Why are Ethanol Stocks Rising When Ethanol Subsidies Are Set to Expire? PEIX, LEC, BIOF

On Monday, ethanol or biofuel stocks Pacific Ethanol (NASDAQ: PEIX), Lignol Energy (CVE: LEC) and BioFuel Energy (NASDAQ: BIOF) were rising as if we are in the midst of running out of oil or for that matter, not running out of costly subsidies for oil substitutes. Specifically, New America Energy rose 21.05%, Lignol Energy rose 11.11% and BioFuel Energy rose 4.33%. However, a quick reality reveals that we are far from running out of oil and much closer to the expiration of costly taxpayer subsidies for ethanol. Specifically, the 45-cent-per-gallon tax credit that the ethanol industry gets for blending ethanol into gasoline will expire in December, saving taxpayers $6 billion a year while another 54-cent-per-gallon excise tax on imported ethanol is set to expire at the end of the year. Moreover, there is also a proposal in Congress to reduce the amount of ethanol required by the Renewable Fuel Standard when corn supplies are tight in order to ensure ample supplies of feed corn. So should you go out and buy ethanol or biofuel stocks like New America Energy, Lignol Energy and BioFuel Energy? Here is a closer look at all three to help you decide:

Pacific Ethanol (NASDAQ: PEIX)

Pacific Ethanol is a marketer and producer of low carbon renewable fuels in the Western United States. On Monday, Pacific Ethanol rose 15.95% to $1.01 (PEI has a 52 week trading range of $0.25 to $7.98 a share) and continued rising in after hours trading. It should be noted that in 2009, five of Pacific Ethanol’s indirect wholly owned subsidiaries filed voluntary petitions for relief under the Bankruptcy Code in order to restructure their debts. That bit of information might be water under the bridge but its not particularly reassuring either. Neither is the fact that Pacific Ethanol was facing the threat of delisting for trading under $1 a share – a problem that Monday’s trading session resolved for the time being. On the other hand, Pacific Ethanol has seen some insider buying plus its risen some 236% over the past month. Given that the best case scenario is that ethanol subsidies are merely reduced rather than eliminated, one has to ask: Do the insiders here know something that we don’t know? Or better yet: Has anyone checked to see how much in political campaign contributions any insiders at Pacific Ethanol have been making recently?

Lignol Energy is a development stage company that is developing and commercializing bio-refinery technologies for the production of fuel-grade ethanol and other biochemicals from biomass feed stocks. On Monday, Lignol Energy rose 11.11% to C$0.10 (LEC has a 52 week trading range of C$0.03 to C$0.25 a share) on trading volume of 243,000 verses an daily average trading volume of 33,014. I am not seeing any recent news to explain the sudden rise in share price but investors should note that back in September, Lignol Energy announced that it had engaged CIBC World Markets and Capital West Partners to arrange strategic partner investments to provide the company with medium-term financing to begin development of its initial commercial projects. Moreover and back in 2008, Lignol Energy had also been selected to receive an award of up to US$30 million from the US Department of Energy to build an ethanol plant in the US but market turmoil forced the company to substantially change the project’s size and scope – causing it to loose DOE funding.

BioFuel Energy (NASDAQ: BIOF)

BioFuel Energy produces and sells ethanol and related products through its two ethanol production facilities located in Wood River, Nebraska and Fairmont, Minnesota. On Monday, BioFuel Energy rose 4.33% to $0.60 (BIOF has a 52 week trading range of $0.15 to $2.24 a share) on very high trading volume of 4.84 million verses a normal daily trading volume of 866,300 shares. Investors should note that over the past month, BioFuel Energy has gained around 147%. However, investors should also note that Cargill Biofuels Investments LLC, which is a 10% beneficial owner of BioFuel Energy shares, recently sold 1.1 million shares and now owns 11.4 million shares. Hence, perhaps they know something that the insiders over at Pacific Ethanol do not know.

The Bottom Line. An investment in Pacific Ethanol and BioFuel Energy right now could be a risky suckers’ bet on what the US government does with ethanol subsidies while Lignol Energy is worth watching to see who they come up with as a funding partner.