by Tom Konrad

Celluslosic Ethanol is all the rage.  A less noticed, but significant "Biofuel 2.0" is biofuel based on algae.

Follow the Biomass

As I have consistently argued (see these recent articles on John Deere, Biogas, Cellulosic Ethanol vs Biomass Electricity, and Renewable or Green Diesel)  the people most likely to make money from biofuel are not the processors and distributors (who compete directly with petroleum or other fossil fuel-based products, and so have little pricing power), but the producers of feedstock, which, like oil, is in very limited supply, and so they will have pricing power.

When it comes to converting sunlight into biomass, algae is the most productive type of plant.  According to this chart from Five Star Consultants , Biodiesel from algae has the potential to produce enough fuel to drive a Prius-type car 370,000 miles per acre per year (MAY), compared to 2,000 to 31,000 MAY for conventional biodiesel crops, while ethanol from switchgrass could produce 32,500 MAY.  Furthermore, some strains of algae are as much as 40% oil by weight, leading to the hope of a large supply of oil which is much easier to convert into biodiesel than it is to ferment even corn (let alone cellulosic biomass) into ethanol.

With an order-of magnitude advantage, it would seem that algae is the green wave of the future, and actually so productive that it could produce enough biomass feedstock for us to continue to drive our SUVs with our current reckless abandon. 

Theoretically, biodiesel produced from algae appears to be the only feasible solution today for replacing petro-diesel completely... In practice however, biodiesel has not yet been produced on a wide scale from algae, though large scale algae cultivation and biodiesel production appear likely in the near future (4-5 years). - Oilgae.com.

Ponds or Reactors?

There are two basic approaches to growing algae: open pond and closed reactor.  The open pond method, which is what Petrosun Drilling (OTC:PSUD) recently announced they are pursuing, involves growing the algae in open ponds of water, much like it grows in nature.  Open ponds are clearly quite cheap, but they require a reliable supply of water to replenish that lost from evaporation (making them impractical in all but the wettest parts of the country (Petrosun's first farm will be on the Texas coast, and use saltwater, which helps with this problem.)  The lack of temperature and weather control can further decrease yields from the theoretical potential.

The other problem with open ponds is that it is impossible to keep other types of algae (a.k.a. weeds) out, meaning that high percentages of oil in the final crop will be impossible to attain. This means that biofuel produced from pond algae will require much more extensive processing to be turned into fuel.  It's easy to grow pond scum, but turning it into something useful is harder.

The other option is the algae bioreactor, one type of which (from Solix biofuels) was referenced in the chart above.  The Solix technology uses closed plastic bags agitated by rollers, has climate control with the use of controlled radiative cooling, and uses concentrated carbon dioxide emissions to enhance algal growth.  (The best description of the technology is at Algae @ Work, a company which was started by Solix's former CTO seeking to apply the technology to carbon capture.)  

To me the bioreactor approach (Solix's technology is only one version) seems most likely to achieve the promise of extremely high yields, and even that is not without problems.  Large scale bioreactors are complex systems.  As such, they will be expensive and take great efforts to move from the lab to commercial scale.

Ken Regelson, the author of the chart above, and he believes that Solix does not have "a prayer of achieving their expected yields per acre" but that he used the number from Solix because he has yet to get authoritative numbers from anyone else.  

What about Petrosun?

I wrote this article because readers wanted to know about Petrosun Drilling (OTC:PSUD), an oil exploration company that has been promoting their algae biodiesel efforts since September.  Other than Petrosun, the only public companies I know of which are seriously looking into algae based biodiesel are large conglomerates: Boeing (BA), Chevron (CVX), Royal Dutch Shell (RDS-A) and Honeywell (HON), which can take the long view and have large research budgets to finance their efforts for as long as it takes.  If you click through the company names to the news stories, you will note the common theme: These are all research stage projects.  

Petrosun has not filed even an unaudited quarterly report since March 2007.  Given that it is also promoting exciting technology, I detect the whiff of snake oil salesmen.  Although readers are clearly interested in this company, until they begin to file current information, I don't consider it worth my time to investigate further.  Petrosun's main product is much more likely to be snake oil than algae oil.

Even if Petrosun does execute on its algae farms, will there be any first mover advantage?  It seems unlikely to me; growing algae in open saltwater ponds will depend on access to suitable land near coastlines... later entrants who can acquire suitable land should be able to produce algae just as efficiently as Petrosun, since they do not seem to have any special technology or expertise.  After all, the company is simply an unsuccessful oil exploration company with a algae farm division.

DISCLOSURE: Tom Konrad and/or his clients have positions in these stocks mentioned here: HON.

DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

Posted by Tom Konrad at 03:06 PM | Permalink | Comments (6) | TrackBacks (0)

The first and last word in any discussion of biofuels should always be "Feedstock."  Feedstock is the "Bio" out of which biofuels will eventually be made, whether it be corn, sugar, jatropha, algae, palm oil, switchgrass, forestry waste, or municipal solid waste.  

Before the era of peak oil, we lived in a world of plenty, which meant that we could squander energy, not only by driving Hummers, but by feeding energy intensive products such as corn crops to livestock, and by dumping "free" sources of energy such as garden waste and used cooking oil into landfills.

The era of cheap energy is over.  The signs are all around, and even peak oil deniers point to expensive-to-extract reserves such as deep water drilling, Canadian tar sands, and even Colorado's Oil Shale.   These sources of oil are not only more expensive to extract, they are are also more carbon-intensive, meaning that regulation of greenhouse gas emissions will raise their price further.

Commodity Squeezes

In terms of biofuels, I've long argued that there is simply not enough feedstock available, and that even if there were enough feedstock to replace all the oil products we use today, there are many other potential uses which will compete for the output of scarce land and water, such as a replacement for coal in electrical generation, and fodder for livestock.  Biodiesel producers may find that the best quality oil is bought up by refineries to make green diesel instead.  In fact, it seems that almost any form of biomass can be converted to Bio-crude and processed in a conventional refinery.  We'll even have to decide if municipal waste should be recycled, burned for electricity, or turned into cellulosic ethanol.

I'm unconvinced that anyone knows exactly how the limited feedstocks we have available will be used, or what process will be most efficient in converting them into their final form.  This makes it difficult to find a biofuel investment that I can be confident will succeed.  One biofuel technology after another has been caught by a commodity squeeze, first corn ethanol and now biodiesel makers.  Polyannaish investors expecting limitless supplies of feedstock for cellulosic ethanol should take note.  Higher commodity prices do not always lead to more supply.  Sometimes higher prices lead to lower demand, and the next boom could easily become the next bust.

The Sure Winner

The only sure winners from limited and increasingly valuable biomass will be the people who produce it: farmers, foresters, and (perhaps) trash haulers and recyclers.  What do farmers do when they have spare cash?  They buy farm equipment, quite often from Deere & Co. (NYSE:DE)  Few stock have ridden the biofuel boom as well as Deere, with the stock rising 400% in the last four years in a nearly uninterrupted uptrend, without the thrills and spills that have turned so many investors off of corn ethanol.  

The beauty of Deere as a biofuel investment is that there is no need to know what the biomass will be used for, or what form it will come in.  In nearly every scenario I can envision, Deere is likely to be a major supplier to the industry which grows it.  From algae to Jatropha, if Deere does not yet sell equipment to plant, tend, and harvest it, it seems a good bet that they will design one.  This technology agnosticism, combined with their wide dealer network in agricultural areas, makes the company seem to me the safest way to bet on biofuels as a trend.

Deere's close relationship with farmers also gives them an opportunity to profit from another up-and-coming crop: Wind.

Even with a 9-year run up, the stock currently trades at a trailing P/E of 22, and despite its construction arm, has not yet been hit hard by the turbulence in the housing market.  Since I expect the housing situation to only get worse over the coming months, a sharp decline in construction income or a continued broad market decline may be just what prospective investors need to pick up this solid biofuel play on the cheap.

Click here for other articles in this series.

DISCLOSURE: Tom Konrad and/or his clients have long positions in DE.

DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

Posted by Tom Konrad at 10:46 PM | Permalink | Comments (1) | TrackBacks (0)

In August, I argued that Biodiesel stocks could be in trouble from more efficient ways to turn the oils and fats they use as feedstock into fuel, and concluded the article by saying that the likely winners are suppliers of oils and fats, not the processors.  James Kingsdale, of Energy Investment Strategies has been thinking along the same lines.  Last week he wrote an excellent overview of the major biofuels industries, including some stock picks.  

One of those stock picks was the diamond in the rough I wish I had known about when I wrote Biodiesel's Nightmare: Renewable Diesel back in August. James writes:

 Darling International, Inc. (NYSE: DAR) ... is a renderer and a collector of waste greases. Renderers collect waste fat and bones from meat producers and turn them into products. Both waste greases and animal fats are potential high FFA biodiesel feedstocks, although Darling presently is not using them for that purpose...

While biodiesel from palm oil is causing deforestation, and the prices of vegetable oils rise because farmers are changing their crop rotations to produce more corn for ethanol, biodiesel (or renewable/green diesel) from waste vegetable oil has a positive environmental impact because it diverts something that would otherwise have to be disposed of to a useful purpose.  

Biodiesel from waste vegetable oil is the greenest biofuel available.  As a member of the Denver Biodiesel Coop, I use it in my car... now I can use it in my portfolio as well.

DISCLOSURE: Tom Konrad  and/or his clients do not have positions in any of the companies mentioned here.

DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

Posted by Tom Konrad at 10:29 PM | Permalink | Comments (0) | TrackBacks (0)

In the most recent two installments of Energy Tech Stocks' interview with me cover my views on transmission stocks, and biofuel stocks.  Readers of AltEnergyStocks know that I am a big fan of electricity transmission, a theme I keep coming back to.  You also know that I have a very ambivalent relationship with both ethanol and biodiesel.  So I liked Bill's transmission article, but I just wasn't able to convey to him the subtleties of how I feel about biofuels.  But he got one thing right: the owners of biofuel feedstock are likely going to be the biggest winners.

Relevant articles on Biofuels

Competition in Ethanol

An Insider's View of the Ethanol Industry

Let Them Eat Grass

Blue Sun Biodiesel

Biodiesel's Competition

My Biodiesel Jeep

The Answer is Trading in the Wind

While you're on the Energy Tech Stocks site, read a little about trading of wind power futures (here and here.nbsp; While I personally have no interest in speculating in wind futures, I predict this will be a great boon to wind farm owners and climate scientists everywhere.  I also predict hedge funds which will use strategies based on emerging inverse correlations between wind power futures and natural gas futures, probably sooner than anyone might guess. 

DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

Posted by Tom Konrad at 02:17 AM | Permalink | Comments (0) | TrackBacks (0)

Until algae farms move from the research and demonstration stage, biodiesel usage is going to be tightly constrained by available feedstock.  The feedstocks for biodiesel are oils and fats, which naturally occur in quantity only in animals or the seeds of plants.  As such, the quantity of oil available is much smaller than the sugars, starches, and cellulose which occur not only in the seeds and fruits of plants, but also in the stems and leaves, and can be used to make ethanol.  Because sugarcane contains the best ethanol feedstock, sugar in the stem (not just the fruit) of the plant, Brazilian ethanol can compete effectively with gasoline without subsidies.

From Trash to Cash

Biodiesel can also compete with diesel on the basis of price, in large part because it is much simpler to convert oils and fats into biodiesel than it is to convert sugar into ethanol, and the oils commonly used for biodiesel today were essentially treated as low-value byproducts (e.g. soybean oil) or zero-value waste products (e.g used cooking oil) of food production.  When petro-diesel cost $1 a gallon, biodiesel was limited homebrew in the garages of a few hippie types, but now that it is around $3 a gallon, turning low value oils and fats into high value fuel can be big business.

US Biodiesel Consumption.

Source: National Biodiesel Board.

How big could the biodiesel business get?  With US production of soybeans at about 3 billion bushels, if the entire soybean crop were converted into biodiesel at 1.4 gallons per bushel, we would have about 4.2 billion gallons of biodiesel, or around 6.5% diesel fuel consumption in the US.   There are many other potential feedstocks for biodiesel, but soy oil accounts for most of US oil production, so we can safely say that domestic biodiesel production will not exceed 10% of domestic consumption without some new source of feedstock.  In fact, potential biodiesel supply is falling, since farmers are changing their crop rotation to include less soy and more corn for ethanol.  All told, the potential demand for biodiesel far exceeds the potential supply, which will be limited by the supply of potential feedstocks, instead.

Currently biodiesel supply is limited by production capacity, but in the long term, as more production facilities are built, supply will be limited by available feedstock.  At this point, commodity arbitrage will set the price of biodiesel close to its main substitute, petro-diesel, and the price of commodity oils will follow along for the ride, but low enough to allow biodiesel producers to earn a return on investment.

New Kid on the Block

The above analysis assumes that biodiesel production is the best way to take vegetable oils and fats, and make them into transport fuel.  This may not, in fact, be the case.  Last spring, ConocoPhillips (NYSE:COP) announced a deal with Tyson Foods (NYSE:TSN) to use fat from Tyson's rendering plants to make "renewable diesel" fuel in COP's refineries.  The key point here is that COP is making what they call "renewable diesel" not conventional biodiesel.  They developed their renewable diesel process using soy oil in Ireland, using their existing oil refinery there.  

I first heard of this process last October at an NREL presentation (they called it "Green diesel" and could not identify COP as the oil company they were dealing with,) but details remain sketchy.  The fact that they refer to the process as a "proprietary thermal depolymerization production technology" and the fact that they are using existing refinery infrastructure should cause alarm to biodiesel firms and investors.   

Why should this cause alarm?  Because COP claims its "renewable diesel" is chemically equivalent to conventional diesel.  If this is true, it's quite possible that it has a lower cloud point than biodiesel, and so could be used at a broader range of temperatures.  In addition, since COP is using conventional refining equipment, they may also be achieving higher energy yields.

According to NREL's Overview of Petroleum and Biodiesel Lifecycles, Biodiesel conversion requires 80 kJ of energy for every 1000 kJ of energy in the biodiesel, while petro-diesel requires only 64 kJ to produce an equivalent amount of fuel.  While the difference in energy costs is fairly minor, transportation fuel is a commodity business, and COP's ability to use the existing pipeline infrastructure into which their refinery is already integrated, as well as its ability to avoid the large capital expenditures required to build a biodiesel refinery from scratch are likely to give them a large cost advantage over biodiesel producers in this thin margin business.

With the exception of small biodiesel producers using local and distributed biodiesel feedstocks such as waste vegetable oil from restaurants, I expect that petroleum refineries will end up having an economic advantage making renewable diesel in comparison to conventional biodiesel producers.  This means that commodity oils and fats available in large enough quantities to interest refineries will be bid up in price to a point where less efficient biodiesel producers will be unable to operate profitably.

All of this may happen remarkably quickly as well.  ConocoPhillips and Tyson say that their deal could ramp up to 175 million gallons by 2009, or about 10% of United States 2006 biodiesel production.  How soon will refineries be competing directly with biodiesel producers for soy and other vegetable oils?

While we can only speculate about the relative economics of renewable diesel and biodiesel, having a new competitor cannot be good for the biodiesel industry.  Biodiesel producers might be sustained by federal biodiesel tax credits, but depending on government subsidies is not a sustainable business model, especially when you are competing with an industry with a long track record of successful lobbying.

The likely winners I see are the suppliers of feedstock.  When the deal was announced, a Tyson spokesman said he expected the deal to increase annual earnings by between $.04 and $.16 per share.

DISCLOSURE: Tom Konrad  and/or his clients do not have positions in any of the companies mentioned here.

DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

Posted by Tom Konrad at 05:55 PM | Permalink | Comments (7) | TrackBacks (0)

It's no secret that money is flooding into the alternative energy sector, but not all of this money comes from sophisticated, investors. Unsophisticated investment is a lighting rod for the scam artists. Because there is both an urgent need to deal with the the problems posed by global warming, energy security, and resource depletion, and the new money is rapidly accelerating the advance of technology in renewable energy, new innovations are very plausible.

There are many ways to lose money in alternative energy, even without being taken by a scam. The current emotional climate in the industry makes even the most solid companies' shares gyrate wildly. Even mildly profitable, relatively unexciting picks like LED-maker CREE go on wild rides from $35 in April 06 to $15.25 at the start of February this year, only to shoot back up to over $25 today. A speculative technology startup such as Beacon Power Corp. (NASDAQ:BCON) , on the other hand, is likely to be even more volatile, having dropped almost 80% in a little over a year, and now looking as if it is headed into an upswing (as our own Charles Morand hopes.)

With all the risk already inherent in investing in a booming (or is it bubbling?) emerging industry, shell companies founded just to raise money from unsophisticated investors are at least one risk we can protect ourselves against. Below are a few basic precautions. I plan to illustrate them and how they apply to U.S. Sustainable Energy Corp. (OTCBB:USSE), a company that recently announced a "revolutionary new process" for creating biofuel from soybeans, which was brought to my attention by a comment on an article I had written on Green Diesel.

1. Stick to the exchanges. With a stock market listing comes regulation and oversight. A stock market listing is not a guarantee that a company is for real, but the extra oversight of the exchange means that if you stick to companies listed on the NYSE, the NASDAQ, and the AMEX, you're very unlikely to be buying into a scam. Even stocks which don't trade on an exchange in the United States often trade on exchanges abroad, but not all exchanges are equal. You're much safer with stocks on the London Stock Exchange than on London's Alternative Investment Market. Another quick screen is to check to see if any legitimate mutual funds or ETFs own the company you are interested in (in fact, for new investors looking to create their own alternative energy portfolios, a good starting point is the holdings of the industry mutual funds and ETFs.)

If you use one of these strategies, essentially trusting the regulator or the investment company (mutual fund) to weed out the scams for you, you don't need to worry much more about scams (unless you've ventured onto some of the wilder and woollier exchanges.) But the cautious approach may preclude investing in a technology that you just have to have in your portfolio. In that case, all is not lost, there are several other ways to sniff out scams. You may end up rejecting a few legitimate companies, but given the risks, why take a chance?

USSE: Traded on the bulletin board, with little or no oversight. Even worse, they got their stock market listing as the result of a reverse merger with a shell company, Laforza Automobiles, which means they also avoided the scrutiny that comes as part of an IPO. Recently, legitimate companies have chosen to use reverse mergers simply to avoid the headache of going public under Sarbanes -Oxley, but it is not a good sign, especially with a Bulletin Board stock.

2. Technology. It may sound obvious, but when picking an investment advisor, an investor will be better served by trying to understand how that advisor manages money,and if she/he is any good, rather than just picking the most likeable person who wants to put them in a "balanced portfolio of mutual funds." Unfortunately, many people do exactly the opposite. This same trap lurks in assessing technology, and scammers know that the typical American has a dismal understanding of basic science. Checking the science with an expert in the field, or even a blog/bulletin board search can go a long way to protect you from hoaxes. Countless startups with sound technology have failed because of bad management, soif there is any doubt about the plausibility of a company's technology, it's just not worth the risk.

USSE: Since their technology sounds somewhat akin to Pyrolysis followed by Fischer-Tropsch conversion, I asked Tom McKinnon, professor at the Colorado School of Mines, because I know he does research on pyrolysis chemistry. He responded:

1. The stated feedstock is corn and/or soy which makes it sound like an oil crop process, but the rest of the text doesn't make any reference to vegetable oils.

2. The three products (char, pyrolysis oil, and gas) are more consistent with a pyrolysis processso why did they mention corn and soy. It would be a waste to use oil crops for pyrolysis when you can use low grade biomass as a pyrolysis feed.

3. The pyrolysis gas is not suitable for FT synthesis without a lot of effort (at least that is my recollection, I haven’t gone back and dug into this.)

4. The high energy content of the fuel indicates that it contains very little, if any, oxygen. Typical pyrolysis oils contain phenols and a whole witches' brew of nasty reactive oxygenates.

5. Pyrolysis oils are generally quite unstable and degrade fairly quickly (time scale of weeks). I don't think anyone in their right mind would put pyrolysis oil into an expensive diesel engine, so maybe these guys have some other process.

It's also interesting to note that their "letter of validation" is from a Ph.D. wildlife ecologist and Biologist with an M.S. from a State University. I guess that all the engineers and chemists had something else to do that day, rather than tour the facilities of a company with a revolutionary new process that will help solve both peak oil and global warming.

3. Management. It's worth looking at management's background. Often shysters wrap up one scam, only to start another. Make sure you get biographical data from sources other than the company's website. You will want to make sure that the board of directors includes outside members with both the ability and motivation to oversee management and make sure that they do not make off with the firm's money.

USSE: Checking the company's management and board of directors , we note that the two lists are almost identical, with the exception of an extra member of the board, David Crow, a former (according to the site) senior vice president of "Pratt and Whitney." As the only person who has any chance of resembling an independent director, I looked him up and found him under the emeritus faculty at the University of Connecticut. He does seem to be an expert on gas turbine engineering, which would be useful for the power plant that USSE is planning, but he seems to have no experience which would help him in his duties of overseeing management.

4. Conservatism. Scammers have the incentive to boast about their company's future, solutions to big problems draw more suckers than fixing mundane, everyday problems. They will also gravitate towards business plans that are easy for everyone to understand and that people can see in their everyday lives. Not constrained by actually needing a real product to sell, they will almost invariably come up with a product that will make most people think "Wow, that'd be great." Conversely, you don't have to worry too much about the company that is trying to sell its widget that will make sewage treatment plants 5% more efficient.

USSE: Quote: "Our patent-pending liquid biofuel provides clean, renewable energy at a fraction of the cost of traditional biodiesel. It's also a superior fuel: it produces more energy and doesn't degrade engine performance, among other benefits."

I'm hardly the first person to point out that something smells in the state of Mississippi, but I hope this example will help give my readers the tools to avoid the next revolutionary new technology to teleport in.

DISCLOSURE: Tom Konrad and/or his clients have positions in these stocks mentioned here: CREE, BCON. He is neither long nor short USSE (his broker does not let him short penny stocks.)

DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

Posted by Tom Konrad at 01:03 AM | Permalink | Comments (0) | TrackBacks (0)

In the face of a declining overall energy market today, three of our favorite alternative energy stocks posted strong gains on high volume.

The Oil Services HOLDRs ETF (OIH) was down 2% and the PowerShares WilderHill Clean Energy ETF (PBW) was down 1.7%. Indeed, the vast majority of the energy stocks that we track were in the red. But bucking the trend were two energy stocks that we have profiled in the recent past and a third company that we will begin covering today.

First on the list is our favorite wind energy play, Welwind Energy International (WWEI). We recommended Welwind during October of 2006, when it was trading around $0.07. It closed today at $0.18, up 26% on 4X average trading volume. That is more than a 900% gain in the six months since we first initiated coverage on Welwind.

Next on the list of breakout stocks today is Nova Biosource Fuels (NVBF). Nova just announced a move from over-the counter to the AMEX, which will be effective on Monday, May 14. Nova recently held its official groundbreaking ceremony at the site of its planned biodiesel refinery in Seneca, Illinois. The plant is expected to have a 60-million-gallon per year biodiesel production capacity from locally generated, low-cost feedstocks, including rendered animal fats and oils and recycled vegetable and animal- based greases. Nova’s stock price increased by 4.5% today on 12X normal trading volume.

Our final stock is getting its first mention on Gold Stock Bull today. Despite being the darling of the ethanol investment community and attracting funding from none other than Bill Gates, we have been hesitant to recommend Pacific Ethanol (PEIX). We watched the stock quadruple during 2006 from $10 to nearly $45, but couldn’t see any fundamental justification for the rise and held off. PEIX has since retreated to around $15 in an overall downturn amongst ethanol producers.

So what is driving our optimism with Pacific Ethanol? A shift from hype to substance. The Sacramento, Calif.-based company swung to a first-quarter profit, earning $1.9 million, or 5 cents per share. During the same quarter last year, Pacific Ethanol lost $612,000, or 2 cents per share. This first-quarter profit was generated from revenue that more than doubled to $99.2 million from $38.2 million. Pacific Ethanol sold 37.5 million gallons of ethanol, almost twice as many as it did a year ago, and ethanol prices were up more than 20 percent.

Pacific Ethanol’s share price responded by climbing 9.1% on 6X normal trading volume. Despite fears by some investors of an oversupply in ethanol during the back half of 2007, we believe PEIX will continue pushing higher. We have a price target of $22 for 2007, which is a 47% increase from the current price. The chart below shows clear support at $15 and we believe a bounce off this price floor is imminent.

Pacific Ethanol currently has one plant operational, one plant about to open and three other plants under construction. The operational plant is located in Madera, California and has a capacity of 35 million gallons per year. It is the largest ethanol plant on the west coast.

Their second plant is being constructed in Boardman, Oregon and will also have a capacity of 35 million gallons per day. Construction is scheduled to be completed in the next few months.

Pacific Ethanol also has begun construction on three 50 MGY name plate capacity production plants that will open mid 2008. Magic Valley, Idaho will serve growing markets in the Intermountain West, while Pacific Ethanol’s Stockton, California and Imperial Valley, California plants will help meet the growing demand for ethanol in California.

The energy bill passed by Congress in 2005 requires an increase in ethanol use by refiners to 7.5 billion gallons by the year 2012. With Democrats now controlling both houses and looking likely to take over the presidency, we can only expect additional government incentive for alternative energies such as ethanol.

A significant portion of Ethanol demand is coming from the fact that states across the country have banned MTBE (Methyl Tertiary Butyl Ether), a fuel additive formerly required to increase octane levels of gasoline. MTBE has found its way into drinking water and many believe is cancer-causing. Ethanol is the only other commercially viable additive that will bring gasoline into compliance with state and federal clean air regulations. Consumption and production of ethanol has continued rising at a record pace and should be considered as part of any investment portfolio.

Good luck and happy investing!

Jason Hamlin is Founder of Gold Stock Bull, a site that has been tracking the secular bull market in gold and silver since its inception, back in early 2002, as well as the emerging bull market in energy since it took off in early 2004.

Posted by Jason Hamlin at 11:22 PM | Permalink | Comments (0)

The International Monetary Fund released its Spring 2007 World Economic Forecast today.

Fuel Vs. Food

There is a short sub-section in Appendix 1.1 ("Recent Developments in Commodity Markets") that I thought might be worth sharing with you. If you download the PDF version of the report and scroll down to page 44, you will find the said sub-section under the heading "Food and Biofuels".

In it, the IMF notes that food prices (as measured by its own food price index) rose by 10% in 2006, driven partly by a poor wheat crop in certain countries but also by (mandated) demand for biofuels in the US and Europe (see graph below).

The report notes that, looking ahead, the prices of crops like corn and soybeans, which are the main feedstocks for ethanol (US) and biodiesel (Europe), respectively, should: (a) continue to rise and (b) begin moving in line with the price of crude oil, which is currently the case with sugar because of its role in the Brazilian ethanol industry.

About the recent news that US farmers are planning to plant more corn acreage next year, the IMF has this to say:

"For 2007, the United States Department of Agriculture is estimating a record corn crop, as planting areas increase by 10 percent from 2006 at the expense of soybeans and cotton. Still, demand fueled by the increase in domestic ethanol production capacity is expected to outpace the production rise."

IMF economists also point out that the price of "partial substitutes" such as wheat and rice, as well as the price of meat and poultry, should trend upwards as a result of higher corn and soybean prices. Finally, high crude prices could place further upwards pressure on the price of corn because corn farming in the US is highly energy intensive.

The IMF - Not Especially Bullish on Corn Ethanol

It is the sub-section's final paragraph, in my view, that best captures IMF's view of current US and European biofuels policy. It reads as follows:

"While on a small scale biofuels may be beneficial by supplementing fuel supply, promoting their use to unsustainable levels under current technology is problematic, and long-term prospects for biofuels depend heavily on how quickly and efficiently second-generation substitutes (such as plant waste) can be adopted. Many energy market analysts also question the rationality of large subsidies that benefit farmers more than the environment.

While new technology is being developed, a more efficient solution from a global perspective would be to reduce tariffs on imports from developing countries (for example, Brazil) where biofuels production is cheaper and more energy efficient."

This reaffirms some of the contentions that were made on this site in the past:

(a) The way the US is proceeding with its approach to ethanol will inevitably place inflationary pressures on domestic and global food prices, which will result in tensions at home and abroad.

(b) The main reasons for pursuing ethanol in the manner in which it is being pursued in the US right now are, in order: (a) placate the farming lobby and earn valuable political support in America's hinterland; (b) placate the wean-America-off-foreign-oil lobby; (c) placate the soft environmentalist lobby; (d) combat climate change...oh, wait a minute...I guess no one's settled that thorny energy balance question yet, have they?

(c) Not letting emerging markets export ethanol tariff-free to the US is bad economically for a lot of people, from poor Brazilians to middle-class Americans

(d) Cellulosic ethanol is the only way forward if biofuels are ever to displace oil in a sustainable manner

To Conclude...

"Old news!", you might say...well you're right, except for this: it's one thing when I or some other insignificant blogger bashes (or celebrates) corn ethanol; it's quite another when the top economic think-tank in the world tells you that it sees real long-term viability problems with the way that this industry is currently structured.

To be sure, it's not like the IMF dedicated a large amount of space to this issue, and I'm quite certain that most of the economists who participated in producing this report don't loose sleep over it at night. But the strong terms used in that little sub-section further reinforce what the corn ethanol bears have been saying: enjoy it while it last, because it's not structured to be sustainable in its current form for much longer...and I'm not talking about environmental sustainability here.

DISCLOSURE: The author does not hold a position in any company involved in biofuels

Posted by Charles Morand at 06:53 PM | Permalink | Comments (2) | TrackBacks (0)

On January 29th, M~Wave [NASDAQ:MWAV] and private vertically integrated Biodiesel distributor Blue Sun Biodiesel announced a merger between the two, with Blue Sun becoming a division of M~Wave, and the merged company being renamed Blue Sun Holdings. Managerial control will also pass to "certain directors and the officers of SunFuels."

If this merger goes through as planned in the second quarter of 2007, US investors will have their first opportunity to invest in a stock focused on a biofuel which is much less controversial among environmentalists than corn-based ethanol. Estimates of the well-to-wheels Energy Return on Energy Invested (EREoI) for biodiesel range from about 1.93 and up, depending on the feedstock, although few numbers are available. The most commonly quoted EREoI for biodiesel is 3 or 3.2, but I've never found a reputable reference for that, and it will clearly vary widely depending on the oil feedstock, with waste oil being "best."

Speaking of feedstock, Blue Sun is a vertically integrated company with several farmer cooperatives raising oil exclusively for Blue Sun, often using varieties of mustard and canola being developed in-house by Blue Sun, although they have also used soy bought on the open market.

They have their proprietary blend of additives, which allows their Blue Sun Fusion biodiesel to offer superior cold weather performance. I've had several conversations with one of their distributors who uses their B100 in a dual tank diesel pickup, and he has been able to drive on B100 when the temperature is as low as 15 degrees F (-9C) (Unless you, like him are a mechanic who happens to carry around a spare fuel filter in your trunk and a spare tank on your vehicle, I would not recommend trying this... he has also had his fuel filters clog when he pushes the envelope too much... ). I'm no mechanic, and so I stick to B20 except during the summer when the temperature stays comfortably above 40F(+5C).

Their additives, according to a study by the National Renewble Energy Laboratory, allow the usual lower maintenance requirements due to the increase lubricity of biodiesel, and reduction of carbon monoxide, hydrocarbons and particulates also seen with most biodiesels, but Blue Sun's blend shows reductions in NOx as well, something that can be a serious issue for biodiesel producers, as we saw when Texas considered banning biodiesel because of increased NOx emissions last fall.

Finally, along with the announcement of the merger with M~Wave, they also announced a partnership with ARES Corporation to build biodiesel production facilities throughout North America, with the first in Clovis, NM. They had previously relied on contract biodiesel production at first tier facilities. Bringing production in house, combined with their own additives, they will have control of the entire biodiesel production and distribution chain (their distributors sign detailed agreements with them on how the biodiesel will be handled all the way to the pump) will likely help them cement their chosen market niche as the high quality biodiesel leader, which will give them a chance to compete with agricultural giants such as ADM and Cargill in the rapidly growing biodiesel marketplace.

Another publicly traded competitor is Earth Biofuels [OTCBB: EBOF], but their main competitive advantage is celebrity endorsement (BioWillie), rather than quality. Of course, investors considering buying MWAV as an early in to this quality biodiesel play should keep in mind that it ain't over til the fat lady sings when it comes to mergers and acquisitions.

Tom Konrad, Ph.D. is an independent investment advisor registered in the state of Colorado who helps people reach their investment goals while protecting the environment.

DISCLOSURE: Tom Konrad and clients hold positions in MWAV, as well as a private equity position in Blue Sun.

DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

Posted by Tom Konrad at 08:30 AM | Permalink | Comments (3)

Green Star Products Inc (GSPI) announced that they have developed and successfully commercially tested their advanced biodiesel reactor.

GSPI reactors require an amazing two minutes to complete the biodiesel conversion reaction versus over one hour for the rest of the industry. This means that GSPI's processing rate through the reactor is at least 30 times faster than the rest of the biodiesel industry. [ more ]

Posted by Mark Anderson at 07:42 AM | Permalink | Comments (0)

Green Star Products Inc (GSPI) announced its plans to construct total Bio-Refinery Complexes for production of both biodiesel and biomass ethanol at each facility.

The first Bio-Refinery is planned to be in North Carolina (see GSPI press release dated April 20, 2006) and the location of the second facility is to be announced soon in the northwestern sector of the United States.

Each GSPI-designed Bio-Refinery will have a start-up production of between 10 or 20 million gallons per year with quick expansion capabilities. The facility infrastructure will be capable of expanding to 60 million gallons per year (and further expansion capabilities could reach 100-million gallons per year), ranking them among the largest fuel production facilities in the world. [ more ]

Posted by Mark Anderson at 08:33 AM | Permalink | Comments (0)