on investing in ethanol that I wrote an article for Financial Sense that suggested that ethanol stocks were overvalued. I focused on Pacific Ethanol, stating that I would “take a look at Pacific Ethanol to show why I think the underlying fundamentals make it a very risky investment.” Here was the problem as I saw it in a nutshell:

Another factor working against Pacific Ethanol’s success is the ability to secure cheap corn supplies for their plant. According to http://www.ethanol.org/FAQs.htm [RR: This link and the next one are both now dead], an important factor to consider when building an ethanol plant is proximity to corn. Local grain supplies, preferably within 50 miles of the plant, are important for keeping costs down. Yet California produces little corn. In recent years, California’s corn crop amounted to barely over 1% of the corn crop in Iowa (http://www.corn.org/web/uscprod.htm). This makes it likely that PEIX will have to import corn from out of state, driving up production costs. It will probably be cheaper for a producer to produce ethanol in the Corn Belt, and then ship the ethanol to California than it would be to ship the corn there and produce it locally. There is a reason that California is not a hotbed of ethanol activity, despite the fact that Californians consume ethanol. It’s too far from the corn, so it is more cost effective to ship in finished ethanol.

I just never thought they were going to be able to compete with the guys in the Midwest. When you ship all that corn from Iowa, you are shipping all of the waste products and all of the water as well. You end up with byproducts in greater quantities than the local markets can absorb. It always made more sense to me to produce ethanol in Iowa, feed the byproducts to cattle in the area, and ship the finished ethanol to California. To me, that was going to be the low cost producer for ethanol in California (with the possible exception of ethanol from Brazil).

On top of the geographical problem, the sector as a whole has been in big trouble as too many producers joined the party. While PEIX was at one time fairly well-capitalized, they were ultimately unable to withstand the problems plaguing the sector in general. My prediction is that the plants will end up being auctioned off as the Verasun assets were.

* OK, maybe a tiny bit of satisfaction toward people who suggested that since Bill Gates had invested in PEIX, I must be an idiot for criticizing it.

May 19, 2009 Posted by | Pacific Ethanol, PEIX, Xethanol, XNL | 87 Comments

Investing in Ethanol: A Case Study of Terrible Investment Advice

Comically Terrible Timing

In June 2006 I read an article at Financial Sense that promoted ethanol as a great place to put your money:

Investing in Ethanol: A “New” Stock Play on Soaring Energy Prices and Why Now is the Time to Invest in this “Fuel of the Future”

Among the gems in the article were these:

Strap on your seatbelt… an alternative energy source is set to take the world by storm. In this research report, we’ll take a close look at the booming ethanol industry… and how investing in ethanol could prove to be an extremely profitable move for investors.

With a mandate from the U.S. government and the obvious need for change, we see this as a fantastic opportunity for investors to earn serious profits.

Take a look at recent investments made by some of the richest and most successful people in the world:

* Bill Gates, the richest man in America, allocated $84 million into Pacific Ethanol, Inc. (Nasdaq: PEIX), a company poised to control a considerable share of the ethanol industry.

Not So Fast

Mary Puplava at Financial Sense had asked me if I would contribute an article there, and I had procrastinated up to that point. But the article above prompted me to write a rebuttal. I told Mary that investors “are going to get trounced” if they take the advice from that article, and I wrote to her in an e-mail that “fundamentally something like Pacific Ethanol is a very poor investment (despite what Bill Gates thinks).” My rebuttal:

Ethanol Investing Counterpoint

In the three months following that rebuttal article, ethanol stocks fell across the board by about 40%, including Pacific Ethanol which I highlighted in the article. (An analyst at one brokerage firm told me that they advised clients to sell ethanol stocks after reading my article). I followed up a few months later with:

The Ethanol Bubble has Burst

I am getting around to the point here, which isn’t actually to argue that I am a financial genius. (As a matter of fact, my portfolio since last summer looks like almost everyone else’s: Down sharply). No, what I want to focus on here is just how that article – and investors like Bill Gates – could have missed so horribly with ethanol stocks. The reason this is pertinent is that I get an e-mail every week or so from someone wanting to know which cellulosic ethanol play I would recommend. For similar reasons to why I disputed that 2006 article on investing in ethanol, the answer is “none of them.”

Why the Advice Was Wrong

The initial article was correct on one key point: On the back of mandates and heavy subsidies, the ethanol industry was poised to grow dramatically. But there were two really big problems for prospective investors wishing to capitalize, and a third if you happened to be an investor in Pacific Ethanol. First, the fact that ethanol has to be mandated to gain market share should have been a strong tip-off that the economics didn’t look all that good. The companies simply were not poised to compete in the marketplace, hence the mandates.

Then there was problem number two: Producing ethanol isn’t rocket science. The barriers for entry into the marketplace are low, meaning competitors were going to sprout up everywhere. I documented a number of cases where complete amateurs decided they were going to get into the ethanol business. I can assure you that complete amateurs don’t go around building oil refineries, because the capital costs and technical challenges pose a very high barrier that Bob the Dentist and his buddies aren’t going to overcome by pooling their money and channeling their passions.

So as a result, ethanol capacity was overbuilt, there was too much competition, and margins vanished. This has led to a wave of ethanol bankruptcies and plant closings. In hindsight, it is clear that ethanol was not the place to sock away your money.

Pacific Ethanol faced an additional challenge: They built their plants far from the raw materials needed to run the plants. I could foresee that an ethanol plant in Iowa could put ethanol in Pacific Ethanol’s backyard for cheaper than they could do it themselves after the logistics of corn imports and DDGS exports were taken into account. The fall for Pacific Ethanol has been steep. Once boasting a market capitalization of over $1 billion (in 2006), that has now fallen to $23 million. Bill Gates eventually decided that Pacific Ethanol wasn’t what he thought it was, and sold out his shares.

The Game is Now Cellulosic Ethanol

So now here we sit in 2009, and many now want to know how to make money with cellulosic ethanol – the next big thing. As I told someone last week, “this is a low margin business.” Why do you think the government not only has to mandate ethanol, but then put extra mandates and goodies in for ethanol made from cellulose? Because the economics look horrible. No producer is going to be able to gain a decided advantage over others. There will be producers of cellulosic ethanol. That technology exists. It just doesn’t exist economically, and nobody is going to do it and make consistently high margins.

Take Verenium, for instance. There was a recent story in the news that they have teamed up with BP on a cellulosic ethanol venture:

BP and Verenium form cellulosic ethanol venture

Within that story was a little detail that I found interesting:

The joint venture expects to break ground on the Florida site in 2010, the press release said, and the estimated construction cost for this 36 million gallon-per-year facility is between $250 million and $300 million.

Ah, capacity and capital costs. That’s the sort of information we can put to good use. What do we find? Capital costs for this 2300 barrel a day facility amount to almost $130,000 per daily barrel. (To put that scale into perspective, a 60,000 barrel a day oil refinery is considered to be small). The following is starting to become a little dated, but I still like it for its relative comparisons:

Capital Costs of Fuel Facilities
Source: EIA Annual Energy Outlook 2006

When someone argues that coal-to-liquids companies might make for good investments, for instance, I point out that capital costs are about double those for gas-to-liquids (GTL), and those GTL projects are being canceled because their costs are too high. So think now about the capital costs of this Verenium venture, and consider the fact that corn ethanol plants with a fraction of the capital costs are going bankrupt. This is not to say that Verenium won’t successfully produce cellulosic ethanol. I just predict that the economics will not allow them to compete with other energy options, and they will live or die by the mandates. Likewise, I believe the same is true for most companies that have aspirations of making ethanol from cellulose.

Are There Any Investment Opportunities Here?

OK, I did say ‘most companies.’ I am hedging a bit, because some company might come up with something slightly advantageous. Will this make cellulosic ethanol a high-margin business for them? No, and if you want to play this game, you are trying to pick a winner out of a pack of losers. Safer in my opinion to stick with a sector that looks like an overall winner.

Look for a company that enables cellulosic ethanol. Buy the company that makes the novel enzyme for cellulose hydrolysis or the membrane system for the separation, not the company that uses them to make ethanol. Profit margins on the former might be good. Profit margins on cellulosic ethanol will at best mimic those of other commodity energy sources.

February 22, 2009 Posted by | ethanol, Financial Sense, investing, Pacific Ethanol, PEIX, personal finance | 34 Comments

Investing in Ethanol: A Case Study of Terrible Investment Advice

Comically Terrible Timing

In June 2006 I read an article at Financial Sense that promoted ethanol as a great place to put your money:

Investing in Ethanol: A “New” Stock Play on Soaring Energy Prices and Why Now is the Time to Invest in this “Fuel of the Future”

Among the gems in the article were these:

Strap on your seatbelt… an alternative energy source is set to take the world by storm. In this research report, we’ll take a close look at the booming ethanol industry… and how investing in ethanol could prove to be an extremely profitable move for investors.

With a mandate from the U.S. government and the obvious need for change, we see this as a fantastic opportunity for investors to earn serious profits.

Take a look at recent investments made by some of the richest and most successful people in the world:

* Bill Gates, the richest man in America, allocated $84 million into Pacific Ethanol, Inc. (Nasdaq: PEIX), a company poised to control a considerable share of the ethanol industry.

Not So Fast

Mary Puplava at Financial Sense had asked me if I would contribute an article there, and I had procrastinated up to that point. But the article above prompted me to write a rebuttal. I told Mary that investors “are going to get trounced” if they take the advice from that article, and I wrote to her in an e-mail that “fundamentally something like Pacific Ethanol is a very poor investment (despite what Bill Gates thinks).” My rebuttal:

Ethanol Investing Counterpoint

In the three months following that rebuttal article, ethanol stocks fell across the board by about 40%, including Pacific Ethanol which I highlighted in the article. (An analyst at one brokerage firm told me that they advised clients to sell ethanol stocks after reading my article). I followed up a few months later with:

The Ethanol Bubble has Burst

I am getting around to the point here, which isn’t actually to argue that I am a financial genius. (As a matter of fact, my portfolio since last summer looks like almost everyone else’s: Down sharply). No, what I want to focus on here is just how that article – and investors like Bill Gates – could have missed so horribly with ethanol stocks. The reason this is pertinent is that I get an e-mail every week or so from someone wanting to know which cellulosic ethanol play I would recommend. For similar reasons to why I disputed that 2006 article on investing in ethanol, the answer is “none of them.”

Why the Advice Was Wrong

The initial article was correct on one key point: On the back of mandates and heavy subsidies, the ethanol industry was poised to grow dramatically. But there were two really big problems for prospective investors wishing to capitalize, and a third if you happened to be an investor in Pacific Ethanol. First, the fact that ethanol has to be mandated to gain market share should have been a strong tip-off that the economics didn’t look all that good. The companies simply were not poised to compete in the marketplace, hence the mandates.

Then there was problem number two: Producing ethanol isn’t rocket science. The barriers for entry into the marketplace are low, meaning competitors were going to sprout up everywhere. I documented a number of cases where complete amateurs decided they were going to get into the ethanol business. I can assure you that complete amateurs don’t go around building oil refineries, because the capital costs and technical challenges pose a very high barrier that Bob the Dentist and his buddies aren’t going to overcome by pooling their money and channeling their passions.

So as a result, ethanol capacity was overbuilt, there was too much competition, and margins vanished. This has led to a wave of ethanol bankruptcies and plant closings. In hindsight, it is clear that ethanol was not the place to sock away your money.

Pacific Ethanol faced an additional challenge: They built their plants far from the raw materials needed to run the plants. I could foresee that an ethanol plant in Iowa could put ethanol in Pacific Ethanol’s backyard for cheaper than they could do it themselves after the logistics of corn imports and DDGS exports were taken into account. The fall for Pacific Ethanol has been steep. Once boasting a market capitalization of over $1 billion (in 2006), that has now fallen to $23 million. Bill Gates eventually decided that Pacific Ethanol wasn’t what he thought it was, and sold out his shares.

The Game is Now Cellulosic Ethanol

So now here we sit in 2009, and many now want to know how to make money with cellulosic ethanol – the next big thing. As I told someone last week, “this is a low margin business.” Why do you think the government not only has to mandate ethanol, but then put extra mandates and goodies in for ethanol made from cellulose? Because the economics look horrible. No producer is going to be able to gain a decided advantage over others. There will be producers of cellulosic ethanol. That technology exists. It just doesn’t exist economically, and nobody is going to do it and make consistently high margins.

Take Verenium, for instance. There was a recent story in the news that they have teamed up with BP on a cellulosic ethanol venture:

BP and Verenium form cellulosic ethanol venture

Within that story was a little detail that I found interesting:

The joint venture expects to break ground on the Florida site in 2010, the press release said, and the estimated construction cost for this 36 million gallon-per-year facility is between $250 million and $300 million.

Ah, capacity and capital costs. That’s the sort of information we can put to good use. What do we find? Capital costs for this 2300 barrel a day facility amount to almost $130,000 per daily barrel. (To put that scale into perspective, a 60,000 barrel a day oil refinery is considered to be small). The following is starting to become a little dated, but I still like it for its relative comparisons:

Capital Costs of Fuel Facilities
Source: EIA Annual Energy Outlook 2006

When someone argues that coal-to-liquids companies might make for good investments, for instance, I point out that capital costs are about double those for gas-to-liquids (GTL), and those GTL projects are being canceled because their costs are too high. So think now about the capital costs of this Verenium venture, and consider the fact that corn ethanol plants with a fraction of the capital costs are going bankrupt. This is not to say that Verenium won’t successfully produce cellulosic ethanol. I just predict that the economics will not allow them to compete with other energy options, and they will live or die by the mandates. Likewise, I believe the same is true for most companies that have aspirations of making ethanol from cellulose.

Are There Any Investment Opportunities Here?

OK, I did say ‘most companies.’ I am hedging a bit, because some company might come up with something slightly advantageous. Will this make cellulosic ethanol a high-margin business for them? No, and if you want to play this game, you are trying to pick a winner out of a pack of losers. Safer in my opinion to stick with a sector that looks like an overall winner.

Look for a company that enables cellulosic ethanol. Buy the company that makes the novel enzyme for cellulose hydrolysis or the membrane system for the separation, not the company that uses them to make ethanol. Profit margins on the former might be good. Profit margins on cellulosic ethanol will at best mimic those of other commodity energy sources.

February 22, 2009 Posted by | ethanol, Financial Sense, investing, Pacific Ethanol, PEIX, personal finance | 34 Comments

More Ethanol Plants Going Down

I won’t say I told you so, but I will make a prediction here:

VeraSun Suspends Production at Three Distilleries

Jan. 9 (Bloomberg) — VeraSun Energy Corp., the second- largest U.S. ethanol producer, has idled three distilleries as demand falls and prices fail to cover the cost of production.

Producers have been struggling to make profits amid fluctuations in corn prices. Pacific Ethanol Inc. today said it will suspend output at its plant in Madera, California. On Jan. 7, Aventine Renewable Holdings Inc. said it halted construction of its refinery in Aurora, Nebraska, for up to 180 days.

Vinod Khosla hasn’t been immune:

Last month, AltraBiofuels Inc., which counts venture capitalist Vinod Khosla among its investors, shut production at its plants in Cloverdale, Indiana, and Coshocton, Ohio.

Aventine’s shares have plunged 99 percent since June 2006, when the company held its initial public offering. Biofuel Energy Corp., whose biggest owners are hedge funds run by David Einhorn and Daniel Loeb, has lost 96 percent since its stock began trading in June 2007.

99 percent! Holy cow. I did think this was amusing:

“Back then everyone thought this was such a great thing,” Gomes said. “Most of the publicly traded guys went into substantial debt to build these plants and capitalize on the rush. Right now you just have too much supply.”

Everyone thought that? Au contraire. Here is an essay I wrote in June of 2006 warning about the dangers to investors in the ethanol industry:

Ethanol Investing Counterpoint

That was in response to a gushing article the previous week advising everyone to stash away their life savings in this great new venture. Some of my comments in response – “many claims regarding ethanol are overblown”, “the underlying fundamentals (specifically of Pacific Ethanol) make it a very risky investment”, “ethanol companies are in the same boat (as dot-coms before their crash)”, “It is simply too easy to get into this business”, and “I don’t think the underlying fundamentals warrant the valuations placed on grain ethanol producers.” So I don’t think everyone thought this was such a great thing.

OK, I said I wouldn’t say I told you so. But here is my prediction. We have a mandated demand for ethanol, which means there will continue to be an ethanol industry. The government will not pull the mandate, because of the danger to Midwestern economies. So the producers that will remain standing in the long haul are those that are integrated. The company/coop that both raises corn and produces ethanol will outlast the others. When corn prices skyrocket, they will put non-integrated producers out of business. But the integrated guys will make money on corn in this situation.

It is analogous to the integrated oil companies. Pure refiners stopped making money when oil prices shot up way over $100 a barrel. Some were even pushed into bankruptcy. But the integrated guys, even though they saw refining margins disappear, made up for it on the oil prices.

It will be the same for the ethanol companies. The farmer’s coop that owns an ethanol plant has a better chance of surviving than the Pacific Ethanols of the world.

On a similar note, I just spotted this story:

Albuquerque Police Abandon Use of E-85

The City of Albuquerque is quietly abandoning part of its push for a greener Albuquerque after finding that E-85 powered vehicles are not all they are cracked up to be.

The city found they cost more to run and to keep running.

Enchanted with the idea of going green, the city bought a couple hundred police cars.

The problem is all the green the city is spending to keep those cars running green.

Albuquerque police Chief Ray Schultz said, “We are looking at a couple different things with the E-85. One is the cost. The fuel efficiency, and some problems with fuel pumps.”

It is going to be interesting to see what happens if the mandate by the government is greater than the demand from consumers – which is where I think we are headed. This will in fact keep ethanol prices low even if gasoline prices start to recover.

January 10, 2009 Posted by | Financial Sense, investing, Pacific Ethanol, PEIX, verasun, Vinod Khosla | 24 Comments

Ethanol Series at Financial Times

Financial Times has put up a series on ethanol in their “In Depth” section:

In Depth: Ethanol

I haven’t had a chance to read the articles, but did speak with a Financial Times reporter and had several e-mail correspondences prior to publication of the series. I don’t know yet if they used anything I gave them, but we covered quite a bit of ground. The primary focus of the series is on the causes of the ethanol boom and subsequent bust.

I just arrived back in the U.S. last night, so as soon as I liquidate a ton of correspondence, I will put up some new posts.

October 24, 2008 Posted by | ethanol, investing, Pacific Ethanol | 88 Comments

PEIX Drops Below $2

Wow! I just checked a few stocks that I tend to watch, and Pacific Ethanol (PEIX) has now fallen to $1.85 a share. It is now down more than 95% off its high, and down more than 90% from the first time I warned that the company was overvalued. Once boasting a market cap of almost $2 billion, that has now fallen to $82 million.

Now, where are all of those posters who kept telling me what a deal this was after it fell to $10? Like our friend James, who cited PEIX investor Bill Gates’ “ability to see into the future” as a reason to invest in PEIX, and told me I was “very, very stupid” if I thought the price would continue to fall. Of course Gates has recently been dumping his shares as quickly as he can (at a huge loss). Personally, as I have said before, if I want some insights into the future of computing, I would listen to Gates. On the topic of Pacific Ethanol, or for that matter any topic far-removed from his area of expertise, not so much.

June 24, 2008 Posted by | Bill Gates, ethanol, ethanol prices, investing, Pacific Ethanol, PEIX | 21 Comments

Pacific Ethanol in Trouble

Don’t say I didn’t tell you so. I warned about PEIX’s poor fundamentals a year and a half ago, and the share price has fallen steadily since then.

Pacific Ethanol suffers a bigger-than-expected loss

Pacific Ethanol Inc., a California biofuels darling that boasts political connections and an investment from Bill Gates, is short on cash and suffering from higher corn and plant construction costs, which threaten to derail the once-promising biofuels maker.

The Sacramento company on Monday posted record-high sales but a larger-than-expected $14.7-million loss in the fourth quarter, reflecting a financial squeeze that has clouded prospects for ethanol producers nationwide.

Pacific Ethanol reported the loss just days after it shored up its depleted coffers with a $40-million cash infusion from Lyles United, a company whose affiliates have provided construction services to Pacific Ethanol and had previously lent it funds.

The Lyles investment provided a bit of good news for the company and helped remedy several violations of Pacific Ethanol’s credit agreement with a group of lenders. The company recently postponed construction of its Imperial Valley ethanol plant, said it suffered from large construction cost overruns and admitted to having a “material weakness” in its financial controls — problems it says it has since fixed.

“Pacific Ethanol is probably having a harder time than other, larger peers,” said Eitan Bernstein, energy analyst at Friedman, Billings, Ramsey & Co., who doesn’t own shares in the company and rates the stock “underperform.”

The company operates ethanol plants in Madera, Calif., and Boardman, Ore., and has a major interest in an ethanol production plant in Windsor, Colo. Two others have yet to come on line; a plant in Burley, Idaho, is in the start-up process and a plant in Stockton is set to open this year.

Are the posters who kept calling this a buy at $15, then $10, then $7 still hanging around? I am just wondering if it’s a super-duper buy now at $4.62.

April 1, 2008 Posted by | investing, Pacific Ethanol, PEIX | 106 Comments

Pacific Ethanol Woes Continue

I have been a critic of Pacific Ethanol’s (PEIX) business model for a long time. I criticized it a year and a half ago in an article I wrote for Financial Sense, arguing that it would be very difficult for them to compete with Midwestern ethanol producers. Add in the excess ethanol capacity spawned by government subsidies, which in turn drove corn prices up and crushed ethanol margins, and I couldn’t see how Pacific Ethanol would consistently make money.

Today, they announced they were halting construction of their newest ethanol plant:

Pacific Ethanol Halts Plant Construction

NEW YORK (Associated Press) – Pacific Ethanol Inc. said Monday it has halted construction of an ethanol plant near Calipatria, Calif., because of weakened market fundamentals that have hurt the industry in recent months.

Ethanol prices have dropped because of oversupply as the industry expanded beyond demand. At the same time, prices for the product’s key feedstock, corn, have risen dramatically, squeezing profit margins further.

“Given current ethanol market conditions, we feel it is prudent and strategic to suspend construction until the market improves,” Chief Executive Neil Koehler said in a statement. He added that Pacific Ethanol is committed to completing the project and is moving ahead with construction of plants in Stockton, Calif., and Burley, Idaho.

Of course after every bit of bad news (and there has been a lot from them lately), there will be those who think this is a buying opportunity. Take this guy, for example. He was critical of an article I wrote about Bill Gates’ PEIX investment. He thought the plunge was a buying opportunity, and I was an idiot for not recognizing it. But if he acted on it, he is down over 40% since I wrote that article.

Remember, just because the share price had already fallen by 75%, that didn’t mean that it couldn’t fall farther. It could, and it did. And I still wouldn’t touch Pacific Ethanol, even though you might make some money on the volatility. I just don’t think they can be profitable long-term. They certainly don’t enjoy any kind of competitive advantage. They will continue to be, in my opinion, at a distinct competitive disadvantage.

December 10, 2007 Posted by | investing, Pacific Ethanol, PEIX | 37 Comments

Pacific Ethanol Continues Slide

In June 2006, I warned about Pacific Ethanol (PEIX) in response to a story suggesting that the company presented a great investment opportunity:

Ethanol Investing: Counterpoint

Some excerpts of what I wrote:

I will make the case that many claims regarding ethanol are overblown, and some are simply fiction. I will also take a look at Pacific Ethanol to show why I think the underlying fundamentals make it a very risky investment.

Local grain supplies, preferably within 50 miles of the plant, are important for keeping costs down. It will probably be cheaper for a producer to produce ethanol in the Corn Belt, and then ship the ethanol to California than it would be to ship the corn there and produce it locally. There is a reason that California is not a hotbed of ethanol activity, despite the fact that Californians consume ethanol. It’s too far from the corn, so it is more cost effective to ship in finished ethanol.

This is not high tech, but this is how companies like PEIX are being valued. It is simply too easy to get into this business, and success is highly dependent on continued government mandates. Maybe someday cellulosic ethanol – the much touted next generation of ethanol technology – will warrant these kinds of valuations. I have great hope for cellulosic ethanol, and believe it can eventually make a contribution. But for now, I don’t think the underlying fundamentals warrant the valuations placed on grain ethanol producers – especially those far from corn supplies.

On the date that article was published, PEIX closed at $22.54. I wrote an update three months later after the price had fallen 38%. Yesterday, PEIX released earnings, and their stock fell to $6.89 – down 69% from the first article I wrote warning that PEIX was overpriced. Some excerpts from a story on their earnings:

NEW YORK (Associated Press) – Pacific Ethanol Inc. swung to a loss in the third quarter due to inventory write-downs as the price of ethanol fell dramatically, the company said Friday.

The ethanol producer posted a loss of $5.9 million, or 15 cents per share, versus profit of $2.7 million, or 7 cents per share, a year earlier.

Ethanol prices have fallen as supplies expanded faster than demand. At the same time, prices for ethanol’s main feedstock, corn, rose dramatically, further hurting profit margins.

Pacific Ethanol shares dropped to a new low of $7.13, down 69 cents of 8.8 percent, in morning trading.

Of course people continue to think that these are buying opportunities, and they keep losing money. Like this guy, who responded to an article I wrote about Bill Gates’ PEIX investment. For him, it was a buying opportunity. Of course share prices have fallen another 20% since then.

November 10, 2007 Posted by | Bill Gates, investing, Pacific Ethanol | 3 Comments

   

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