R-Squared Energy Blog

Pure Energy

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

Xethanol Now Defunct

This will be my last ever story on Xethanol. I have written a number of stories on them in the past. I wrote that their claims that they would be the first to produce commercial cellulosic ethanol were ludicrous. That was the gist of the interview I gave to Sharesleuth when they were writing their Xethanol exposé. I predicted that Xethanol would “offer up a litany of excuses and delaying tactics for why their cellulosic ethanol plant is not up and running.” I explained to several reporters that the technology agreements they touted to investors could be had for next to nothing, and in February of 2007 I predicted that Xethanol would eventually go bankrupt. I was sounding these warnings when the share price was $12. It eventually fell to well under $1.

You know where this is going, don’t you? I had failed to check in on Xethanol for a while, but today I did a search for the stock symbol, and got this: “No quote found for that symbol.” Hmm. So I searched Google News, and found this:

Xethanol changes name, energy focus

The self-proclaimed discredited cellulosic ethanol company Xethanol Corp. relaunched itself on Aug. 28 on the New York Stock Exchange as Global Energy Holdings Group Inc. and is ushering in what company executives hope will be new life for the company.

“We’re moving on from ethanol and the reason is – the business model doesn’t work,” Ames said. “With the price of corn and energy…we’ve lost a lot of money doing that. We’ve spent a lot of money in cellulosic research and nothing out there is really fruitful and will make a major economic impact on producing ethanol.”

And in another article, former Xethanol CEO David Ames made a very profound statement:

Ames is skeptical that cellulosic will change the U.S. energy system. He said difficulties associated with making the fuel will not be eased by making it in bigger batches.

You can scale widgets, but you can’t scale chemistry,” he said.

This is exactly what I keep trying to tell people who insist that cellulosic ethanol is going to proceed along a Moore’s Law path and scale up to displace significant quantities of gasoline. It’s not going to happen. The chemistry and physics are working against you.

I truly feel bad for Xethanol investors, but this is what can happen with overhyped technology. The investor who is out of their field of expertise can’t easily distinguish an overhyped company from a company with true potential. But that’s one reason I write this blog: To sniff out and expose the hypesters, while promoting the diamonds in the rough.

On a more positive note, their new direction (into methane) is a much more promising field. Biomass can be fermented to methane at a fraction of the expense and complexity that it takes to make cellulosic ethanol. This doesn’t mean they will be a commercial success, but their odds have gone from one in a million to one in a hundred.

November 11, 2008 Posted by | Global Energy Holdings Group, GNH, natural gas, Xethanol, XNL | 56 Comments

Investing in Energy Storage

I attended a presentation last year where a number of alternative energy technologies were discussed, and I was asked whether any major topic had been missed. I responded that I felt like the single most important topic had been missed: The enabling technology of energy storage. An efficient and cost effective energy storage solution is critical for smoothing out the intermittency of solar, wind, and tidal energy. This is the one advantage that biomass does have over these sources: Biomass may be inefficient at gathering solar energy, but it does store nicely.

How important is energy storage? I think it is absolutely crucial, but largely overlooked in alternative energy discussions. It simply isn’t as sexy as solar, but without a good storage solution, solar will never fulfill its potential. And it just hasn’t seemed to me that we are attacking the storage problem with a sense of urgency. So I was really glad to run across this story a couple of days ago:

Energy storage nears its day in the sun

MONACO (Reuters) – Energy storage is an unglamorous pillar of an expected revolution to clean up the world’s energy supply but will soon vie for investors attention with more alluring sources of energy like solar panels, manufacturers say.

The article sums up the problem:

While the supply of the wind and sun far exceeds humanity’s needs it doesn’t necessarily match the time when people need it: the sun may not be shining nor the wind blowing when we need to cook dinner or have a shower.

Soaring production of solar panel and wind turbines is now spurring a race to develop the winning energy storage technologies which will drive the electric cars and appliances of the future.

The race is heating up as manufacturers with entirely different solutions near the moment of commercial production.

Then it discusses a couple of storage solutions that are vying for supremacy, such as:

For example, UK-based ITM Power sees the future of energy storage in the explosive gas hydrogen. The company is developing a piece of kit called an electrolyzer which uses solar or wind power to split water into hydrogen and oxygen.

The hydrogen is then stored in a pressurized container until it is needed, whether to drive a car, produce electricity or for cooking.

“With batteries you’re taking enormous quantities of basic raw materials,” said Chief Executive Jim Heathcote, referring to cadmium in nickel cadmium varieties. His company won an award for research at the Monaco conference, organized by corporate finance advisers Innovator Capital.

“Two things we’re confident of is the supply of renewable energy and water,” he said.

ITM Power aims to start production later this year of electrolyzers and next year of hydrogen fuel cells which generate electricity.

“The one problem everyone’s had is how to store. The ability to take (surplus) renewable energy and make useful fuel out of it is almost priceless,” Heathcote said.

Investment Opportunities

The remainder of the article describes the investment opportunities in energy storage companies, which look attractive. I think in this next phase of my life, I will be more active at seeking out and acting on opportunities such as this. I have not done this in the past, even when I felt strongly about the direction of commodities or stock sectors. For instance, I just saw this comment from yesterday at The Oil Drum:

About four months ago Robert Rapier suggested that investors looking at energy commodities consider gasoline futures as a likly profit maker. That day I checked the price on http://www.bloomberg.com at $1.92 per gallon. I suggested to a relative that is heavy in the market to get into gasoline futures then as that commodity looked under priced. The person said it looked riskey and required too much diligents to handle.

Today gasoline closed at $2.55, up 33%. A $5000 investment in futures would have netted over $100,000 in following RR’s advice.

Did I act on my own advice? No. (I can already hear my wife asking “Why didn’t you act?”)

Did I act last spring when I was convinced gasoline prices were headed higher? No.

Did I invest in corn futures when I was predicting that because of the ethanol mandates they were headed much higher from their (then) $2/bu price? No. (Corn futures have more than doubled since then).

Did I short ethanol stocks when I wrote that they were overvalued? No. (I do know some who did just that based upon what I had written, and they made out quite well.)

And probably the best (worst?) example of all, did I short Xethanol when it was at $12 and I knew that a devastating exposé was about to be released by Sharesleuth? No. (XNL is now worth less than $0.50 a share).

I always advise people to invest in what they know. I got burned in 2000 investing in technology stocks that I didn’t properly understand. It is hard to do the proper due diligence if you really don’t grasp the important issues in the sector. In technology, it was hard for me to say which companies were poised, and which ones just thought they were poised (and fooled the analysts). But I do understand the energy sphere. I just have to start acting on my convictions. (I haven’t totally twiddled my thumbs on this issue. I have invested my 401K shares per my conviction on higher oil prices, and that has paid out quite well.)

Disclaimer: If you do act on anything you read here, you are on your own. I may change my mind tomorrow about whether something is still a good investment (with gasoline inventories where they are, gasoline futures are starting to look a lot riskier), and I don’t send out warnings to take profits and run. I am obviously not writing an investment blog, although clearly there are numerous financial implications based on developments in the energy markets.

February 25, 2008 Posted by | energy storage, investing, Xethanol, XNL | 570 Comments

Xethanol: Another Multimillion Dollar Loss

Xethanol continues to demonstrate that even with generous subsidies, they can’t make any money:

Xethanol Announces Second Quarter 2007 Financial Results

For the second quarter of 2007, the company reported a net loss of $6.6 million, or ($0.23) per share, as compared to a $5.9 million net loss, or ($0.24) per share, for the same period of the prior year. The increase in the net loss was primarily related to $4.5 million in non-cash charges including a $2.8 million impairment charge on property held for development.

The company reported net sales of $3.3 million for the second quarter of 2007 compared to $3.2 million in net sales in the second quarter of 2006. Cost of goods sold was $3.4 million in the quarter as compared to $2.4 million in the comparable period in the prior year. The increase was attributable to the higher cost of corn compared to the same period in the prior year.

General and administrative (G&A) costs were $2.2 million in second quarter 2007 as compared to $1.3 million for the comparable period in the prior year. The increase in G&A was primarily due to an increase in legal, accounting and professional fees.

As of June 30, 2007, the company had cash, cash equivalents and marketable securities of $18.1 million and $437,000 of long-term debt.

So, a $6.6 million loss on sales of $3.3 million. Regarding their cash on hand, it is down from $21 million at the end of the last quarter. XNL continue their march toward bankruptcy, which is one of the predictions I have made. Given their inability to profit during good times for ethanol producers, how will they fare when margins are squeezed?

August 14, 2007 Posted by | cellulosic ethanol, Xethanol, XNL | 29 Comments

Xethanol: Another Multimillion Dollar Loss

Xethanol continues to demonstrate that even with generous subsidies, they can’t make any money:

Xethanol Announces Second Quarter 2007 Financial Results

For the second quarter of 2007, the company reported a net loss of $6.6 million, or ($0.23) per share, as compared to a $5.9 million net loss, or ($0.24) per share, for the same period of the prior year. The increase in the net loss was primarily related to $4.5 million in non-cash charges including a $2.8 million impairment charge on property held for development.

The company reported net sales of $3.3 million for the second quarter of 2007 compared to $3.2 million in net sales in the second quarter of 2006. Cost of goods sold was $3.4 million in the quarter as compared to $2.4 million in the comparable period in the prior year. The increase was attributable to the higher cost of corn compared to the same period in the prior year.

General and administrative (G&A) costs were $2.2 million in second quarter 2007 as compared to $1.3 million for the comparable period in the prior year. The increase in G&A was primarily due to an increase in legal, accounting and professional fees.

As of June 30, 2007, the company had cash, cash equivalents and marketable securities of $18.1 million and $437,000 of long-term debt.

So, a $6.6 million loss on sales of $3.3 million. Regarding their cash on hand, it is down from $21 million at the end of the last quarter. XNL continue their march toward bankruptcy, which is one of the predictions I have made. Given their inability to profit during good times for ethanol producers, how will they fare when margins are squeezed?

August 14, 2007 Posted by | cellulosic ethanol, Xethanol, XNL | Comments Off on Xethanol: Another Multimillion Dollar Loss