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Actionable news in PEIX: Pacific Ethanol, Inc.,

Pacific Ethanol Begins To Benefit From A Favorable Regulatory Environment

Summary

U.S. ethanol producer reported Q4 earnings that surprised to the upside on an adjusted basis as a sharp increase to the Low Carbon Fuel Standard's carbon price helped its margins.

While dilution and higher interest expenses hurt the company's earnings in the wake of the Aventine acquisition, the added capacity is counting just as the operating environment is improving.

Furthermore, the company's largest shareholder is pushing for the type of sale that I stated was a possibility last December, and this would be an opportune time for it.

I continue to like Pacific Ethanol as an interesting, albeit risky, long investment opportunity given an improved operating environment and new M&A interest.

U.S. ethanol producer Pacific Ethanol (NASDAQ:PEIX) reported Q4 earnings last month that surprised the market by beating on EPS, despite missing slightly on revenue. The company's share price spiked on the news but subsequently shed its gains in response to faltering energy prices (see figure). The share price has still increased by 50% over the last three months, however, following the bottoming of crude prices in mid-January. Last December I wrote that Pacific Ethanol was a potential takeover target due to the discount at which its shares traded relative to its peers. Last week its largest shareholder publicly encouraged the company to consider selling part or all of its operations as a means of eliminating the discount. This article re-evaluates Pacific Ethanol as a potential long investment in light of this announcement, its Q4 earnings, and the volatile domestic ethanol market.

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Q4 earnings report

Pacific Ethanol reported Q4 revenue of $376.8 million, up by 47.1% YoY and missing the analyst consensus estimate by only $0.8 million. The large increase compared to the same quarter of the previous year was due to a record sales volume of 213.5 million gallons, an increase of 59% over the same period. The company's own production more than doubled to 117.5 million gallons due to the completion of its recent acquisition of Midwestern ethanol producer Aventine Renewables. Third-party sales came in at 96 million gallons, up by 14% YoY. The revenue increase did not keep pace with the higher sales volumes as the price of ethanol fell alongside that of crude to an average of $1.66/gallon during the quarter, a decline of 23% YoY.

Pacific Ethanol's cost of revenue increased by 54% YoY to $367.2 million, reflecting the higher production volume. The positive aspects of the Aventine acquisitions began to make themselves felt during the quarter in the form of a reduced corn price: the company paid an average premium compared to CBOT corn of only 0.35/bushel during the quarter, down from an average premium of $1.30/bushel in Q4 2014. A constraint on the company's margins in the past has been the distance of its ethanol facilities from the high-yielding corn crops in the U.S. Midwest. Acquiring Aventine's Midwestern ethanol facilities gave the company access to cheaper corn supplies, resulting in the reduced premium during the most recent quarter. Likewise, its co-product margin increased from 28.5% to 35.7% YoY. This was partially offset by a lower ethanol price premium, however, which fell from 19% versus CBOT to 11% over the same period due to the reduced value of Midwestern corn ethanol under California and Oregon's Low Carbon Fuel Standard [LCFS], although such a result was expected post-acquisition. The company's gross profit fell from $18.4 million to $9.5 million YoY despite the higher production volume due to the lower ethanol price.

GAAP net income came in at -$1.1 million, down from $12.5 million in Q4 2014. GAAP EPS likewise declined from $0.50 to -$0.03 over the same period. The EPS number was further weakened by a 70% YoY increase to...


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