This morning’s earnings report from Archer-Daniels-Midland (NYSE:ADM) offers proof that if a company is going to be in the ethanol business, it had better have a fallback position.  ADM blew past analysts’ estimates of $0.69 per share and $15.98 billion in revenue, hitting EPS of $1.63 on revenue of $21.16 billion. Both figures are more than double those for the same period last year.

Where ADM did not do so well was in its corn processing operations. Operating profit in the division was down by $135 million,with biofuel products off nearly 62% and sweeteners and starches down61%. Revenue was $2.24 billion, a rise of about 47%, thoughvolumes were up just 3%. Mark-to-market losses on corn hedgescontributed to higher feedstock costs and higher energy costs alsodampened profits. Investors liked the news as ADM shares are up nearly18% this morning.

VeraSun (NYSE:VSE), a pure-play ethanol company, didn’t have a backstop and the company is now in Chapter 11 and may be a new net-zero for shareholders.

After the market closed yesterday, Anadarko (NYSE:APC) reportedquarterly earnings of $2.165 billion, or $4.62 per share. Anon-cash gain of $2.193 billion on derivatives and other adjustmentsboosted revenues significantly. Discretionary cash flow (non-GAAP) grewfrom $736 million in the same period a year ago to $1.132 billion thisyear.

Anadarko’s realized prices for both crude oil and natural gas were upabout 58% and 92%, respectively. The company’s share price is up morethan 5% in early trading today.

At the other end of the energy pipeline, refiner Holly Corporation(NYSE:HOC), this morning reported EPS of $1.00 on revenue of $1.72billion. Analysts had been expecting EPS of $0.87 and revenues of $1.71billion.

Net income was down more than 14% from the same period a year ago, andEPS was off nearly 6%. Refining margins were up 18% year-over-year, butreduced throughput and higher costs caused the decline in net income.Holly has $225 million in cash, no debt, and a credit facility for$175, none of which is outstanding. But the drop in net income isrolling over the good news. Holly’s share price is off about 1.2% thismorning.

With pure-play ethanol companies watching their margins and shareprices dive, it’s not unreasonable to wonder what could happen ifPacific Ethanol (NASDAQ:PEIX) or Aventine (NYSE:AVR) will followVeraSun down the Chapter 11 path.

ADM hasn’t shown any interest so far in picking up one of these guys,but it might not be a bad idea. Until another gasoline additive (notMTBE) can be found to help keep wintertime air clean, ethanol is stillthe only game in town to meet federal and state mandates for emissions.

For that matter, even a crude refiner like Holly might be interested inan ethanol play. On second thought, that’s not likely at all.

Paul Ausick
November 4, 2008

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