Good news at VeraSun Energy - stock goes down

Tuesday April 1, 2008 

VeraSun Energy (VSE: 4.21 -0.25 -5.61%) had a pair of news releases that I would categorize under good news, or at least neutral, and the stock was beaten up pretty good. First, the merger with U.S. BioEnergy was approved. The press release is here. The dollar value of the merger has definitely fallen, but VeraSun picks up some significant assets.

U.S. Bioenergy had fallen to negative profitability (i.e. losses) by the last quarter results. VeraSun is still generating profits and I expect them to improve the efficiency and assets of the acquired plants.

The other press release is here. This one announces the completion of an ethanol plant in Ohio that brings VeraSun’s annual production capacity over 1 billion gallons. For comparison, VSE shipped 353 million gallons in 2007. The company is still in a strong growth mode as far as production goes.

I also have a few points concerning the ongoing viability of corn ethanol as an alternative fuel. There has been a lot of press lately concerning the value of corn ethanol. In my opinion it is the only significant quantity, U.S. produced, non-oil, vehicle fuel that will be available for several years if not longer. On to my points:

  • Almost all of the cars currently on the road, all built since 1999, are certified to run on ethanol blends of up to 10% (E10). Ethanol is the only current way to significantly reduce petroleum use for vehicles currently on the road.
  • Many cities mandate E10 gasoline to lower carbon monoxide emissions to meet federal clean air standards. Since it was discovered that MTBE loves ground water, ethanol is currently the only gas additive that reduces emissions.
  • Three states have mandated E10 minimum for all gasoline and others are considering similar regulations. In 2007 the California Air Resource Board (CARB) passed regulations that all gas sold in California will be E10 or greater by 2010. California will require at least 1.7 billion gallons of ethanol per year to meet the mandate.

I have written in the past that I believe VeraSun Energy will become a major producer of ethanol on a profitable basis. Their low cost structure allows them to be profitable even when crush spreads are tight and they will make a lot of money if/when the crush spread spreads.

vse-stock-chart.pngNote: I currently do not have a position in VSE.

Filed Under 20 Stocks, Growth, Renewable Energy

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