Pacific Ethanol (PEIX)

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See all Bulls Reasons Bulls: Reasons To Buy Company could beat expectations for 4th 100% agree Company could beat expectations for 4th "The Company anticipates reporting net sales of approximately $130.4 million for the fourth quarter of 2007 as compared to net sales of $80.6 million for the same period in 2006. The volume of ethanol sold by the Company in the fourth quarter of 2007 increased by... read more View or Edit Reason 2 votes 100% agree Corn Harvest in 2008 likely to be 2nd largest ever 100% agree Corn Harvest in 2008 likely to be 2nd largest ever Good news for ethanol producers like ADM (ADM), Verasun (VSE) and Pacifc Ethanol (PEIX). The U.S. Department of Agriculture forecast that farmers will harvest 12.3 billion bushels of corn, up more than 570 million bushels from last month's estimate of 11.7 billion.... read more View or Edit Reason 1 votes 100% agree See all Bears Reasons Bears: Reasons To Sell Distrubing excerpts from the fourth quarter earnings report 50% agree Distrubing excerpts from the fourth quarter earnings report "The Company anticipates reporting gross profit of approximately $1.7 million for the fourth quarter of 2007 as compared to gross profit of $11.7 million for the same period in 2006. The Company anticipates reporting that its gross profit margin was approximately 1.3%... read more View or Edit Reason 2 votes 50% agree Send the authors a comment or suggestion Cars don't need to be entirely replaced to run on ethanol just a few parts costing less than a co... more [Dismiss] [Done] See All Suggestions

Top Contributors Avinash Gandhi Related Articles Ethanol Biofuels Bluefire Ethanol (BFRE) Verasun Energy (VSE) Verenium Corporation (VRNM)

Ethanol's momentum could slow or die, however, thanks to the terrible publicity that corn-based ethanol has been receiving in the press. By driving up corn demand, ethanol has increased the prices of food, and it ultimately uses more oil than an energy-equivalent amount of gasoline (because corn uses oil as a fertilizer), making it less carbon-efficient and more petroleum-dependent than gasoline. To remedy these problems, cellulosic ethanol, which is derived from plant wastes, is emerging as an alternative. Pacific Ethanol is currently researching methods to cost-effectively turn wood chips into green fuel, and is in the process of constructing a 2.4 million gallon per year facility (the largest in the Northwestern United States. Its plans for expanding its cellulosic business after the facility's construction are still undefined.

All forms of ethanol, however, face significant infrastructure problems. Running a car on ethanol requires a different type of engine that most cars in circulation don't have, so making the switch from gas to ethanol will be very difficult, as it would require replacing millions of vehicles. Though a few automakers are producing flex-fuel vehicles and ethanol companies are teaming up with refiners to bring the fuel to pumps around the country, there is (as yet) no legislative support for these costly infrastructure changes and the mandated 36 billion gallons is less than 25% of the 160 billion gallons of gasoline used in the U.S. every year, making private industry unlikely to take the transition seriously. Pacific Ethanol competes with companies like VeraSun Energy, ConAgra, Nova Biosource Fuels, Verenium Corporation, and Bluefire Ethanol.

[edit] Business and Financials

Pacific Ethanol is the largest producer of ethanol on the West Coast. Ethanol is a sugar-based biofuel, essentially a form of alcohol, which produces energy when burned. In the current social and political climate, where people are worried about problems that stem from gasoline use (like climate change, terrorism, and a thinner wallet), ethanol is being touted by many sources as the next major source of automotive fuel. Though it burns with only two-thirds of the energy of gasoline, it is relatively clean and is considered to be a renewable energy because it is most often made from corn (which can be regrown). Ethanol can also be produced from plant and animal wastes, known as cellulosic ethanol, which is generally considered to be more efficient and environmentally-friendly than corn-based ethanol. Pacific Ethanol has entered the cellulosic ethanol business, and is in the process of building its pilot production facility.

Pacific Ethanol sells its ethanol to petroleum refiners, who incorporate into gasoline blends to be sold at retail stations around the country. Its two largest customers, each with more than 10% of its sales shares, are responsible for 32% of the company's revenue.

Currently, Pacific Ethanol has a production capacity of 80 million gallons per year, split between two plants; the company is building new production facilities with the intent of increasing capacity to 220 million gallons per year by the end of 2008 and 420 million gallons per year by the end of 2010.

[edit] Trends and Forces

[edit] The U.S. Government is Pumping Money into the Ethanol Industry - and Pacific Ethanol is Reaping the Rewards

There are corn ethanol subsidies in place that paid the industry $7 billion in 2006 (and more in 2007). Of these subsidies, companies like Pacific Ethanol benefit directly from federal blenders subsidies of $0.51 per gallon - totaling $2.5 billion in 2006^[2]. In 2007, the average price at which Pacific Ethanol sold its ethanol was $2.15 per gallon, while the company produced its ethanol at a cost of $2.41 per gallon^[3]. Without the subsidy, the company sees a loss of $0.26 per gallon and with it, the company turns a profit of $0.25 per gallon. The government subsidy is necessary for the company to make a profit with its current production methods.

In December 2007, Congress passed the Energy Independence and Security Act of 2007, which mandates that renewable fuels production (read: ethanol) in the U.S. should increase from 2007 levels of around 4.7 billion gallons per year to 36 billion gallons per year by 2022. Though 21 billion gallons per year of this target are required come from cellulosic ethanol and other "advanced biofuels"^[4], that still leaves 15 billion gallons (at least) for the corn-based ethanol industry to produce every year - twice the estimated production for 2007^[5]. A federal tariff on imported ethanol of $0.54 per gallon should leave this demand to be met by U.S. companies - like Pacific Ethanol. Mandated production increases and heavy corn-based ethanol subsidies make Pacific Ethanol's industry very lucrative, though highly dependent on government support for continued success.

[edit] Corn-Based Ethanol Gets Bad Press for Raising Corn Prices and Requiring Oil to Produce

Since the Energy Policy Act of 2005, ethanol has been pushed as the next big biofuel. With oil prices shooting up in recent months, reaching $100/barrel at the New Year, consumer and government demand for alternative fuels has been increasing. As oil prices have risen, however, so too have corn prices; Pacific Ethanol's average payment for a bushel of corn rose from around $2.44 in 2006 to $3.61 in 2007^[6], depressing its margins and making its fuels less price-competitive with gasoline.

Rising corn prices, aside from making ethanol much less cost-efficient, cause prices for many other foods to rise - corn is a major animal feedstock, forcing meat prices up, and high-fructose corn syrup is found in pretty much every mass-produced food product. Corn prices haven't just shot up on their own, however; petroleum is used as a corn fertilizer, making corn's price directly related to oil's price. Furthermore, demand for corn went through the roof because of the emerging ethanol market; it was the increased production of corn-based ethanol, demanded by the Energy Policy Act of 2005, that led 20% of all corn produced in the U.S. to go to ethanol production in 2006 - a rate that was surpassed in 2007^[7]. There is only enough corn in the U.S. to produce 15 billion gallons of ethanol per year^[8] - and some of that has to go to food production as well.

All these problems have lead to a wealth of bad press for corn-based ethanol; "The Clean Energy Myth", or some variation on it, has become a ubiquitous headline for newspapers and weeklies in recent months. As corn prices continue to rise, driven by oil prices and and capacity constraints, Pacific Ethanol's margins will shrink; the backlash from the bad press related to ethanol's problems could ultimately harm the long-term prospects of the fuel source, as Congress may retract or amend its energy bills or U.S. consumers may simply not buy E85 cars when they are released.

[edit] Pacific Ethanol is Entering the Cellulosic Ethanol Market

In January, 2008, Pacific Ethanol won $24.32 million from the Department of Energy to build the first cellulosic ethanol pilot plant in the Northwestern United States, which is expected to have a capacity of 2.4 million barrels per year^[9]. The company will also benefit from a Cellulosic Ethanol Tax Credit, which became effective on January 1st, 2008, and gives a total government subsidy of $1.18 (for large producers) to $1.28 (for small producers) per gallon of cellulosic ethanol produced^[10] (this includes the $0.51 per gallon ethanol credit already in place). As public sentiment turns away from corn-based ethanol, Pacific Ethanol's entry into the cellulosic market gives it access to the other 21 billion gallons per year mandated by the Energy Independence and Security Act of 2007, though its plans for growing this segment after the pilot plants' construction are as yet undefined.

[edit] Cars Need Special Engines to Run on Ethanol-Based Fuels

Currently, American cars can run on a mix of 90% gasoline and 10% ethanol, though there isn't nearly enough corn-based ethanol being produced at the moment to meet this capacity. Part of the goal of the government's support of ethanol is to increase ethanol production and use to a scope well beyond that of the standard 10% blend. E85, a blend of 85% ethanol and 15% gasoline, is the big hope for the biofuels industry because the widespread adoption of E85 would grow the level of ethanol demand almost as high as that of oil (for gasoline). There are, however, a number of blockades to the widespread adoption of E85 in the U.S.:

• E85 cars have been shown to run with an almost 50% reduction in miles per gallon - though this is measured in miles per gallon of E85, not of total gasoline^[11].
• There are over 247 million cars in the U.S.^[12], but very few of them are "flex-fuel" vehicles, which are compatible with E85. The prospect of replacing all of these with flex-fuel vehicles is staggering, and the automotive industry is dragging its feet at the idea of having to develop cost-efficient vehicles that are E85 compatible.

Without solutions to these obstacles, ethanol and cellulosic ethanol have no hope of being considered "replacements" for petroleum.

[edit] Competition

Currently, Pacific Ethanol is the largest manufacturer of corn-based ethanol on the west coast. The company competes with a number of other biofuels companies - and the market is expanding quickly.

• Aventine Renewable Energy Holdings - Aventine produced 10% of the country's ethanol in 2007, and takes advantage of a large marketing network and economies of scale to increase its margins.
• Pacific Ethanol - Pacific Ethanol won $24.32 million from the Department of Energy t
• VeraSun Energy's production capacity for corn-based ethanol, at 560 million gallons per year, represented 7% of the U.S. total in 2007^[13].
• Nova Biosource Fuels and ConAgra - ConAgra has agreed to have Nova use its animal wastes to produce biodiesel, and will purchase 130 million gallons of this biodiesel each year from the companies' joint venture to sell on international markets^[14]
• Verenium Corporation - Though Verenium started as an agricultural, industrial, and medical enzyme engineering company, it recently became heavily involved in researching enzymes to produce cellulosic ethanol, and will soon start construction of a 1.4 million gallon-per-year pilot plant in Louisiana and a 1.4 million liter-per-year pilot plant Osaka, Japan^[15]. The company hopes to start construction in early 2009 on a 30 million gallon-per-year plant in the Southeast U.S.
• Bluefire Ethanol - Bluefire uses "acid hydrolysis" to convert wood waste, green waste, paper, urban trash, rice and wheat straw, and other feedstocks that would generally be thrown into a landfill into cellulosic ethanol.

[edit] Notes

1. ↑ PEIX 2007 10-K
2. ↑ zFacts.com: "Subsidies for corn ethanol"
3. ↑ PEIX 2007 10-K, Calculated by dividing cost of goods by gallons produced
4. ↑ HR 6 Energy Bill Summary
5. ↑ Denver Post: "Not enough corn to fill Bush’s ethanol tank"
6. ↑ PEIX 2007 10-K, Page 34
7. ↑ "Corn can't save us: Debunking the biofuel myth"
8. ↑ Denver Post: "Not enough corn to fill Bush’s ethanol tank"
9. ↑ Pacific Ethanol News Release: "Pacific Ethanol Wins DOE Cellulosic Energy Grant"
10. ↑ "Salazar Lauds Passage of Finance Comm. Ag Tax Package/ Includes Ag Disaster Fund & Essential Ag & Energy Incentives", Point 3
11. ↑ Wikipedia: E85
12. ↑ http://en.wikipedia.org/wiki/Passenger_vehicles_in_the_United_States
13. ↑ VSE 2007 10-K, Page 3
14. ↑ Seeking Alpha: "Look Out For Winners In the Transition from Petroleum"
15. ↑ Verenium News Release: "Verenium Corporation Announces Milestone Payment to the University of Florida for Cellulosic Ethanol Technology License"
16. ↑ VSE 2007 10-K, Calculated by dividing operating costs by gallons produced
17. ↑ PEIX 2007 10-K, Calculated by dividing cost of goods by gallons produced
18. ↑ AVR 2007 10-K, Page 42, Calculated by dividing cost of goods by gallons produced