Before you get your hopes up and rush out to buy shares of ethanol refiners, keep in mind that corn costs aren't the only variables in the ethanol equation. Between 20% and 25% of nonfixed refining costs arise from natural gas, which is used to cook the corn mash. A $1 per million BTU move in the cost of natural gas generally results in a 9.6 cent-per-bushel shift in the corn crush margin. Figure in the recent rise of natural gas prices and the crush margin shrinks to 50 cents per bushel before fixed costs.

Corn Crush

That makes the recent bounce in the share price of Pacific Ethanol Inc. (NASDAQ GM: PEIX) all the more surprising. Since the beginning of the year, Pacific's stock followed the corn crush margin southward, losing 64% of its value. On Monday, though, the Sacramento, Calif. renewable fuels producer posted surprisingly robust results. Excluding a one-time impairment charge, first-quarter profits of 6 cents per share astonished analysts who'd been expecting a 9-cent loss.

Though Pacific's average sales price decreased 4 cents a gallon from last year's first quarter, revenue surged 61% to $161.5 million, nearly $7 million more than Street estimates. As a consequence, Pacific Ethanol shares shot up more than 60% Monday to $5.14, on volume 13 times its recent average.

Pacific's move triggered sympathetic stirrings in other pure-play ethanol stocks. Verasun Energy Corp. (NYSE: VSE) skipped $1.16, or 19% higher, to $7.35. Aventine Renewable Energy Holdings Inc. (NYSE: AVR) jumped $1.24, or 26%, to $6.05.

Earlier this month, Verasun posted a 257% first-quarter revenue increase and an earnings swing to 8 cents per share, while Aventine announced year-over-year revenue growth of 17% in its first quarter.

Ethanol Producers

Do these numbers presage a bottoming in the ethanol sector? Trading in the next few days will confirm whether ethanol producers have truly turned their fortunes ‘round or are just experiencing a dead-cat bounce.

 Prev12Next