Money and Investing Thoughts

When VeraSun Energy (VSE: 0.00 N/A N/A) revealed last week they had somehow managed to lock in corn supply prices for the 3rd quarter at near record prices and would incur a $100 million loss for the quarter the stock dropped over 70% in a single day. Until that point I had believed the company management was doing a pretty good job of growing the business and squeezing out profits during a difficult period. With one bad decision they put the company at a risk of bankruptcy.

An attempt to raise cash by selling stock failed when the news of the pending losses hammered the stock. The stock offering was withdrawn and the most recent press release started out with this nugget:

In light of strategic interest expressed by multiple parties during its current equity offering, VeraSun Energy Corporation (“VeraSun”) (NYSE: VSE) has retained Morgan Stanley to act in an advisory capacity to evaluate strategic alternatives.

This has been interpreted as a desire have the company bought out by a deeper pocketed party. My ramblings on Sunday attempted a guess at a buyout value and I want to take another look at that possibility. First, a listing of what VSE has going for it:

• VeraSun owns 14 ethanol plants with a total annual capacity of 1.6 billion gallons. The current cost to construct a 100 million gallon capacity ethanol plant is at least $200 million. 14 times $200 million is a $2.8 billion value on the plants.
• VeraSun generated over $1 billion in revenue in the last quarter with 3 plants yet to come on line. They are able to sell every gallon they can produce and have had to buy 3rd party product to meet customer demand. A guess is that with all plants running the company can generate $6 billion in annual revenue.
• Corn and ethanol commodity prices seem to be locked into a tango where they rise and fall in tandem. This price dance allows ethanol producers a small net profit per gallon. Increasing efficiency and co-product sales offer potential for expanding profits.

I see the negatives for VSE as two-fold: First, the current slim profit margins leave no room for errors such as the company made for the current quarter. Second, public opinion concerning ethanol as a fuel source is ambivalent at best. Government policies drive a certain level of use of ethanol but the product is not really seen as a viable alternative to gasoline.

I do believe that VeraSun could be attractive to the right buyer. VSE has $1.6 billion in long term liabilities and a current market cap of less than $300 million. Paying $2 to $2.5 billion for VSE would be a drop in the bucket for one of the major oil companies attempting to green up its image or maybe a private buyer like $120 billion revenue ag giant Cargill.

At this point I do not believe that VSE has enough cash to cover their losses for the quarter and continue operations. Their options are to either declare bankruptcy, which would wipe out the shareholders, or find a “strategic” partner. I am sure a buyout would be at an excellent premium from the current under $2 share price, but probably a disappointment to stock owners with higher cost bases. From here I would rate the stock as highly speculative.

Note: I have a long position in VSE.

ReviewJournal.com – Business – Speculators come back.

On this site I have been writing about the recent signs of recovery for the Las Vegas and Sacramento real estate markets. These two regions were among the hottest during the real estate run up and hardest hit when the bubble burst. The article linked above from the Las Vegas Review Journal gives a highly anecdotal account of investors coming back into the Vegas market. I think the best way to get a feel of the article is selected quotes:

Many of them are cash buyers, Realtor Robin Camacho of Top10Real EstateValues.com said…..“I’m working with so many buyers, it’s unbelievable,” Camacho said. “It’s been tough getting offers accepted lately, even offers for well over list price. Right now, I’m working with at least seven or eight serious, well-qualified buyers — some strictly cash — at the same time, which is incredible, even in a good market.”

A report from Credit Suisse on the Las Vegas housing market said buyers are back and looking for deals.

Local resident Wendy Reese was able to snag a foreclosure home in northwest Las Vegas….“I had been doing my research and every time I found a home and ran to it, it was like, ‘We have 12 offers.’ Some were cash deals. It’s definitely a buyer’s market.”

Most of the loans that Patrick McNaught sees as president of Greystone Financial Group in Las Vegas are primary residents who’ve been “sitting on the sidelines,” priced out of the housing market and renting in the meantime. They’re buying with Federal Housing Administration financing and 3 percent down, he said.

I repeat, this is primarily anecdotal evidence and prices have not yet stabilized, but it appears that the large number of properties that have been taken from imprudent mortgagees are being sucked up by buyers sensing a bottom of the market. Primary home buyers are starting to come off the sidelines and get into a well priced home with 3% down and FHA mortgages. These will be buyers who have steady jobs, fixed mortgage payments and in for the long term. The investment side comes from buyers who can pay cash or put down a large cash down payment. I would define cash buyers as “smart money” at this point in the cycle just from the fact they have the cash to make these types of investments. Las Vegas especially has a long term appeal to investors with a net inflow of 5,000 to 6,000 new residents per month.

Next up: Have prices bottomed in Sacramento?

Each week I provide a review of the previous week’s performance of the WilderHill New Energy Global Innovation Index, symbol NEX. This information is provided by New Energy Finance. The NEX consists of about 90 stocks from 20 countries in seven sectors and is the bogey for the PowerShares Global Clean Energy Fund (PBD: 9.70 0.00 0.00%). These results are for the week ending on Friday.

For the week the NEX lost 9.5%, similar to the NASDAQ, down 8% and somewhat worse than the S&P 500, off 5.9% and AMEX Oil, down 6.2%. This was the 2nd week in a row the NEX dropped greater than 9% and the index is off 24% since the last positive return week, 4 weeks ago. The NEX’s broad international exposure has hindered the results further as foreign markets have declined even faster than the U.S. stock markets.

All sectors in the index were in negative territory for the week with solar power leading the way falling 12%. Evergreen Solar and JA Solar were punished due to exotic stock lending agreements with Lehman Brothers, leaving the lent shares in some kind of limbo. The best performing sector was the ‘renewable other’ consisting primarily of mini-hydro and geothermal companies. This sector was off 1.6%.

At this point the renewable energy sector, as represented by the NEX, is in free fall and has returned to January 2007 valuations. Although the long term prospects for renewable energy are bright, the sector is definitely out of favor at this time. Here are the winners and loser from the sector for the week:

NEX top gainers since 09 Sept 2008
Canadian Hydro Developers KHD + 12.0%
Ebara 6361 + 6.5%
Plug Power PLUG + 6.0%
Zhejiang Yankon Group 600261 + 4.4%
Meidensha Corp. 6508 + 4.1%

NEX top losers since 09 Sept 2008
Evergreen Solar ESLR - 40.2%
Climate Exchange CLE - 28.2%
JA Solar Holdings JASO - 28.1%
Theolia TEO - 26.1%
Medis Technologies MDTL - 25.0%

VeraSun Caught In The Corn – Forbes.com.

According to the above report from Forbes it appears that VeraSun Energy (VSE: 0.00 N/A N/A) managed to lock in a significant amount of corn contracts at near the peak of the recent corn run up. In the mean time ethanol prices have fallen in lock step with falling corn prices.

So VeraSun got upside down between their feedstock costs and the prices they could get for the end product. Analysts are now forecasting a 44¢ per share loss for the 3rd quarter.

I have considered the VSE management to be pretty sharp in controlling their costs to maintain profitability in difficult conditions. The ethanol crush spread has stayed positive throughout the recent commodity gyrations as long as the feed stock and ethanol were purchased and sold in the same time frame. It appears company management screwed this one up royally. Now they are trying to sell 20 million shares into the market to raise some capital. It may take them some time to recover from this one if they do. My mistake for owning a small position in VSE.

Note: I have a long position in VSE

Ship Finance International Ltd. (SFL: 12.27 0.00 0.00%) has entered into a purchase then lease back of two deep water drill rigs with Seadrill Ltd. The total purchase price of the rigs is $1.7 billion with SFL contributing $300 million and obtaining financing for the $1.4 billion balance. Of the $1.4 billion note, Ship Finance will only be liable for $100 million. The leases to Seadrill will be 15 year bareboat charters.

As a result of this deal, Ship Finance will be increasing the quarterly dividend to 60¢, pushing the yield on the current stock price to over 11%. SFL has paid a steady, growing dividend throughout its 5 year existance.

It is impressive that Ship Finance can put together a deal of this magnitude in the current financial environment. This is a record breaking deal for the maritime industry and SFL has now invested $3.4 billion in offshore equipment. The dividend increase will be the 3rd in 2008, increasing the annual payout by approximately 10% over 2007. The recent market down turn has made strong dividend payers like SFL tremendous values. Ship Finance’s historical yield has been between 7.5% and 8.5%, indicating the stock should be at least $28 once the market becomes rational again. SFL is a component of this site’s Income Portfolio and I will be increasing the position in the portfolio.

Note: I have a long position in SFL.

Press release: Ship Finance International Ltd..