Pacific Ethanol, When Debt Issuance Is Good (PEIX, ADM, VLO)

In March 2009, the five ethanol-producing plants owned by a subsidiary of Pacific Ethanol, Inc. (NASDAQ: PEIX) filed for bankruptcy protection. The plants exited bankruptcy in June 2010, under ownership of several banks. Pacific staffed, managed, and operated the plants for a fee, and marketed the products under a profit-sharing agreement. Pacific also had an option to purchase up to 25% of the plants for a price up to $30 million. Pacific’s problem was that it had almost no cash.

Now, some of the company’s institutional investors have agreed to purchase $35 million in senior convertible notes, to put Pacific back on its feet. Pacific will also sell its minority interest in another ethanol producer for $18.5 million, and use $23.3 million of the $53.3 million in total proceeds to buy 20% of its previously owned plants. The company will also use $17 million to retire debt, and keep $10 million in cash reserves.

This could work out well for Pacific, mostly because ethanol prices are rising. Archer Daniels Midland Co. (NYSE: ADM) reported a sales increase in its segment that includes ethanol of $133 million in its fourth fiscal quarter ended in June, and a $219 million fiscal year increase. Every other segment of ADM’s operations had lower revenues, both quarter-over-quarter and year-over-year. Valero Energy Corp. (NYSE: VLO) also saw a 60% jump in operating income in its ethanol business in its second quarter.

Ethanol prices are rising now, just the reverse of what was happening in 2009 when Pacific filed for bankruptcy protection. Then, corn prices were rising, but demand for ethanol was falling as drivers kept their cars parked. Now, corn prices are rising again, but so is demand, mostly due to federal mandates on the amount of ethanol that must be blended with gasoline.

A further boost is expected when the US EPA rules on a boost in the percentage of ethanol permitted in retail gasoline. The ethanol industry wants a 15% blend (E15), a level resisted by automakers. The EPA is expected to approve a 12% blend (E12), and the decision is due by the end of September.

Shares in Pacific rose more than 12% this morning when the financing deal was announced. Since then, the shares have lost about 5%, trading at $1.02, $0.06 below yesterday’s close. Its 52-week trading range is $0.35 to $2.75.  Trading volume in shares in the first 90 minutes of trading has already exceeded the company’s average daily volume of more than 2.7 million shares.

Paul Ausick