Ethanol Market

The Dynamic Wealth Report
November 30, 2007

Has The Ethanol Market Bottomed?

Verasun (VSE) and US BioEnergy (USBE), two of the largest ethanol firms in the US, announced their intent to merge in a $700 million
transaction.  This business acquisition is very interesting.  I think this is a sign of good things to come for the fledgling ethanol industry.

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First, low margins in the industry are keeping new competition away.
In addition, weaker players are starting to either collapse or be
bought. 

Additionally, renewable fuels legislation is not going anywhere.  The
industry is still going to need to produce 7.5 billion gallons of
ethanol and other renewable fuels in 2012.  Looking at today’s production, that may be a bit difficult.

The top 6 ethanol producers, which account for a majority of industry production, produce less than half of the mandated demand in 2012.

This is not necessarily a problem now, but remember, ethanol plants
take several years to build and key components can be difficult to find.
I believe that as we get closer to 2012, ethanol prices will rise and
production margins will improve.  No doubt large scale delivery
agreements will be announced as early as 2010 as the major oil companies work to lock in long term supply.

Between now and then I see massive consolidation. The smaller and weaker players who can’t use size to their advantage will be snapped up.  I would expect companies like Aventine Renewable Energy (AVR), the fifth largest producer of ethanol, to become active in buying other producers.  They might even become a potential target themselves.  Last year the company produced and shipped just under 700 million gallons of ethanol.

We may have reached the bottom of the ethanol decline. The consolidation in the industry will act as a stabilizing force.  By selectively
picking the right stocks at the right time, savvy investors have the
opportunity to make some serious money.

•  Banc of America recently upgraded both Valero Energy (VLO) and Western Refining (WNR) from a neutral rating to a Buy.  The analyst expects margins to rise along with increases in gas prices.

•  Punk, Ziegel upgraded the financials this week.  Citigroup (C) got the
upgrade from a market perform to a buy and Washington Mutual (WM) was upgraded from a sell to market perform.

•  Citigroup initiated coverage on Time Warner (TWTC) with a buy rating.

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