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Biofuels Report: Pacific Ethanol Has Robust Year Ahead

Summary

Pacific's stock price has had a huge disconnect between its revenues and share price.

Rapidly expanding EPA requirements are forcing refiners to drastically increase the use of biofuels either through blending or purchasing of RINS.

Decreasing corn prices and increasing Ethanol prices put producers like Pacific in a sweet spot.

The company is paying down debt and otherwise strengthening its balance sheet.

Mid-2017 should see a return of Pacific's $20/share price.

Pacific Ethanol, Inc (NASDAQ: PEIX) has at times been a hero and other times a disappointment to investors. It looks like the company may again be flipping from a disappointment back to hero in 2017 as market conditions promise to fling cash at it.

The Company

Pacific produces and markets low-carbon renewable fuels in the Western United States. It produces and markets co-products, including wet and dry corn gluten feed, condensed distillers solubles, corn gluten meals, corn germs, distillers yeast, and CO2.

The company's recent stock price of $6.77 comes near the high end of a 52-week trading range of $2.41-$7.75. It has a Market Cap of $293.47 million and a current EPS of -0.60.

A negative PE for an established business is always a warning sign, but the environment it is operating in looks to turn this around quickly.

PEIX data by YCharts

The stark eruption in revenue comes from several factors. The two main ones include a healthy runup in Ethanol prices and associated RINs (Renewable Identification Numbers),as well as a five year low in corn prices. This has been fed by already high in-storage corn levels and near record expected crops for 2016. USDA is projecting that 2016-17 corn ending stocks will rise to nearly 2.1 billion bushels by September 1, 2017.

Despite increasing use of corn for ethanol production, corn prices thus continue to come down. The ending 2015-2016 price was estimated by the USDA at $3.65/bushel, down from $6.89 in 2012-2013. The USDA predicts the coming year average price to dip down to $3.40/bushel.

With corn prices going down all users of corn, like Pacific, are enjoying the lowering costs. But even better the environment for ethanol and RINs to get tighter, prices higher and more profitable.

First an explanation of RINs is in order:

Running On RINs

All U.S. refiners and those who blend fossil fuels such as diesel and gasoline are mandated to add biofuel to the mix. The amount they have been required to blend in has been stepping up since 2007.

Refiners and blenders have two options in complying with the EPA Mandates. They may:

  1. Blend enough biofuel into their fuel to meet the EPA requirement
  2. Purchase a Renewable Identification Number (RIN)

Every time a gallon of biofuel is produced it is assigned a RIN. The producers (like Pacific) of RINs can then can sell those RINs (separate from the actual gallon of bio fuel). Refiners who are unable to actually blend in the biofuel into their diesel or gasoline can then buy the RINs.

RINs are a close cousin of the carbon credits system, where air polluters can buy credits...


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