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Updated Research and Company Profiles
With this in mind, I decided to publish an alternative energy guide outlining the benefits and setbacks related to ethanol, biodiesel and the hybrid car industry. The information has been compiled from a series of published Sleuth columns and other research I conducted in Spring/Summer 2006. Some of the ideas were updated for this essay, and I will continue to update the information presented here as necessary. Select small-cap securities working in the alternative energy sector are also listed in this report. While no direct recommendation was ever made to purchase shares of these stocks, updates on share prices and pertinent news will be added on a regular basis. It is also important to recognize the volatility of many of these small securities. In April 2006, a wave of media attention and higher gas prices drove up the share prices of many of these companies. Since the hysteria has died down, share prices have settled back to more reasonable levels in most cases. Here is a look at three alternative energy companies I’ll profile later in this piece. You should be able to clearly see when buying increased, and how shares have settled since earlier this year:
(Note that 02 Diesel (OTD) is back to where it started one year ago. It is the smallest of the three stocks depicted above, with a market cap of about $27 million.) I never encouraged readers to attempt to time the market when it comes to these stocks, and I still do not recommend this strategy. Attempting this could lead to catastrophic losses. If you determine one of the securities mentioned worth purchasing, expect to hold for a few years before it realizes its true value. Remember, the “alternative energy age” is still in its infancy. It will be some time before the world will see how these ideas play out as far as practicality and profit are concerned. Research thoroughly and be patient -- then you will be rewarded. Alternative Energy Part I: New Laws Could Energize Small-Cap Alternative Energy Outfits The Wall Street Journal featured ethanol on the front cover last week. Here at home, the Baltimore Sun touted ethanol as an “emerging energy star.” Even our president called in an interview earlier this year for the U.S. “to not only advance that technology of deriving fuel from corn, but also deriving fuel from waste materials.” That’s bold talk for a one-time oilman, but it is becoming more and more apparent that alternatives to the traditional barrel of crude will have to become more prevalent in this age of political tension and dwindling natural resources. A Corn Farmer’s Best Friend Ethanol is made from the sugar of corn or sugarcane -- and is basically grain alcohol that can be mixed in varying amounts into gasoline. Brazil has successfully reduced 40% of its oil demand by using ethanol fuels and ethanol-burning vehicles. And it has made its way into the United States as well, with special thanks due to new government mandates. The U.S. Energy Policy Act of 2005 required that ethanol production increase to 7.5 billion gallons a year by 2012. (Right now, production is at 4 billion gallons annually.) And some local jurisdictions are jumping ahead with their own ethanol laws. Take Hawaii, for instance -- a state that has passed a law requiring 85% of all its gas to contain at least 10 percent ethanol by next month. According to the Associated Press, some companies don’t think they can make the transition by the deadline set for April 2: “The would-be producers say they are a year or more away from having production facilities in place... Oil companies in Hawaii are importing ethanol in order to meet the April 2 deadline.” In other states -- especially in corn country -- news of new ethanol facilities seems to come out every week. Once total funding is secured, the Southeast Missourian reports that a new ethanol plant could be constructed as early as this year...and it’s not the region’s first facility. The plant would produce 100 million gallons of ethanol a year: “Construction of a second new ethanol plant in Southeast Missouri could start as early as this summer on more than 100 acres along Nash Road and be fully operational 18 months later, officials said Wednesday... Same goes for North Dakota’s corn country. From the Associated Press: “Two companies plan to build North Dakota’s largest ethanol factory here in southeastern North Dakota's corn country, with construction beginning late this summer. Officials of Gold Energy LLC of Wahpeton and US BioEnergy Corp., which is based in Brookings, S.D., announced the project Wednesday. The plant will cost about $145 million to construct, and will be designed to produce 100 million gallons of ethanol annually.” A Growing Trend This is happening all over the country: Wherever corn is being grown, there is talk of ethanol. Governments will begin mandating its use and it could be the rehab program our oil addiction so desperately needs. And with bio-fuels in such strong demand, small producers are bound to get their share of the business. The government is even helping the small-cap company along in this case, offering a “small producer biodiesel and ethanol credit.” This credit will benefit small biodiesel producers by giving them a 10-cent per gallon tax credit for up to 15 million gallons of agri-biodiesel produced. In addition, the limit on production capacity for small ethanol producers increased from 30 million to 60 million gallons. This is effective until the end of 2008. Even gas stations themselves are being thrown incentives. Gas stations are eligible for a 30% credit for the cost of installing clean-fuel equipment, like E-85 ethanol pumping stations, effective through December 31, 2010. According the U.S. Department of Energy, a clean fuel is “any fuel that consists of at least 85% ethanol, natural gas, compressed natural gas, liquefied natural gas, liquefied petroleum gas, or hydrogen and any mixture of diesel fuel and biodiesel containing at least 20% biodiesel.” Relevant Companies - First Reported March 20, 2006/ Updated Sept. 2006 1. 02Diesel Corporation (AMEX: OTD) Recent price: $1.05; 52-week high: $2.97. 02Diesel develops additive products that help fuels burn cleaner by adding ethanol. 02Diesel's main product is called O2D05 -- a fuel additive that can be made from soybean oil, vegetable oil or animal fats. It is designed to stabilize blending of fuel grade ethanol with diesel fuel, with the end result being a clean burning fuel called 02Diesel. Possibly even more important to 02Diesel’s business is its ties to Brazil -- a country that has successfully reduced 40% of its oil demand by using ethanol fuels and ethanol-burning vehicles. In 2004, 02Diesel began operations in Brazil through its 75%-owned subsidiary, O2Diesel Químicos Ltda. O2Diesel is finding new markets for its additives, shipping its first bulk order to Australia. Alan Rae, CEO of O2Diesel, said in a statement that “many of our early adoptive partners have eclipsed the one-year anniversary since switching to O2Diesel's fuel,” thus building credibility of O2Diesel’s additive as a viable alternative. 2. Pacific Ethanol Inc. (NASDAQ: PEIX) Recent price: $18; 52-week high: $44.50. Pacific Ethanol makes corn-based ethanol, and also sells products generated from the manufacture of ethanol, such as grain and carbon dioxide. Shares of Pacific took a big hit in the spring after the company signed off on the sale of 5.5 million shares of the stock totaling $145 million. Pacific Ethanol will use the cash to speed up work on five ethanol production facilities. 3. MGP Ingredients Inc. (NASDAQ: MGPI) Market cap: $236 million; share price: $14.40; 52-week high: $19.22. MGP Ingredients distills wheat starches and wheat proteins for wheat starches and vital wheat gluten and mill feeds. The company makes alcohol used in beverages and industrial alcohol -- like ethanol. Like Pacific, MGP also deals in the grain and carbon dioxide byproducts of its distillery operations. MGP reported net income of $2.1 million ($0.12 per share) for its most recent quarter -- up from the $1.6 million ($0.10 per share) reported a year ago. Despite this growth, MGP did not meet analyst’s expectations, which were set at $0.14 a share. And while revenue was up 12% to $79.4 million, distillery products sales grew 22% percent to $10.2 million, according to the Associated Press. And MGP’s management has said it expects the company will charge higher prices for its products while paying lower prices for natural gas during the next quarter. Because of this, they are expecting operating income totaling at least as much as during the previous three quarters combined. Talk about a serious growth opportunity... Up Next: Part II: Small-Caps Could Solve the Ethanol Dilemma
The government recently issued an order that requires the use of the product I'm talking about for ALL government vehicles, including military aircraft, trucks, buses, cars, Postal Service vehicles, fire trucks and emergency vehicles. |
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