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Some investors have certainly made money with ethanol stocks. Investors once made money on dot-coms as well. Making money is no indication that the underlying fundamentals are good. Some of those dot-coms still exist today, but many of them had unworkable business models and went bankrupt. I will argue that some ethanol companies are in the same boat. I did a case study in that essay of Pacific Ethanol (PEIX) and argued that the fundamentals simply did not support the valuations being placed on many ethanol companies. So, how have ethanol companies fared since that June 23rd report? Here is a quick look at some of the purer ethanol plays: Pacific
Ethanol (PEIX) – down 38% The Xethanol case is of particular interest, because it shows exactly how a company can take advantage of investors during periods of irrational exuberance. In a now famous Xethanol exposé by Sharesleuth.com, Moonshine Blindness, reporter Chris Carey built the case that Xethanol was merely capitalizing on ethanol hype in a get rich quick scheme. I was interviewed and quoted in that story, and I compared Xethanol’s claims to the hydrogen hype of a few years ago. Yes, you can make ethanol from cellulose. But nobody has shown that it can be done economically. Xethanol, however, was promising to build the first commercial cellulosic ethanol facility and this led investors to bid up the stock. Add to this story a series of Xethanol insiders with a history of SEC troubles, and you have all the ingredients for a share meltdown – even absent the wider ethanol sector meltdown. Have ethanol stocks bottomed out? As I said in my earlier essay, I don’t try to predict individual stock movements. I do believe that many ethanol companies are still overvalued, given the current market fundamentals. I would not be a buyer, even at these prices. Jim Cramer, at TheStreet.com recently had these sentiments: Ethanol stocks aren't broken, neither are ethanol companies -- "they are dead," Cramer told his viewers. Ethanol is over and is "done for good," he said, emphasizing not to look at the weakness in ethanol as a buying opportunity. "Sell it immediately," Cramer said. Some solidly managed companies will continue to make money in the ethanol sector, but capacity is being rapidly overbuilt. Remember that these companies ultimately trade in low-margin commodities, not high-margin technology assets. Vinod Khosla’s About Face Over the past few months, I have engaged in a series of debates with Vinod Khosla regarding the potential of ethanol to displace U.S. gasoline consumption. While he and I agree on many alternative energy issues, we have some very basic disagreements over his ethanol promises. I wrote an essay challenging many of Mr. Khosla’s claims: Vinod Khosla Debunked Shortly after, Mr. Khosla e-mailed me and asked if he could call and speak to me about his ideas. We had a couple of very long phone conversations, one of which I documented (with his blessing) at: A Conversation with Vinod Khosla I also posted an essay written by Mr. Khosla to my blog, and to The Oil Drum: Vinod Khosla Responds Briefly, my primary concern is that Mr. Khosla has been over-promising on the potential of cellulosic ethanol. I have no problem with him risking his own money on these ventures, but he is lobbying governments to risk taxpayer money on his vision. If the government believes Mr. Khosla’s claim that we could produce 200 billions of ethanol from cellulose in 20 years (there is currently no commercial cellulosic ethanol production), my concern is that attention could be diverted from solar, electric transport, wind power, conservation, etc. Since it is the public’s money at risk, I have closely scrutinized Mr. Khosla’s claims, and rebutted those that I felt were without merit. Given Mr. Khosla’s claims on ethanol, you may imagine my surprise when someone recently e-mailed me the following link from Red Herring: Khosla: Ethanol Not Final Fuel In this article, Mr. Khosla states “Contrary to what you might believe, I think it’s extremely unlikely that in 20 years we will be using any ethanol in cars.” Has he had a change of heart? In previous presentations, he has argued that ethanol will displace gasoline in the next 20 years. He has encouraged massive investments into ethanol infrastructure. Therefore, this appears to be a dramatic change in his position. I know that he has his eye on the potential of butanol and longer chain alcohols (and I agree with him on this), but I don’t know what else he may have up his sleeve. Investors will want to keep an eye on these developments.
Robert Rapier has a master's degree in chemical engineering, and bachelor's degrees in chemistry and mathematics. He has 15 years of experience in the petrochemicals industry, including experience with cellulose ethanol, gas-to-liquids (GTL), and butanol production. He holds several U.S. and international patents, and is currently employed by a major oil company. Robert maintains an energy blog at http://i-r-squared.blogspot.com/. CONTACT
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