May 1, 2012
Green Plains Renewable Energy is an industry leader about to commercialize an exciting new “green” technology but with its stock at $8.00, it is trading at less than six times estimated earnings for 2013, more than 50% below its 2010 high, and almost 50% below book value.
The ethanol sector has been characterized over time by unfulfilled promise and booms and busts. However, I believe today’s ethanol industry, characterized by consolidation and innovation, offers prospects for sustainable growth for well-positioned producers of this renewable fuel.
Despite being regularly attacked for increasing farm acreage at the expense of wilderness (untrue: In 1980, 6.64 billion bushels of corn was harvested on 84 million acres…in 2012, the USDA estimates 13.2 billion bushels of corn will be harvested on 90.7 million acres, only an 8% over the acreage more than 30 years ago), for not providing energy savings (untrue: The U.S. Department of Agriculture’s study, The 2001 Net Energy Balance of Corn-Ethanol, concluded that ethanol has in fact a positive energy balance and thus is energy efficient), and for being uneconomic without government tax credits (untrue: The blenders’ tax credit, which didn’t go to ethanol producers anyway, expired at the end of 2011 and ethanol is being currently being sold profitably at a price 20% below that of gasoline), ethanol now accounts for roughly 9% of vehicular fuel in the United States and demand for ethanol is growing across the globe (the United States exported about one billion gallons last year). The three largest ethanol producers in the United States include a privately-held company, a division of the world’s largest agricultural products processor, and a subsidiary of the world’s largest independent petroleum refiner. It’s the fourth largest ethanol producer that we believe now offers investors a unique vehicle for participation in this often misunderstood but promising industry.
Omaha-based Green Plains Renewable Energy, Inc. is North America's fourth largest ethanol producer, operating nine ethanol plants in Indiana, Iowa, Michigan, Minnesota, Nebraska and Tennessee with a combined operating capacity of 740 million gallons (mmgy) of ethanol per year. The Company also operates an independent ethanol marketing service that currently provides marketing services to its affiliated plants as well as four other ethanol producers with expected operating capacity of 265 million gallons per year. Green Plains owns Blendstar, LLC, a biofuel terminal operator with nine facilities in seven states. Green Plains' Agribusiness segment operates grain storage facilities and complementary agronomy, feed, and fuel businesses in Tennessee, Missouri, Iowa and Minnesota.
Importantly, Green Plains is a vertically-integrated producer, marketer and distributer of ethanol. It focuses on generating stable operating margins through its diversified business segments and its risk management strategy. The Company believes that owning and operating assets throughout the ethanol production/distribution chain enables it to mitigate changes in commodity prices and differentiates it from companies focused only on ethanol production. Today, it has operations throughout this chain, beginning upstream with its agronomy and grain handling operations, continuing through its ethanol, distillers grains and corn oil production, and ending with its ethanol marketing, distribution and blending facilities.
Ethanol Production. Green Plains operates a total of nine ethanol plants in Indiana, Iowa, Michigan, Minnesota, Nebraska and Tennessee, with approximately 740 mmgy of total ethanol production capacity. At capacity, these plants collectively consume approximately 260 million bushels of corn, and produce - as a byproduct of ethanol production - approximately 2.1 million tons of distillers grains used for animal feed annually.
Corn Oil Production. At September 30, 2011, the Company was operating corn oil extraction systems at all nine of its ethanol plants. Industrial uses for corn oil include feedstock for biodiesel, livestock feed additives, rubber substitutes, rust preventatives, inks, textiles, soaps and insecticides The corn oil systems are designed to extract non-edible corn oil from the whole stillage process immediately prior to production of distillers grains.
Agribusiness. Green Plains operates three lines of business within its agribusiness segment: bulk grain, agronomy and petroleum. In its bulk grain business, it has 14 grain elevators with approximately 37.2 million bushels of total storage capacity. Through its agronomy business, the Company sells fertilizer and other agricultural inputs and provides application services to area producers,. Additionally, it sells petroleum products including diesel, soydiesel, blended gasoline and propane, primarily to agricultural producers and consumers. Management believes its bulk grain business provides synergies with its ethanol production segment as it supplies a portion of the feedstock for its ethanol plants.
Marketing and Distribution. Green Plains’ in-house marketing business is responsible for the sale, marketing and distribution of all ethanol, distillers grains and corn oil produced at its nine ethanol plants. The Company also markets and distributes ethanol for other ethanol producers. The expected production capacity of these other producers is approximately 260 mmgy. Additionally, Green Plains owns Blendstar, LLC, which operates nine blending or terminaling facilities with approximately 495 mmgy of total throughput capacity in seven states in the south central United States.
The Extra Bonus
Green Plains continues to support of the 35%-owned BioProcess Algae joint venture, which is focused on developing technology to grow and harvest algae, which consume carbon dioxide, in commercially viable quantities. During the third quarter of 2011, BioProcess Algae constructed an outdoor Grower Harvester system next to Green Plains’ Shenandoah ethanol plant, which as of September 30, 2011 was successfully producing algae. BioProcess Algae currently is exploring potential algae markets including animal feeds, nutraceuticals and biofuels. BioProcess Algae successfully completed its first round of algae-based poultry feed trials, in conjunction with the University of Illinois. The algae strains produced by the Grower Harvester system for the feed trials demonstrated high energy and protein content that was readily available, similar to other high value feed products used in the feeding of poultry today. BioProcess Algae broke ground on a five acre algae farm on February 1, 2012 at Shenandoah. If Green Plains and BioProcess Algae determine that the venture can achieve the desired economic performance from the five acre farm, a build-out of 400 acres of Grower Harvester reactors near its Shenandoah ethanol plant will be considered. We believe a 400-acre farm could generate a profit of $3 million producing algae for animal feed (maybe more if used for nutraceuticals). In addition to Green Plains’ and other ethanol producers’ facilities, algae farms could be attractive adjuncts to power plants all over the country, not only for algae production but also for carbon capture.
Earnings Outlook and Valuation
Green Plains, and other ethanol producers, struggled with narrower profit margins during 2011 and in early 2012 as corn prices rose in the wake of a disappointing corn harvest. The Company reported 2011 EPS of $1.01, down from $1.51 in 2010, despite an increase in revenue to $3.55 billion from $2.13 billion. The first quarter 2012 ethanol margins shrank to little better than breakeven and the Company reported a loss for the period. Second quarter results should be better but still subpar. However, quarterly comparisons, aided by corn oil profits, increased ethanol production with recovering margins, and a growing agribusiness, should turn positive later this year. The Company is expected to report a profit for the full year, and next year is shaping up extremely well. Estimated corn acreage this year is up 4% from 2011, and December futures are currently about 18% below the May contract level. The EPA decision to increase the allowed level of ethanol in conventional gasoline from 10% to 15% should become effective in mid-2012. With ethanol currently priced about $1.00/gallon lower than gasoline, there will be a strong economic incentive for many refiners to increase their ethanol blend levels, significantly increasing ethanol demand. The early expectations for 2013 are for Green Plains’ earnings of $1.40, almost back to the record level of 2010.
Green Plains’ shares seem attractively priced. The Company’s book value per share is $15.51, and we believe the book value of its ethanol and agricultural business assets significantly understates the demonstrated private market value for such assets Early in 2010, Green Plains’ shares hit a high of $17.97, a level about 125% above the stock’s current price. The market appears to be focused on near-term margin pressures rather the long-term growth potential; we believe this creates an outstanding opportunity for capital appreciation over the next 6-12 months.
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I, Paul Resnik, the research analyst of this snapshot report, hereby certify that the views expressed in this report accurately reflect my personal views about the subject securities and issuers; and that no part of my compensation, was, is, or will be directly, or indirectly, related to the specific recommendations or views contained in this report.