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The serious money says biofuel
Watch for investment opportunities to come in the government-encouraged crop-based energy industry
Saturday, August 04, 2007
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| CREDIT: Brian Gavriloff, the Journal |
| Freshly pressed oil drips from canola seeds. |
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As any pro stock trader will tell you, only a fool fights the tape.
Whether the market is gripped by irrational exuberance and zooming to new highs, or enduring one of its periodic meltdowns, it’s risky to bet against the tide — no matter what your personal views.
Apparently, that lesson isn’t lost on Alberta Energy Minister Mel Knight. He unveiled details of a $209-million program earlier this week to help Alberta biofuel producers ramp up output.
As Knight candidly admitted, Canada’s energy powerhouse has been slow to embrace ethanol and biodiesel. Ontario and Saskatchewan, among others, have been far more aggressive in building capacity.
But Knight knows which way the wind is blowing. Better to jump aboard now than miss this train entirely.
With Ottawa committing billions toward renewables — while targeting five per cent ethanol in gasoline by 2010, and two per cent biodiesel in diesel fuel by 2012 — new plants are sprouting like weeds.
As The Journal’s Dave Finlayson reported Wednesday, more than 30 firms have already shown interest in building new biofuel plants in Alberta since the province unveiled its plan in October.
Currently, Alberta has only one ethanol plant — Permolex’s Red Deer plant, which plans to triple output to 120 million litres annually. A $400-million plant in Innisfail with more than three times that capacity is planned by Dominion Energy and its partners. Startup is slated for 2008.
Nationwide, more than 20 corn and wheat-fed ethanol plants — up from eight in 2006 — with annual capacity of almost 2.3 billion litres will be pumping out fuel by 2010, according to the Canadian Renewable Fuels Association (CRFA).
On the biodiesel side, at least three new plants are in the pipeline, with five already in production. Dozens more are on the drawing board.
Virtually all of them are being financed by private firms or investment consortia, although traditional oil giants like Suncor and Husky Energy are also big players.
In the United States — which last year topped Brazil as the world’s largest biofuel producer — well over 100 ethanol plants have sprung up thus far, and that list is expected to top 200 in the next few years.
Ethanol output in the U.S. is expected to jump by 12.4 billion litres or roughly 67 per cent over the next year to some 30.7 billion litres, the U.S. Renewable Fuels Association (RFA) estimates.
That would outstrip the previous 2012 target of 28.4 billion litres, says FirstEnergy Capital analyst Steven Paget, and the U.S. is now considering tripling its annual target to 100 billion litres by 2022.
Indeed, so much new ethanol capacity is coming onstream so quickly that spot prices for ethanol have dropped below those of gasoline in the U.S., reducing producer profit margins to razor thin levels.
Still, most observers see the current softness as a temporary blip, as ethanol producers, consumers and traditional petroleum refiners adjust to a brave new world in which biofuels are a permanent fixture.
Looking out a decade, Kory Teneycke, exec director of the CRFA, says he expects ethanol to account for well over 10 per cent of the retail fuel market in Canada and the U.S.
“I think it will be a permanent part of the energy mix,” he says. “For the first time in recent history, since the age of oil began, we’ll have diversification away from traditional crude to meet our energy needs.”
So does that spell bad news for Big Oil? FirstEnergy’s Steven Paget doesn’t think so. The robust growth in demand for fuel will easily accommodate the new ethanol supply, he figures.
By his estimates, fuel demand in Canada will jump by some three billion litres a year by 2010, with ethanol accounting for 75 per cent of that. At that level, it would account for five per cent of the national fuel market.
Of course, biofuels have a big potential downside. Corn prices have jumped as ethanol plants have sprung up, triggering alarm bells among cattle producers and food processors, and raising concerns about rising food prices in developing countries.
But a bumper U.S. corn crop in 2007 has lessened those fears somewhat, at least temporarily.
As for attractive investment opportunites in the burgeoning biofuels sector, there are very few of them in Canada. Most plants are privately owned, or subsidiaries of large firms such as Suncor and Husky.
In the U.S., it’s a different story. Several major independent ethanol producers are publicly traded and closely followed by Wall Street, including companies like VeraSun Energy, Aventine, and BioFuel Energy.
Most are currently trading well below their 52-week highs. Ian Horowitz, an analyst at New York’s Soleil Securities, says he thinks the stocks will face more “tough sledding” for a quarter or two before a rebound begins, and industry consolidation ensues.
His current favourite is Aventine. He rates the stock a “buy” with a 12-month target price of $24.75 US.
glamphier@thejournal.canwest.com
© The Edmonton Journal 2007
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