But is ethanol the new sound of a more energy-conscious century? Or is it merely a passing fad, with handfuls of IPO’s looking to grab the easy money while it still exists?

It could be a little bit of both. Ethanol will be one of several alternative fuel sources that will help break the country’s petroleum habit. As I’ve mentioned before over the past several months, advances in diesel and biodiesel, liquification and hybrid power technologies will share these duties.

And although there is a wave of ethanol IPO’s that are lining up to take your money, not all of them can be top dog. As within any industry, some will disappoint and others will falter, dropping off the face of the Earth soon after.

On top of the ethanol heap is Archer Daniels Midland (ADM: NYSE), worth $25.6 billion. Share prices are up almost 70% so far this year.

The second-largest ethanol producer in the U.S., VeraSun Energy (VSE: NYSE), debuted on Wall Street last week. The IPO raised enough money for VeraSun to skip over the world of small-caps, posting a market cap today of more than $1.8 billion. In fact, VeraSun’s shares were up 30% on its first day of trading last week. (The IPO was at $23 per share, a little more than expected.)

And after topping out at more than $30 a share, VeraSun was trading at $25.50 a share this morning. And the hype that ethanol has generated has pushed VeraSun’s P/E to a staggering 631. And the company is readying itself for some serious growth.

Money from VeraSun’s IPO will go to more than double its ethanol production by 2008 to 560 million gallons. (Right now, VeraSun produces 230 million gallons of ethanol a year — 5% of the total U.S. ethanol production.)

VeraSun (which is based in South Dakota) plans to use the IPO money to help pay for a facility in Iowa — a welcome facility and for general corporate purposes, according to Reuters.

Robert Walberg wrote about the VeraSun IPO in a recent Street Patrol column. He also discusses two other ethanol company’s IPO plans — Hawkeye Holdings and Aventine Renewable Energy Holdings — and the curious relationship between one of them and VeraSun.

Walberg notes that going from two plants to five plants by 2008, like VeraSun is planning to do, will be expensive. Therefore, investors should be ready for additional stock offerings that could send the stock price sinking.

But even more worrisome is the relationship between Avantine and VeraSun. “Aventine Renewable Energy buys virtually all of the ethanol VeraSun produces. Recognizing the potential conflict of interest that creates, especially as Aventine starts to increase its own production of ethanol, VeraSun has informed Aventine that the distribution deal will end in March 2007,” he writes.

So it looks like VeraSun will be shopping for a new distributor fairly soon. And if the company can’t find a way to get its product to the consumer, there could be some delay to all of the growth the company has been talking about.

Aventine — which Walberg compares to Pacific Ethanol, a small-cap company that has been mentioned in this column numerous times — has announced plans to offer 7.75 million shares at a range of $37 to $41 per share.

But even this deal isn’t all it’s cracked up to be. Company insiders are selling 1.4 million shares on the offering, Walberg writes, which is almost 20% of the total shares. I certainly wouldn’t want to put my money into a company whose own people are bailing out before the stock hits the open market…

Will Avantine and VeraSun succeed once the partnership is severed? Only time will tell, but some of these red flags are too much for me to stomach. It might be best to look elsewhere for the time being.

Reader Questions, Answered

Everyone is writing in about Nuclear Solutions (NSOL.OB: OTC BB), asking about the company’s planned ethanol production. And yes, it is true. A subsidiary of Nuclear Solutions is making moves toward ethanol.

Recently, Fuel Frontiers, Inc., a subsidiary of Nuclear Solutions, has partnered with Ambient Energy to purchase a 1,034-acre site in eastern Pennsylvania for the construction of a 250 million-gallon coal waste-to-ethanol production facility.

And it’s not just used coal that will be used. The company is looking at used tires, wood wastes, biomass, discarded corn stalks and other agricultural by-products to be used to make the ethanol as well.

Resident transformational technology expert Jonathan Kolber has written about Nuclear Solutions at length in past columns. In fact, Jonathan has written that he expects Nuclear Solutions to be one of the best performing stocks of the next five years. Here’s his column from the archives if you missed it.

Best,

Gunner
June 19, 2006

Avoiding Some Ethanol IPOs was originally featured in the Penny Sleuth.