There’s Still a Market for Ethanol (GPRE, VLO)

A (very) small cap ethanol producer, Green Plains Renewable Energy Inc. (NASDAQ: GPRE), has agreed to buy two ethanol plants formerly owned by now-bankrupt VeraSun Energy Corp. The owner of the plants is a group of companies led by AgStar Financial Services, which has agreed to provide Green Plains with the financing to pay the $123.5 million purchase price.

Green Plains will put up $10 million in cash and finance the rest. AgStar has also agreed to give Green Plains a revolving loan of $16 million to provide for the working capital for the two plants, which are located in Nebraska. The two plants add 150 million gallons of production to Green Plains’ current 330 million gallons. Last March, Valero Energy Corp. (NYSE:VLO) gained about 670 million gallons of annual ethanol production when it purchased seven plants formerly owned by Verasun.

Green Plains expects to close the deal in June and to have the plants in production in no more than 60 days after the closing. The company reported a net loss of $7.2 million (EPS loss of -$0.38) for the first quarter of 2009, and long-term debt of $301 million.

Corn-based ethanol appears to be turning into a local-market product. The availability of the 85% ethanol blend (E85) outside the Midwest corn belt is essentially non-existent. Because corn-based ethanol cannot be transported through existing pipelines, it must be trucked to blending points, which adds to its cost and diminishes its value as a green fuel. Many agricultural cooperatives have gotten into the corn ethanol business, but expecting that business to expand nationally is a pipe dream. The future of corn-based ethanol is still behind it, to paraphrase Yogi Berra.

Green Plains’s shares are thinly traded, and its market cap is just $72.75 million. Shares closed yesterday at $2.918, and the 52-week range is $1.12-$9.64.

Paul Ausick
May 28, 2009