Ethanol IPOs fuel market interest

US News
By Kit R. Roane

Posted 6/6/06


Here come the ethanol IPOs.

Three of the largest ethanol producers in the country are planning to make initial public offerings this year, with the first, VeraSun Energy Corp., expected to go public later this month.

South Dakota-based VeraSun is the country's second-largest maker of the corn-based fuel, ranking only behind Archer Daniels Midland Co. It is the first pure-play ethanol producer to file to go public. Also in the pipeline are Hawkeye Holdings Inc. and Aventine Renewable Energy Holdings Inc.

And investor interest has been strong. VeraSun recently said it expected to take away $328 million from its IPO instead of the $150 million originally projected.

The companies are riding a wave of interest in energy producers of all types. But ethanol has been particularly appealing to some investors because of the fast growth of the market and the strong rise in ethanol prices as politicians have railed against America's dependence on foreign oil.

Ethanol, which is made from both corn and sugar cane, has hit nearly $3 a gallon recently as it has gained a market as both a stand-alone fuel and as a replacement for the gasoline additive MTBE, which is a water pollutant.

The growth of interest in ethanol is likely to heat up competition among suppliers as new entrants come into the market. Ethanol distributor Pacific Ethanol raised $138 million last month to build five ethanol plants. Other companies also have plants on the drawing board.

Of course, the bloom may already be coming off the rose. Pacific Ethanol, which recently rose to about $45 a share, is now hovering around $25. And more pain could be coming to the ethanol market in future months and years.

Analysts warn that there is probably already plenty of ethanol supply coming to refiners. And the economics of producing ethanol are tremendously risky owing to the volatility of the raw materials needed to make it. Further growth in supplies of the fuel could combine with rising input costs–the corn it is made from and the natural gas needed to produce it–to squeeze the bottom line at these companies.

"As far as I'm concerned, today is the best of times in the ethanol market," says Michael Judd, president of Greenwich Consultants. "The margins are very attractive, but they won't always be." His view of the ethanol IPOs: "I don't think they are going to be good buys for investors."