October 1, 2006

Ethanol Stocks: Survival of the Fittest

In the rush to secure a position in the booming biofuels industry there are already early winners, companies with promising futures, and companies that will have to persevere to stay in the game. As last week has amply demonstrated (see 9/23/06), every drop in the price of oil affects the speculative value of ethanol related stocks. Even the strong players have recently witnessed bearish performance, but that is unlikely to dissuade pending deals from going through. Buyers beware - investing in this sector presents high risks.

On the other hand, high flying venture capitalists are betting big on the future of ethanol. We are clearly at the "bleeding edge" of the ethanol product lifecycle - and it is going to be a BIG one.

The first phase is based on the deployment of corn and sugar fermentation refineries. There has been a huge surge of investment in this field feeding off the President's Advanced Energy Initiative of 2005, concern about our dependence on Middle East oil, hurricane Katrina's damage to oil rigs in the Gulf of Mexico, and the huge spike in oil prices in 2006.

The second phase involving cellulosic feedstock conversion to ethanol has yet to officially begin with the construction of commercial-scale facilities. With the rosy forecasting of people who should know, many investors are holding their chips for this second round to begin proving itself.

An online monitor of the price and health of existing ethanol stocks is the GoG2G Blog whose role is "Looking into Socially Responsible Stocks and the future of alternative fuels." Konrad Imielinski has just published Ethanol's Winners and Losers which list the winners as Pacific Ethanol, Inc. (PEIX) and Archer Daniels Midland (ADM). The losers during the early going are Xethanol (XNL) and GS CleanTech Corporation (GSCT.ob).

Here are the "Top ethanol plays" as identified by the Yahoo Finance website and Seeking Alpha:

Archer Daniels Midland (NYSE: ADM - News) is the most obvious ethanol play, since it controls about 25% of the capacity in the U.S. The company gets about 25% of its operating profits from ethanol and the sale of related byproducts.

Pacific Ethanol (NASDAQ: PEIX - News) is the biggest pure play on ethanol production. The company currently markets ethanol in several western states including California, Nevada, Arizona and Oregon. But it hopes to have five ethanol plants running in the region by the end of 2008.

Green Plains Renewable Energy (NASDAQ: GPRE - News), a recent initial public offering with plans to build an ethanol plant in Iowa.

Diversa (NASDAQ: DVSA - News) is developing enzymes for use in what may be the next generation of ethanol production techniques discussed by Bush in his State of the Union address.

MGP Ingredients (NASDAQ: MGPI - News) is a producer of food-grade and fuel-grade alcohol,with $300 million in sales in the last 12 months.

VeraSun Energy Corp. (NYSE: VSE - News) is an producer, focusing primarily on the production and sale of ethanol and its co-products. This focus has enabled the Company to grow its ethanol production capacity and to work with automakers, fuel distributors, trade associations and consumers to increase the demand for ethanol.

Aventine Renewable Energy Holdings Inc. (NYSE: AVR - News) is a producer and marketer of ethanol in the United States. The Company markets and distributes ethanol to many of the energy companies in the United States.

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