Pacific Ethanol, PEIX
by bobwins | March 25, 2014 12:14 pm
It’s volatile. It’s already runup but I still think it has potential.
I got Pacific Ethanol, PEIX, from Keith Schaefer[1] late last year. I had been taking his newsletter for over a year and ignored GPRE because it was an ethanol[2] stock. When he recommended PEIX, I decided to look harder because GPRE had done very well. Turns out ethanol is fundamentally different in the near term. Corn has come way down from the peaks caused by the drought of 2012. Farmers responded, as they typically do, to the high prices of 2012 by planting record acreage of corn. Prices plummeted to below $4/bushell instead of $12/bushell during the drought. Corn is the principal ingredient to make ethanol so their COGS went down sharply. Ngas is also a primary cost of cooking the corn and it also dropped in the same time period. The result is a profitable ethanol sector in the refining business.
Current conditions are as good as they get for ethanol producers. The rail cars that Bakken[3] producers are using to transport crude is also needed to transport ethanol. They are scarce. Most of the ethanol is produced in corn country. It’s having trouble getting to regional refineries. The bad weather hampered production of ethanol as some plants had to shut down for lack of ngas. Corn has started back up but ethanol, due to shipping and weather conditions, has gone up more. West Coast ethanol has been about $1/gallon more than Midwest ethanol for weeks.
PEIX is a small producer of 160million gallons per year but all four plants are in the West. The current pricing anomaly is giving them $1 more than Midwest producers. 40million gallons/qtr X $1 = $40million bucks that will drop to the bottom line if conditions stay the same all qtr. Share count was around 15million but recent price increases have put warrants[4] into the money. Share count will likely be closer to 23million by year end as the warrants are counted in FD share count.
But for Q1, the share count will average closer to 18million shares and eps should be over $1. The stock is selling for $16.26 today. Q1 results should send the stock over $25. After that, they will restart their fourth plant in California to produce 200million gallons/yr and add growth for the remainder of 2014(and some risk of startup expenses hurting profits).
I bought stock in the mid 4’s when Schaefer recommended it. I also have options[5], due to my conviction that the profits were coming. Q4 2013 eps was .54 and the stock zoomed but I still think there is big upside. The refiners could follow Valero[6]’s example. Their earnings were bolstered by ethanol while other refiners had shrinking margins.
This is a volatile stock and conditions like corn prices could turn on a dime but I think Q1 will deliver exceptional profits with room for improvement as the 4th plant comes online in Q2.
- Keith Schaefer: https://www.stockgumshoe.com/tag/keith-schaefer/
- ethanol: https://www.stockgumshoe.com/tag/ethanol/
- Bakken: https://www.stockgumshoe.com/tag/bakken/
- warrants: https://www.stockgumshoe.com/tag/warrants/
- options: https://www.stockgumshoe.com/tag/options/
- Valero: https://www.stockgumshoe.com/tag/valero/
Source URL: https://www.stockgumshoe.com/2014/03/microblog-pacific-ethanol-peix/
It seems the best place to produce ethanol is where you have both low cost corn & natural gas. West coast has neither & corn cost likely to rise due to lack of irrigation water in California. Would it not be less cost to ship ethanol than the bulk products of corn &fuel?
Admittedly CA has great prospects for NG production thru fracking . Whether that flies in CA is unknown because of large population of ‘Greens”.
Actually PEIX has all four plants in the West. They place their plants close to their customers, minimizing distance to deliver product. The cost of corn is higher but ngas is available and plentiful from Colorado/Wyoming. Ethanol prices are different by region and the Midwest definitely is the epicenter of production but byproduct income is significant. Dried Distiller’s Grain and corn oil can make up to 25% of ethanol revs. Midwest plants use ngas to dry the leftover husks and cob material into DDG. They ship this dried product in containers to China for animal feed. The ngas expense is significant but China has been buying a lot.
PEIX doesn’t dry their leftovers. They sell it “wet” to local farmers for feed. This reduces both ngas drying expense AND transportation expense vs DDG.
So PEIX gets less for their Wet Distillers Grain but sells it to local customers and spends less to deliver it. Likewise, PEIX sells their ethanol to West Coast refineries. Since there aren’t as many ethanol plants in the West, they are currently also getting a $1/gallon premium for their ethanol in the West and West Coast refineries still have to get ethanol from the Midwest. Right now, PEIX is in the sweet spot of an industry that is firing on all cylinders. They also bought surplus beet sugar from the government, who had to buy it from farmers, at prices around $.06/lb. Sugar is the prime ingredient in making ethanol so the plant’s inputs could be easily adjusted to receive the sugar. Should reduce costs by 15% until they use up the sugar.
I sold a $10 put on peix today.
Retraction: Make that I bought a $10 put on PEIX today 3/27 /2014.
PEIX had a big day today, bouncing over 10.6% to $15.81.
Q1 ends on Monday so the results will be in the books. Waiting for the actual results will be hard but the fundamentals still look great for ethanol and PEIX.
http://www.bloomberg.com/news/2014-03-28/ethanol-rises-to-highest-price-since-july-2006.html