Conditions improving for ethanol producers

Pacific Ethanol, other companies gearing up to boost capacity to meet expected increase in demand

Idled ethanol plants, such as the one operated in Idaho by Pacific Ethanol Inc., are coming back on line as the industry’s survivors bet on a recovery.

Sacramento-based Pacific Ethanol and other ethanol firms are placing their bets largely because of improving market conditions as well as the federal renewable-fuel standard, which requires oil companies to expand their ethanol purchases every year for the next dozen years. California’s low-carbon fuel standard also could boost demand.

“Certainly the industry isn’t out of the woods yet, but today the outlook is brighter than it was a year ago,” said Matt Hartwig, spokesman for the Renewable Fuels Association in Washington, D.C. “By and large, ethanol producers are making profits today whereas they may not have been a year ago. All of that points to a stronger year in 2010.”

The industry struggled for the past two years as corn prices fell, supply grew faster than demand and credit markets froze. Ultimately more than 25 percent of ethanol plants were idled.

“Many producers were facing liquidity problems,” said Jinming Liu, senior analyst at Ardour Capital Investments LLC in New York, adding that producers continued to file for bankruptcy as recently as December.

Analysts are more optimistic about 2010.

“We saw a spike in margins in the fourth quarter,” said Cory Garcia, an analyst with Raymond James Financial Inc. in Houston. “Margins kicked back up in a pretty meaningful way. Those that weathered the downturn have been in a more favorable position in terms of being able to survive.”

Pacific Ethanol (Nasdaq: PEIX) posted a third-quarter net loss of $12 million last year, the most recent numbers available. That’s an improvement over a more than $69 million net loss in third-quarter 2008. At the same time, third-quarter sales dropped last year to $72 million, down 61 percent from $184 million in the third quarter of 2008.

Early this month, the ethanol producer and marketer — founded and chaired by former California Secretary of State Bill Jones — announced it had resumed production at its 60 million-gallon-a-year facility in Burley, Idaho. Pacific Ethanol suspended production of ethanol at the plant in February 2009 because of unfavorable market conditions.

And while last fall the company’s slumping stock attracted the attention of Nasdaq, which demanded that Pacific Ethanol’s shares top $1 or face removal from the exchange, it appears likely that, as of today, Pacific Ethanol has avoided being delisted.

Nasdaq gave the company 180 days — or until March 14 — to boost its flailing stock and keep it above $1 a share for at least 10 consecutive business days. Shares topped $1 apiece on Jan. 8 and have remained above $1 since.

Shares rose 7 cents, or 3.12 percent, Wednesday to $2.32 in early-afternoon trading.

Over the hump?

In an effort to refinance debt in mid-May, Pacific Ethanol’s five ethanol-producing units filed for Chapter 11 bankruptcy protection. Neither the publicly traded Pacific Ethanol nor its other subsidiaries filed.

Last year, Pacific Ethanol halted production at three of its four plants — in Burley, Madera and Stockton. Only a plant in Boardman, Ore., remained operating. The plants combined have the capacity to produce 200 million gallons annually, according to a company quarterly report. Pacific Ethanol also owns 42 percent of Front Range Energy LLC, which owns a plant in Windsor, Colo., with an annual production capacity of up to 50 million gallons.

In 2008, before the plants were idled, Pacific Ethanol produced 40 million gallons of ethanol in California, according to the California Energy Commission.

Paul Koehler, vice president at Pacific Ethanol, declined to disclose how much the company plans to produce this year or offer any other “forward-looking statements.”

The company has added 35 employees in Burley, for a companywide work force of more than 100.

While there was an oversupply of ethanol plants on the market, Koehler said the sector now is “getting into a supply-and-demand balance.” Asked whether the industry could face a repeat of an oversupply, Koehler said it’s always a risk.

“But I think with the increasing renewable-fuel standard supported by the federal government, we should stay in relative supply-and-demand balance at least in the next several years,” he said. “I don’t foresee a return to our 2008 and 2009 situation.”

Demand expected to rise

The U.S. demand for ethanol production is linked to the federal renewable-fuel standard, which requires oil companies to expand their ethanol purchases to 36 billion gallons annually by 2022. The Energy Independence and Security Act of 2007 set forth incremental increases in renewable-fuel volumes beginning with 9 billion gallons in 2008 and ending at the 36 billion gallon number.

source: bizjournals