Not looking at the facts (ethanol blends with 31 billion gallons of production) has already created a big mess today. If we’re going to overhaul the RFS, shouldn’t we address all of its shortfalls with the facts in mind? Nonetheless, it does address one major flaw: Investors will want to begin reviewing their options should it pass.
Risks for major producers
Reform could be bad news for large corn ethanol producers such as Archer Daniels Midland Company (NYSE:ADM) and Valero Energy Corporation (NYSE:VLO). The two companies have a combined annual ethanol capacity of nearly 3 billion gallons, which is almost one-quarter of the country’s production. It doesn’t take much imagination to see how devastating that could be for investors, who have been hit by fluctuating ethanol margins in the past.
The largest producers are big enough to refocus production to cellulosic feedstocks, but it will be a painful corrective process that will take years to complete. Depending on the fine print included in the potential legislation, sugarcane ethanol could also be disqualified from the blending requirements. The United States has been a consistent net exporter of ethanol in recent years, but imports from Bunge Ltd (NYSE:BG) and Raizen are still important in times of drought and could be halted until both grow second-generation capacity.
Potential opportunities
While the bill could effectively exterminate smaller producers who aren’t as resistant to volatility or don’t have the ability to switch to second-generation feedstocks, there are opportunities in the chaos.
Although it may not affect the fundamentals for the company, cellulosic-fuel producer KiOR Inc (NASDAQ:KIOR) could use the changing market conditions to supercharge its growth. KiOR will have two biorefineries in operation by the end of 2014, with an annual capacity of nearly 50 million gallons. If the company reaches efficiency targets, production could increase to 70 MMgy. In that scenario, without changes to the current mandate, the company could sell its fuels for $5.24 per gallon. Profitability could soar even further if new legislation hands out more credits to cellulosic ethanol producers to reinforce growth, which could spur the company to add even more capacity.
A non-obvious play on disappearing corn ethanol production is Gevo, Inc. (NASDAQ:GEVO), although it comes with substantially more risk. The company’s platform aims to retrofit existing ethanol biorefineries to produce higher value isobutanol, which has applications in fuels and blendstocks, specialty chemicals, plastics, and rubbers. After scoring some major wins in a recent legal battle with Butamax, a joint venture between BP plc (ADR) (NYSE:BP) and DuPont Fabros Technology, Inc. (NYSE:DFT), the company can now focus on proving its technology at commercial scale.
Gevo’s Luverne, Minn. biorefinery. Source: Gevo.
After contamination issues dealt a blow to its scale-up timeline last year, Gevo, Inc. (NASDAQ:GEVO) is now ready to restart its Luverne biorefinery. A successful ramp-up into 2014 would demonstrate the feasibility and profitability of its platform and open the door for its future. Management has stated that partners and potential partners courted by the company represent more than 1.2 billion gallons of ethanol capacity waiting to be put to better use. Add a bill that could make corn ethanol obsolete, and an entire industry could look to Gevo, Inc. (NASDAQ:GEVO) for saving their operations.
Foolish bottom line
Keep in mind that a bill was only drafted and is a long way from becoming law. Nonetheless, investors in Valero Energy Corporation (NYSE:VLO) and Archer Daniels Midland Company (NYSE:ADM) should be aware that changes to the RFS are inevitable over the next several years. Future reform may not go as far to nix corn ethanol from blending requirements, but you can expect drastic reductions to total production volumes. The important thing to remember is not to panic — opportunities always exist in this thing called investing.
The article This Bill Wants to Cut Ethanol Production in Half originally appeared on Fool.com is written by Maxx Chatsko.
Fool contributor Maxx Chatsko has no position in any stocks mentioned. Check out his personal portfolio, his CAPS page, or follow him on Twitter, @BlacknGoldFool, to keep up with his writing on energy, bioprocessing, and emerging technologies.The Motley Fool has no position in any of the stocks mentioned.
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