Green Plains Thrives by Spreading Its Bets
Kiplinger’s Biofuels Market Alert - Vol 3, No 14 : July 15 2009
While margin pressure and volatile feedstock prices have forced several pure play ethanol producers into bankruptcy, diversified agriculture companies like Green Plains Renewable Energy (GPRE) and The Andersons (ANDE) are rebounding along with the stabilizing economy. Green Plains stock is up nearly fivefold since early March as investors have come to realize that the corn ethanol industry is not going away.
“We’re not fully exposed to ethanol, although it’s the biggest thing we do,’’ says Green Plains CEO Todd Becker.
In the first quarter of 2009, ethanol production generated 62% of the firm’s $221 million in revenue - and most of its operating losses ($7.4 million). An operating profit in its marketing and distribution of ethanol and distillers dried grains (DDGs) partially offset a per share loss of 38¢. Green Plains can also count on profitable contributions from its agribusiness segment (grain storage and marketing, seed and fertilizer sales) in the second and fourth quarters when farmers plant and harvest. Green Plains owns a 51% stake in ethanol blender and distributor Blendstar LLC and is also researching algae as a feedstock through a joint venture with BioProcess Algae LLC.
In addition to its varied revenue streams, Green Plains benefits from a focus on fundamentals and risk management. The company sidestepped most of the commodity volatility by seizing opportunities and avoiding long-term positions. “We buy corn, sell ethanol, buy natural gas and sell DDGs,’’ says Becker. “We understand the commodity business and the importance of locking margins away.’’
Its staying power has enabled Green Plains to add production capacity at bargain prices. It completed the purchase of two former VeraSun Energy plants this month near Central City and Ord, Neb. The 50 million gallon Ord plant is already on line, with the 100 million gallons per year (Mgy) Central City facility scheduled to fire up by the end of July.
Green Plains bought the plants from AgStar Financial for 82¢ a gallon compared with current plant replacement costs of $1.75 to $2 per gallon. It also received a favorable financing arrangement, requiring an outlay of just $10 million and delaying principal payments for two years.
By then, Becker expects the ethanol business will be back on its feet. Even so, Green Plains keeps abundant cash on its balance sheet - $53.5 million as of March 31, 2009 - compared with $42.3 million for The Andersons - to withstand downturns and maintain flexibility. It also keeps a lid on costs by maintaining a lean corporate office with just 50 employees.
At a recent $7.15, Green Plains shares are trading near their 52-week high. The stock currently lacks Wall Street coverage, but Becker says the catalysts are in place for growth to resume: Margins have expanded in the past two months, ethanol prices have fallen below gasoline and supply has adjusted to demand. The federal government’s OK to boost the ethanol blend in gasoline by 50% - from E10 to E15 - would clearly be another positive.
“Margins have returned to the ethanol industry that allow us to service our debt and maybe more,’’ Becker says. “That had been gone for a while.’’
Kiplinger’s Biofuels Market Alert - Vol 3, No 14. July 15, 2009