US BioFuels Industry Consolidating And Ready For New Growth
Associated Content from Yahoo! : February 17 2011
By Jonathan Gal
GPRE (NASDAQ) Emerging as the Leading Ethanol Growth Stock!
The United States ethanol production industry suffered mightily during the Great Recession. Even before the Crash of 2008, the mortgage crisis, and the ensuing Great Recession, ethanol producers had serious problems of their own. The price of corn and other ethanol inputs had risen above the value of the ethanol product, putting many companies into a position of being 'upside down', losing money on every gallon of production. Those industry problems, coupled with the Crash, Recession, and the fears of investors hit the industry heavily, sending many producers into Chapter 11 Re-Organization.
A small number of shrewd consolidators took advantage of the situation, purchasing production assets at attractive prices and putting together new, larger production companies that are now more competitive than the smaller, stand-alone plants of the pre-Crash days. These consolidators are now benefitting from economies of scale, lower financing costs, and new technologies that increase the profitability of ethanol production. On top of that, federal incentives are now kicking in, which further strengthens the future outlook for the industry.
The leading consolidators are forming highly competitive enterprises that will dominate the industry and lead it forward. The top tier, known as The Big Four (4), of the industry are: Valero (NYSE: VLO), Archer Daniels Midland (NYSE: ADM), POET (private), and Green Plains Renewable Energy (NASDAQ: GPRE). Together, these four companies comprise a total of over 5 Billion gallons per year of ethanol production capacity, approximately 38% of the 13 Billion gallon per year industry, according to statistics published by the Renewable Fuels Association, an industry trade association. And, with their important strategic advantages - financial backing, economies of scale, and new technologies - these four are likely to grow further as they acquire smaller plants and companies that do not have these important advantages.
There is a second tier of producers, each of which has 200 - 500 million gallons of production capacity, for a total of approximately 2.5 Billion gallons per year of production, about 19% of industry capacity. None of this group appears to have the capital resources necessary to successfully enter the ranks of the first tier, but they will probably still fare better than the third tier companies, all of which have production capacity of less than 200 million gallons per year, because economy of scale is one of the key factors needed to compete successfully in this market. This bottom tier consists mostly of 50 - 110 million gallon per year producers, but it also includes Bill Gates' Pacific Ethanol (NASDAQ: PEIX) which, at 190 million gallons per year of production, barely misses the bottom range of the Second Tier companies. This third tier makes up the remainder of the industry, representing approximately 43% of the industry, or about 5.9 Billion gallons per year.
The most interesting company of the entire industry, from an investor's perspective, is the fast growing, first tier company called Green Plains Renewable Energy (NASDAQ: GPRE). With solid investment banking by Piper Jaffray (NYSE: PJC) and a growing credit line from PNC Bank (NYSE: PNC) and other lenders, Green Plains is acquiring capacity at a rapid pace. In addition to its strong financing and its growing capacity, GPRE is also highly focused, vertically integrated, and aggressively pursuing new technologies, a strategic combination that further strengthens its competitive position in the industry, even against the other top tier companies.
Green Plains strengthens its downstream market position by owning its own fuel blending capabilities - its 'Blendstar' subsidiary. It strengthens its relationship with its upstream, farmer-suppliers by providing them with Agronomy, Petroleum, and Bulk Grain services through its 'Green Plains Grain' subsidiary. And, it is aggressively pursuing new technologies that dramatically enhance the profitability of the ethanol production process, including Corn Oil Extraction and Photosynthetic Algae BioReactors.
Corn Oil Extraction Systems ("COES") are an add-on technology, which has been thoroughly patented by a technology development company called GreenShift Corporation (OTCBB: GERS). According to information published recently by both GPRE and GERS, the two companies are working closely together on installing this technology onto all of GPRE's plants, which creates an extra $9 Million of profitability for every 110 million gallons per year of ethanol production capacity.
With GPRE's capacity set to exceed 700 Million gallons per year after completing recently announced acquisitions, the COES technology add-on should increase GPRE's total annual profitability by upwards of $63 Million per year. For a company that reported $31.6 Million in profits for the first nine months of 2010, this $63 Million per year in extra profits amounts to more than a doubling of profitability for Green Plains Renewable Energy. And, these extra Corn Oil Extraction System profits are expected to begin hitting Green Plains' books on the next earnings release, which is due out on March 1, 2011.
Looking even deeper into Green Plains' technology development plans, one finds another technology, with even greater potential, in the works. On February 2, 2011 GPRE announced in a press release that Phase I of its algae bioreactor testing was successfully completed and that Phase II of its algae bioreactor technology has completed construction and will soon be producing test results.
An algae bioreactor consumes the carbon dioxide emissions from an ethanol fermentation plant by turning it into algae biomass. The algae biomass produced can, in turn, be used as a feedstock for additional biofuel production, including both ethanol and biodiesel. Although GPRE may be a year or two away from commercial application of this technology, its theoretical potential for profit enhancement of a typical ethanol plant is even greater than the profit enhancement of the Corn Oil Extraction System!
With these important, new technologies in the pipeline, a vertically integrated business model focused exclusively on ethanol, and strong financial backing from the capital markets, Green Plains is currently the most attractive ethanol investment in the public markets. While other top tier companies like Valero, ADM, and POET clearly rival Green Plains for that title, GPRE stands out by virtue of its 100% focus on ethanol and also by virtue of its "pure play growth stock".
A well managed, pure play growth stock can achieve much higher valuations and grow much faster than diversified stocks like ADM and Valero; and POET - to date - remains private. So, if GPRE can deliver above average growth to its stockholders over the coming quarters, then it will be rewarded with a stronger stock price than its competitors. A stronger stock price will, in turn, strengthen the company's ability to make additional acquisitions of ethanol capacity, as well as its ability to develop and install new technologies that make those acquisitions more profitable.
This virtuous cycle of increasing production capacity and increasing profitability will propel Green Plains far ahead of its competitors in the top tier. While ADM & Valero's acquisition plans are slowed down by the internal politics and weaker stock prices of those diversified companies, and POET's acquisition plans are stymied by not having a strong public stock at all, GPRE will likely pull ahead of its competitors and become the undisputed industry leader within 2-3 years time. Investors who get in now should benefit handsomely.