We also paid off $17 million of our term debt in the first quarter resulting in our four Western ethanol plants becoming completely debt free.
U.S. ethanol producer reported Q4 earnings that surprised to the upside on an adjusted basis as a sharp increase to the Low Carbon Fuel Standard's carbon price helped its margins.
While dilution and higher interest expenses hurt the company's earnings in the wake of the Aventine acquisition, the added capacity is counting just as the operating environment is improving.
Furthermore, the company's largest shareholder is pushing for the type of sale that I stated was a possibility last December, and this would be an opportune time for it.
I continue to like Pacific Ethanol as an interesting, albeit risky, long investment opportunity given an improved operating environment and new M&A interest.
U.S. ethanol producer Pacific Ethanol (NASDAQ:PEIX) reported Q4 earnings last month that surprised the market by beating on EPS, despite missing slightly on revenue. The company's share price spiked on the news but subsequently shed its gains in response to faltering energy prices (see figure). The share price has still increased by 50% over the last three months, however, following the bottoming of crude prices in mid-January. Last December I wrote that Pacific Ethanol was a potential takeover target due to the discount at which its shares traded relative to its peers. Last week its largest shareholder publicly encouraged the company to consider selling part or all of its operations as a means of eliminating the discount. This article re-evaluates Pacific Ethanol as a potential long investment in light of this announcement, its Q4 earnings, and the volatile domestic ethanol market.
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Q4 earnings report
Pacific Ethanol reported Q4 revenue of $376.8 million, up by 47.1% YoY and missing the analyst consensus estimate by only $0.8 million. The large increase compared to the same quarter of the previous year was due to a record sales volume of 213.5 million gallons, an increase of 59% over the same period. The company's own production more than doubled to 117.5 million gallons due to the completion of its recent acquisition of Midwestern ethanol producer Aventine Renewables. Third-party sales came in at 96 million gallons, up by 14% YoY. The revenue increase did not keep pace with the higher sales volumes as the price of ethanol fell alongside that of crude to an average of $1.66/gallon during the quarter, a decline of 23% YoY.
Pacific Ethanol's cost of revenue increased by 54% YoY to $367.2 million, reflecting the higher production volume. The positive aspects of the Aventine acquisitions began to make themselves felt during the quarter in the form of a reduced corn price: the company paid an average premium compared to CBOT corn of only 0.35/bushel during the quarter, down from an average premium of $1.30/bushel in Q4 2014. A constraint on the company's margins in the past has been the distance of its ethanol facilities from the high-yielding corn crops in the U.S. Midwest. Acquiring Aventine's Midwestern ethanol facilities gave the company access to cheaper corn supplies, resulting in the reduced premium during the most recent quarter. Likewise, its co-product margin increased from 28.5% to 35.7% YoY. This was partially offset by a lower ethanol price premium, however, which fell from 19% versus CBOT to 11% over the same period due to the reduced value of Midwestern corn ethanol under California and Oregon's Low Carbon Fuel Standard [LCFS], although such a result was expected post-acquisition. The company's gross profit fell from $18.4 million to $9.5 million YoY despite the higher production volume due to the lower ethanol price.
GAAP net income came in at -$1.1 million, down from $12.5 million in Q4 2014. GAAP EPS likewise declined from $0.50 to -$0.03 over the same period. The EPS number was further weakened by a 70% YoY increase to the company's number of shares outstanding due to acquisition-related dilution. The net loss was due in part to a $2 million non-cash asset impairment charge resulting from a post-acquisition IT redundancy, however. Excluding this charge resulted in a slight quarterly profit in the form of an adjusted EPS of $0.02 that beat by $0.11 despite comparing unfavorably with the Q4 2014 adjusted EPS of $0.39. A poor Q3 result caused the company's FY 2015 earnings to come in negative, however, with the company reporting a decline from $2.62 in FY 2014 to -$0.33. Its annual adjusted EBITDA fared only slightly better, falling from $95 million to $14.1 million YoY. The company held $52.7 million in cash at the end of FY 2015, down only a bit from $62.1 million at the end of the year, although its total liabilities ballooned from $86 million to $304 million as part of the acquisition financing. Its annual interest payments increased by $3 million YoY as a result, further hurting the EPS result.
Pacific Ethanol's ability to generate a net profit in Q4 despite suffering from the combined effects of low fuel prices as well as the share dilution and debt increase resulting from the Aventine acquisition was no small feat. One factor that contributed to the result was the 2015 decision by California to tighten and extend its LCFS, which caused the value of the standard's carbon credits to surge from $25/metric ton this time a year ago to $125/metric ton. Ethanol produced by the company's Western facilities achieves a carbon intensity that is roughly 10 points below the standard's current threshold due to the company's high energy-efficiency production process. This translated in FY 2015 to a $0.10/gallon credit under the LCFS for corn ethanol produced at the Western facilities. The company's Western footprint has long been a constraint on its profits due to the costs of those efficiency gains and the lack of access to cheap feedstock, and the Aventine acquisition was driven in part by a need to decrease its exposure to this limitation.
Given the earnings support provided by the LFCS in 2015, then, the standard's ability to impact Pacific Ethanol's earnings moving forward is an important component of the company's outlook. The initial response is to view the higher carbon credit value under the standard as a sign of things to come, especially following the announcement by Stanford researchers that the "social cost" of carbon is closer to $220/metric ton. Such a credit value would result in a total credit for Pacific Ethanol's Western ethanol of closer to $0.18/gallon.
Even if the standard's carbon price moves higher in the coming years, however, it is important to note that the carbon intensity reduction threshold that must be achieved to qualify for the credit becomes tighter over the same period. For example, in the event that the carbon price remains at $125/metric ton, the tightening threshold will reduce the current $0.10/gallon value to $0.05/gallon by 2020. In other words, the standard's carbon price will need to exceed Stanford's social cost calculation in 2020 if Pacific Ethanol is to achieve the same credit value for its Western corn ethanol. That said, recent evidence suggests that the carbon price will move higher in coming years, with one analysis attributing the increase to the hoarding of credits by emitters in anticipation of future carbon intensity reductions being much more difficult to achieve than the reductions to date have been.
Pacific Ethanol fully intends to profit from the high carbon credit value as long as it lasts and management announced during the Q4 earnings call a number of moves to increase its income under the standard. For example, while it expects to incur capex in FY 2016 of $24 million, only approximately $5 million of that will be on maintenance ($0.01/gallon of installed capacity). The rest is expected to be spent on continued energy efficiency gains at its Western facilities. Even more importantly, the company began producing cellulosic ethanol from corn fiber in Q4, and it ultimately expects to achieve 1 million gallons of annual cellulosic ethanol production. While tiny compared to its total production capacity, the cellulosic ethanol volume will achieve outsized financial returns for the company in the form of a $1.01/gallon non-refundable federal tax credit and a much larger credit value under the LCFS. Cellulosic ethanol from corn fiber cannot exceed a small fraction of corn ethanol production, of course, but it will further support Pacific Ethanol's margins.
In the shorter-term, Pacific Ethanol continues to be negatively impacted by a low-margin environment resulting from cheap crude and large ethanol inventories. Ethanol inventories spiked early in Q1 as a fragmented corn ethanol industry continued to maximize production despite the presence of low and even negative margins, resulting in a very poor crush spread. Pacific Ethanol announced in March that its aggregate facilities were running at only 85% of total capacity due to this unfavorable operating environment. There are several indications that this is beginning to improve, however. First, U.S. drivers have responded to low fuel prices by driving more, and ethanol consumption is on pace to set a multi-year high later this summer as a result (see figure). Second, poor production conditions in Brazil and emission reduction commitments by countries in the aftermath of last December's Paris Climate Agreement have resulted in strong exports, with the total volume for January alone rising by 27% YoY. Finally, gasoline prices have rebounded since January and, while still well below their 2014 (let alone 2015) highs, they are no longer as low as they were earlier this year. The corn ethanol crush spread recently moved back into positive territory and I expect it to continue improving as the summer driving season commences.
AGOURA HILLS, CA--(Marketwired - Apr 19, 2016) - VAPE Holdings, Inc. (OTCQB: VAPE) (the "Company" or "VAPE"), a holding company focused on providing healthy, efficient, and sustainable vaporization products, announced today it has entered into binding agreements for long-term equity capital at market prices that will support the future growth of the Company.
On April 19, 2016, the Company agreed to terms for an equity line that contemplates its single financing partner providing up to $5 Million over the next three years. The Company has the ability to sell the equity at its discretion at prevailing market prices with no discount.
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