VeraSun Energy - Q3 Update
VeraSun Energy (VSE: 4.21 -0.25 -5.61%) is the largest pure play ethanol producer. Ethanol producers have taken a hit due to the double whammy of lower ethanol prices and higher corn prices. VeraSun did manage to stay in the green with a 7 cent per share profit, but things are definitely tough in the corn belt.
Here are the positive notes:
- Production continues to grow up 77% YoY to 100 million gallons for the quarter.
- Revenue was up 49%
- Cash on hand is $320 million
- 4th quarter production will be 40 million gallons higher than Q3.
The negative factors:
- Average corn cost $3.32 a bushel, up 62%
- Average ethanol price: $1.96, down 17%
- 4th quarter corn and ethanol prices are on track to slightly worse than Q3.
Next some trends and projections concerning the future for VSE:
- Production and revenues for VSE will continue to grow strongly towards the 1 billion gallon annual production goal. VeraSun is selling all it produces.
- 4th quarter earnings will obviously be flat. The higher production and revenue will give some economies of scale, but the commodity prices are still unfavorable.
- Gas stations offering VeraSun’s proprietary VE85 fuel grew 85% to 150. I believe more widespread availability of E85 is very important to the long term viability of ethanol as a fuel.
- More states have, and additional ones will, mandate a 10% ethanol blend for regular gas to reduce carbon emissions and petroleum dependence. This could change the supply demand balance for ethanol towards higher prices.
- $3.00 gas with $2.00 ethanol + tax credits makes blending economically attractive to fuel sellers.
An additional item from the quarterly report, VeraSun is developing the technology to extract corn oil as part of their process. Corn oil is forecast to add 15 cent profit to each gallon of ethanol. Two plants are gearing up for this technology to be operational in 2009. 15 cents times 200 million gallons of ethanol equals the $7.5 million additional profit per quarter or another 8-9 cents a share.
Bottom line ethanol is a commodity business and VeraSun needs prices to swing its way. Record corn prices will not stay that way indefinitely and ethanol is the only current way to significantly reduce our dependence on carbon fuels. I think in a few quarters the ratio of ethanol and corn prices will correct and VeraSun with growing production will show profitability to go with the revenues.
VeraSun Energy (VSE: 4.21 -0.25 -5.61%) is a component of this blog’s 20 Stock Portfolio. I do not currently own any VSE.
Filed Under 20 Stocks, Growth, Small CapComments
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