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R59,
The reason gross margins were lower was that the West Coast premium averaged about 60-70 cents a gallon on ethanol sold in Q1. In Q2 it was around 25 cents, yet the premium on shipping was unchanged.
What I am trying to say Rule is that the LA Hub is the benchmark price for almost all of the ethanol sales out West. Those rack prices include other factors that may or may not translate into producer revenue.
It really doesn't matter that those plants are distant to LA. They sell based on an index price and that information is available in the Kinergy marketing material and is how almost all commodities distribution works, take or pay. LA + Basis... or CBOT + Basis. I can almost guarantee you that they are not using small regional depots that are illiquid to create sales contracts. It is the equivalent of using wal-mart prices for corn. As a proxy on a relative basis, I guess it is ok but using it to determine farmers gross margin is almost useless.
When in Q1 they said they have "pre-sold" Madera's production for the year. It means they have entered into indexed purchased agreements for the production going out a year. It is how they structure their corn purchases, and their ethanol. I work in the pipeline industry and it is very similar to how smaller oil companies buy/sell oil. They will look at an reference price at the time of delivery and that is what they will get paid. LA is an order of magnitude less liquid than Chicago. Those other regional terminals probably only go through a couple million gallons a year and to be viable they would need
51% for 3 customers means nothing. The other players are all major oil companies. Just in California there are 17 refineries, owned by 12 companies, representing a capacity of 2 million barrels a day. That represents an ethanol demand of over 3 billion gallons a year for blending. Putting that into perspective, I don't think those players, which are all $10-20B+ companies are going to be overpaying by a buck a gallon for ethanol, they would just buy RINs.
I am not saying rack prices are a wasted endeavour, just that they are not useful for predicting ethanol crush spreads and earnings. If you look at the 10Qs for all the major refineries they provide details on their purchasing. The other states Kinergy operates in all have lots of refining capacity. The only people buying small trucks of ethanol are small industrial users. If you look back at historical charts for rack prices, they are above gasoline for most of history, which is just not the case for ethanol futures. It is high because their was no retail market for ethanol and the product was expensive to hold for very little volume.
Kel,
In each of their 10Q they give warning to the risks faced by Kinergy and do indeed give some indications that Kinergy suffers losses in a lower trending market. Market action in March will likely have wiped any Kinergy profitability for the rest of the quarter. Previous periods with similar volatility show a loss for the operation on the order of $0.5-1M. The swings were much higher than they would have possible hedged for...
Rule,
A daily Ethanol report is published from all the major hubs by progressive fuels. www.progressivefuelslimited.com/Web_Data/pfldaily.pdf
I have mentioned it before but not provided a direct link.
Pacific Ethanol's major customers are integrated oil companies and I think their single largest customer is Chevron which has several large refineries in the west. They may sell at rack through Kinergy, but not to people blending major quantities. At several calls now they have mentioned LA hub prices now with references to their reveneue. Their last 5-6 quarters have tracked an average of 70% LA prices, and the 30% CBOT; probably reflecting that some of their eastern most plants do not receive LA pricing.
The USDA publishes a weekly grain report here:
http://www.ams.usda.gov/mnreports/lswcagrain.pdf
And the prices listed for Stockton have pretty much nailed the PEIX delivered corn price since I have tracked.
Rule where are you getting those prices?
Those look like Rack prices and not terminal prices. Rack price is not what PEIX gets paid. Rack prices are the prices that major refineries sell their products to market at. PEIX sells their ethanol at terminal spot prices mainly indexed to LA and chicago + basis to the major refineries for blending. The rack prices have fuel taxes, other costs and commissions baked in.
The price in the Los Angeles Terminal was 2.79 Bid and 2.82 Ask.
There is nowhere in the country right now what is receiving a producer price over $3.
The 4 major terminals in the country for Ethanol index prices are:
New York Harbor Barge - 2.43B/2.46A
Argo ITT - 2.415B/2.43A
Gulf Coast - 2.50B/2.52A
NorCal - 2.79B/2.82A
The premium for California Ethanol has been on a tear in the last week or so. The premium for delivered corn is $1.69 which is higher than Q1, but CBOT corn has come down quite drastically...so West Coast Crush spreads are very very healthy at $1.30 a gallon.
Right now I am looking for somewhere around $0.85 for non-gaap adjusted earnings for Q2. Premiums have come back up a bit to healthy levels (30 cents) over the last couple weeks and Pacific Crush spreads are at about a $1/gallon and natural gas has settled down. Big wild card as everyone on the board knowns is the Warrant adjustment which we can calculate at the end of June.
REX trades at a PE of 8 or so off of recent quarters earnings. If PEIX can get a PE of 6 off of non-GAAP earnings(they are smaller, our analysts are terrible, and management hasn't really been shareholder friendly)... we are in the low $20's.
GPRE is really starting to look like a steal. The futures curve has flattened out significantly from where it was over the last 2 quarters so the hurt from hedging will be minimal this quarter 10 cents/gallon versus over a dollar in Q1. They have a capacity of 1B gallons and trade at a similar $/gal capacity as PEIX. The volatility is also much less so an options play is cheaper. May diversify my ethanol holdings a bit here. Both seem to have comparable upside. PEIX has the bonus of premium exploding on train issues.
Zoom,
Like others have said, read up. I would suggest you look into long ratio call spreads. They are real cheap to setup, you are protected on the way down, unlimited upside and only have an issue if the stock doesn't move. Which with PEIX is never an issue. Use more realistic strike prices though. $40 is a pipe dream. That's $800M+ market cap or $4+/gal capacity.
ID,
Some comments.
The sign on the warrant adjustment is backwards. We are looking at a $15-16M increase in GAAP earnings if the prices stay at the level they are right now on June 30, not a charge against earnings. The intrinsic value has gone down significantly since earnings, but delta on the warrants is lower now so further declines will not really be as accretive to earnings. Also the provision from income tax comes from warrants are not a tax deductable expense, so even though they had a loss last quarter they had to provision taxes on the "real" earnings they had. For Q2 that should be a number should be lower, somewhere around $2.4M
Second, income from operations at $33.8M is much too high in the current ethanol market. $18-22M is more likely to be the range if CBOT ethanol stays in the $2.10 range and Corn is $5+ w/ West coast premiums of $0.30 cents and corn premiums of $1.15 per bushel.
SG&A is also a bit too high. They guided that the value going forward would be in the $3.5M range.
Otherwise looks not too shabby. Good stuff.
Rule_62,
Thanks for all the work you have been doing with respect to warrants.
When looking at Crush spreads, you need to use the pricing out of Los Angeles. The crush spreads have been moving much more aggressively on both coasts as the large $1+ premiums in NY and LA have completely wound down. For the entire month of March, the ethanol premium PEIX was receiving was adding $2.85 to their crush spread on top of what Mid-West Producers were receiving.
This has collapsed in recent weeks, hitting a low of $0.10 last week. Which would add about $0.27 to their crush spread. Which you can clearly see is a very material difference versus Iowa.
On the downside to the west coast position, there is the higher effective feedstock cost. PEIX was paying a basis of $1.3 for delivery and premium per bushel. That has not changed at all and is closer to $1.35 as of last week over CBOT.
So in March PEIX was net positive on the ethanol premium-corn premium by a stupid large margin, enjoying enormous windfall profits. And in April they were taking it in the teeth. I was getting very worried last week about their gross margins as it was approaching $0.12/gallon, which would seriously impact earnings negatively and not support the current stock price. That was an over reaction to the ethanol report 2 weeks ago and have since come back to healthy levels supporting a stock price much higher than what we have today. I am pretty happy with the model I had made for PEIX. For EBITDA it was within $2M (adjusted for ownership % and Kinergy earnings), and I had disregarded the cash charge but estimated it in an with Gecko Research at $35 using Black Sholes. This quarter if things remain stable in the West Coast at today's levels they are looking at over $0.70 of EPS, and about $1 of gross operating earnings, neglecting any impact from warrants. Those can be priced in at the end of June to a pretty good degree of certainty and also Kinergy will likely swing to a loss or best case break even this quarter.
Progressive Fuels publishes a daily updates on the biofuels sector everyday after the market close. I have been tracking LCFS premiums, RINs, and West Coast pricing data for the last 6 months or so. Based on the last two quarters, I am noticing about 3/4 of their in-house production receives the West Coast pricing and with Madera opening it will rise to I am estimating 4/5.
It is in the range of 1.5-2.5 cents per gallon. As it is a percentage with minimum and caps. Those are the caps.
They lose money on the business in times of steadily decreasing ethanol prices and get windfall gains in an increasing quarter. In average they earn about $1 million a quarter from this business. The swings in-profitability is they cannot eliminate complete exposure from price as they are selling spot and have a few days of exposure for each transaction. This is detailed in their annual report if you need more information.
Pretty sure they are recorded as a charge between the last adjustment value and intrinsic value at the time of exercise.
Or PEIX could buy the warrants off them... and tear them up. I like where you are going with this though.
...I couldn't help but smile at that.
heber,
That is the exact opposite logic of what I think will happen. In the case where you feel the stock price will decline or overextended you exercise and cash out. Right now with the market fundamentals, exercising sooner than you have to is a waste of time premium and also a waste of cash. Your delta remains the same but you need to put down the cash or sell the position immediately. Q1 had a number of warrants expiring hence the exercising. The remaining options have some time left to go on them. I have options for the firm I work for that are deep ITM and have 7 years left... why would I exercise them... only if I felt that the prospects for the company were negative.
Thanks Bob. What I meant is that the profitability of the firm is not being impaired (aka ability to invest in operations) or any other use of company funds. I wrote above that it is a real shareholder expense in that the losses are directly taken by shareholders in the form of lower PPS/EPS via dilution... in a VERY real way... just not the firms cash flow statement. GLTA.
If they mean what they historically have done with internal production is they have entered into indexed contracts to sell that production. It will be indexed to the CBOT futures price + premium & Basis at the month of delivery.
Even if they did fully hedge by locking into futures contracts at the end of Q1, the prices for anything after June is essentially the same as in March due to the STEEP STEEP backwardation in the futures market at that time. The curve has flattened significantly, with the front month coming down to the longer dated contracts.
In short, locking in would not have received higher prices for the full year... only for April/May delivery... but at the expense of any major move back up on the backs of China implementing any fuel standard or the drought in Brazil.
I think what he is trying to point out is that for FY EPS for 2014 you cannot use the Dec 1 or the March 31st numbers because of the expected dilution. You need to use estimates for Dec 31 2014 to calculate a reasonably accurate EPS and P/E ratio based price for the stock...
Stockrosen, the money does not have to be paid back. It is not a real expense to the corporation but is a real cost to the shareholders as it represents the amount of wealth transferred from common shareholders to warrant holders in excesses of the exercise price. Represents the cost of raising money to shareholders with warrant issues. Think of it like an interest expense but without the requirement to payback principle. When the stock rises that increase in enterprise value would have just gone to shareholders but now is diluted with warrants so the stock goes up less in pps. Hopefully that makes sense. Again this has nothing to do with the current profitability of the firm or its future cash flow, just an accounting entry like depreciation.
I am not kel but the adjustment is purely an accounting adjustment that adjusts for the value of the outstanding warrants. It has occurred in every quarter in the past and will occur until all warrants are exercised. It will be positive to earnings when the stock decreases and negative to earnings when the stock increases. You will probably not want to own the stock when it helps earnings though.
The problem that I was trying to bring up before is that what gets reported on every stock screener in the financial world isn't $1+, is a loss of $0.69 and the corresponding P/E of NA.
The big boys don't buy in afterhours because there isn't the volume available. Hammering a stock for taking a non-cash charge for appreciating in value ... doesn't make sense to anyone with any sense of finacial education. Pleanty of firms will be happy to take the stock at these prices.
FYI the PR written for the Sacremento paper is much more concise...
http://www.sacbee.com/2014/04/30/6367633/pacific-ethanol-reports-higher.html
In their 10-K and in previous PR they mentioned that Kinergy typically is highly profitable in times of higher trending ethanol prices and typically loses money in downward trending markets. Q1 should be a blowout quarter for Kinergy.
Market makers will create the contracts if you get filled.
Dutch, there is a blend limit to how much sugar they can add without compromising their ability to generate co-products (WDG and Corn oil). While corn prices have gone up over the last few months, co-product prices have gone up more than corn mitigating some of the higher costs.
I would suspect that PEIX blended sugar opportunistically during Q1 to protect against logistics delays from midwest corn. With the current El Nino year causing turmoil in some markets like Coffee and sugar, many predict sugar prices will go higher. Causing the surplus supply in the US to get drawn down, potentially putting a damper on future sugar auctions.
It is in PEIX's best interest to provide a stable blend of sugar in their process for quality of their co-products as well as so investors don't discount it as a one time event. Juicing one quarters earnings with a limited inventory of sugar will just get ignored as a one-time event and not part of continuing operations.
Agreed. They must be hedged out super long. With the crazy steep futures curve they probably left 3/4 of their profit on the table.
Good work. I am sure the underwriters of the previous offering will be all over them as well. This is great news.
Plot market cap... Share price isn't a fair comparison. PEIX has grown shares outstanding by well over 100% in the last year...
Rule 62, I am not sure I agree that Q2 is a non issue. Guidance is key here. West coast premiums have absolutely collapsed over the last 4 weeks, going down 18 cents on Friday alone. Sure Iowa crush spreads are higher than Q4 but norcal spreads are lower. Q4 premium averaged 50 cents We are sitting at 35 cents right now and falling. That is about a 40 cent reduction per gallon margins, and corn basis costs are still high. With madera and increased ownership they can probably offset the earnings impact of dilution, which still makes this a $20+ stock. I really hope they make a clear announcement with adjusted non-gaap earnings. The gaap ones will be absolutely terrible due to the warrant adjustment.
Huge sell limit order at $15.38 80K shares. Hopefully it's not like this the whole way up.
edit: and the order was filled up and onward.
Yeah agree completely. Acquisitions at cyclical peaks typically end in goodwill asset write-downs for shareholders.
Just ask miners who made acquisitions in the last business cycle.
Their profitability is based on margin, not leverage, liquidity ratios and other balance sheet strength metrics are what will improve. Making non-accretive offerings is not the way to earn shareholder trust. Especially in an cash-flow environment we are in now and with the expected warrant cashflow they will have too much cash (Starting to build cash balance) without the offering as of this current quarter. They will need to create a dividend or go on an acquisition spreelater in the year as holding $60-100M in cash for a company this size is unacceptable. No matter how you spin it you will not find anyone with a financial education that backs the move at this time. The only possible reason was this was planned long ago (before good margins) and the penalty to the underwriters was too high to back out. With the underwriting costs and the warrant anti-dilution clause, this raise was incredibly expensive to common shareholders. It done now though...time to move on.
It is stated right in the form 4. This is an automatic sale to cover withholding taxes due.
The latest PR looks even more ridiculous. $26M capital raise and they spend most of the time talking about the benefits of reporting $500K in unsecured debt.
Then borrow it in debt.
Doing a stock offering is the most expensive form of a capital raise and especially this one "general corporate and debt payment" is not accretive to earnings no matter how you spin it. The recently released documents paint a picture that the creditors want to end their relations ship by not extending the credit and rewording existing facilities to remove wording allowing for increases in the facilities in $1M increments.
The only logical non-dilutive use would be for ownership repurchase, but that could have been announced at the time of the raise. If that was the case the stock would no be where it is. PR would do miracles here. The SP is where it is, because investors want to believe that the company is stable, cash flow positive and these systematic dilution events are behind it.
IMO Kel, I think the sequence of events would be based on IRR on the investment. Unless their are significant costs associated with this last 9%, it should be acquire 100% ownership, invest in yield enhancing technology to increase stability of earnings (Corn oil is a <1.5 Yr payback), then look at empire building. You are right though on the price, the Keyes plant would sell for close to $2.5/gallon capacity.
Yeah that's why I mean, the effect on trading action could be minimal if the shares were already shorted, and this block trade covers the action. It would mean that additional selling volume is past us.
On the same note, the Nasdaq is getting steam rolled today, good to see PEIX isn't on it's own under selling pressure. Momo's are driving this train.
Why do they need to cover? The stock action of the last few weeks where large block trades would just be dumped on the market with impunity could mean they have already shorted the stock in the $17 range where large volume of transactions already occurred. If they knew they would were going to underwrite the offering they could now just keep the shares bought off PEIX to cover. Seems fairly smart Short at $17ish into strength and cover in a 1.75M share block trade for $15.04
I never really accounted for non cash charges on warrant execution. I accounted the dilution just not the income statement charge. Real investors should only care about EBITDA and long term earnings potential. My cash flow projections and debt payoff were fairly close. I just think the optics of the gaap eps with.the fair value charges will have more of an impact than they should.
Hopefully they announce earnings adjusted for one time costs. That number will be over $1
Yes the absolute price is higher than it was a few weeks ago but the margin price has changed drastically.
The premium on the coast has averaged about $1 a gallon this quarter and has contracted to 75 cents a gallon in the last day or so. Once imports arrive and rail cars move this will get obliterated. That is why the NY barge price was limit down two days in a row.
Corn is also materially higher. Corn and Ethanol moved up in tandem for most of the quarter supporting strong fundamentals. As stockholders we only care about EPS and if earnings margins go back to Q4 earnings the stock can't sustain these levels ($0.34 EPS with fully diluted sharecount)
Yeah I don't really understand the lack of reaction to the margins.
The large spike in ethanol really set things up for a shock in the supply chain. Imports are reversing the coast pricing model for now and putting pressure on that premium we Love/Need.
The underwriters have an absolute obligation right now to support the stock until the 8th, either that or they have issued a private placement as a block trade to clients in advance.
Between that affecting guidance, the large loss on fair value to warrants on the income statement (easily $10-15M) and this dilution (Madera opening is going to be just offsetting dilution from offering and warrants)... the EPS headline is going to be far worse than we expect but somewhat better than the street expects if they can overlook the fair value adjustment and look into the numbers. I just hope the market is smart enough to look at the FCF this operation is pulling off and not just the GAAP earnings that pop on the stock screener. I am seeing EBITDA of around $27M for Q1 and income to common of around $10M so a fully diluted $0.45 EPS.
If ethanol stays above $2, and corn at around $5 we should be able to pull off $4 of FCF.
FYI just for people who don't understand why some are so against issuing warrants and the offering, it is that it is a shareholder value incinerator. That is why they record fair value adjustments as a loss when the stock price goes up. For example: Lets that there is a company that has one shareholder with one share valued at $15. There is an outstanding warrant with a strike of $7.50. It gets exercised and the company gets $7.50 cash. So the value of the company grows to $22.50 but each persons share is now only $11.25. The money comes at a great expense to shareholders, it may sound good to see cash injections into the company.
Yeah but also look at PEIX share price. The stock is definitely correlated.
The funny thing is that this afternoons session is the most stable I have seen peix stock price since earnings.
Great post rule_62.
This equity raise has so many unintended consequences. I am very very surprised they didn't give a better explanation for raising $30m.