Tuesday, July 10, 2018 1:13:46 PM
Also, great seekingalpha article here:
https://seekingalpha.com/article/4186190-will-california-carbon-credits-help-reverse-slide-pacific-ethanol-shares
Pacific Ethanol is a leading U.S. producer of ethanol.
The share prices of PEIX have seen a sentiment-crushing decline from over $10/share to under $3/share in the last two years.
It is possible that rising LCFS credits will help PEIX beat earnings estimates for the next two quarters.
This idea was discussed in more depth with members of my private investing community, Commodity Conquest.
Background
Pacific Ethanol (PEIX) is one of the leading producers of ethanol in the U.S. The consumption of ethanol is mandated by various U.S. government programs. Over the past several years, PEIX has acquired several large-scale ethanol production facilities, and now has an annual nameplate production capacity of over 600 million gallons. A March 2018 fact sheet on PEIX can be found by clicking this link; this fact sheet outlines some of the demand drivers for ethanol, as well as some of PEIX key initiatives.
Ethanol Gross Margins
The gross margins from ethanol production come from the conversion of a starch (corn or sugar) into ethanol. Ethanol is blended with gasoline at 10% (E10) to as much as 85% (E85) for retail consumption in the U.S.
Ethanol production margins can be seasonal, with dips most often occurring in Q1. Margins for 2018 Q2 – on average – are higher than they were for Q1 for U.S. production.
Renewable Fuel Standard
The RFS is the law which requires petroleum companies to blend biodiesel and ethanol with their diesel and gasoline. The RFS has seen some recent changes, and the modifications have put downward price pressure on RIN prices. This affects the biodiesel and petroleum refiners directly, and the ethanol producers indirectly. Most, if not all, of the impacts of the RIN pricing are shown in the ethanol margin graph above. Therefore, while the tone of the current RFS discussion might be considered as negative for ethanol producers, ethanol production margins have not broken to a new, lower range.
PEIX Slides To New Lows
Over the last two years, PEIX has experienced an investor sentiment-crushing fall from near $11/share to recent 3-year lows of $2.30/share. PEIX has not had positive trailing full-year earnings since 2014. Following a multi-year acquisition growth plan, PEIX finds itself with significant levels of debt.
Lack of profitability combined with meaningful debt service have contributed to the decline in share price. Here is a 3-year weekly chart with regression trend lines and the 50-week moving average.
Source: TradingView
PEIX began as a west coast operation, but over the past few years has acquired several facilities in the Midwest. Some of its plants are older and less efficient than other producers. Its west coast facilities lack economies of scale and have higher delivered costs of corn than a typical Midwest ethanol plant. On the other hand, PEIX’s west coast facilities benefit from additional renewable energy credits and the value these credits have been rising for about a year.
Rising LCFS Values
The values of Low Carbon Fuel Standard (“LCFS”) credits have increased substantially in the California market, and this should help improve average PEIX production margins.
Source: Viking Analytics
Earnings Forecast
As a result of generally higher ethanol margins for Q2 and rising values of LCFS credits, we have currently forecast that PEIX will beat analyst expectations for Q2 and Q3 earnings. With improved profitability, PEIX will also see improving debt coverage ratios.
The total fleet value of PEIX facilities is currently under $0.50/gal of production capacity, which is substantially less than the replacement value. As a result, one might view PEIX to be fundamentally under-valued.
PEIX often under-performs analyst and investor expectations, so investors may want to be cautious with any long positions. Nevertheless, we believe that the risk-reward supports the consideration of long position ahead of the next earnings release.
Commodity Conquest
In my Commodity Conquest service, I publish a daily commodity report for gold, crude oil, natural gas, and agriculture. I also do in-depth coverage of eight energy firms.
My verifiable trading record from on all completed trades through July 5th has included a win rate of over 65% with an average annualized return of 79%.
Disclaimer
This article was written for information purposes and is not a recommendation to buy or sell any securities. I never intend to give personal financial advice in any of my articles. All my articles are subject to the disclaimer found here.
Disclosure: I am/we are long PEIX.
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