Shares of Pacific Ethanol, Inc. (NASDAQ: PEIX) have enjoyed a slow but steady climb on Friday, hitting a high of 0.42 after opening the session at 0.35. Along with the share price bump PEIX has seen trading volume spike to an impressive 6.7 million in the first two hours, this after failing to top the 1 million mark the last two days. Currently PEIX is above their 50-day moving average of 0.33 but remains well behind their 200-day moving average of 0.82.
Hitting that 0.82 anytime soon may be wishful thinking for shareholders as the issues that have slammed the ethanol industry remain in place and the chances of those being resolved quickly is doubtful. Chief among those issues is the high corn prices that have cut deep into the profits of ethanol producers.
Evidence of this problem can be seen in PEIX’s second quarter results as they reported a 16% increase in total gallons sold compared to the second quarter 2011, 116.6 million gallons compared to 100.6 million gallons, yet they had a gross loss of $4.9 million during the most recent frame compared to a gross profit of $1.3 million one year earlier.
PEIX was also victimized by a lower average price per gallon of ethanol sold so despite the additional 16 million gallons sold in the second quarter 2012 net sales were just $205.4 million, down from $214.6 million during the second quarter 2011.
As a result of these factors PEIX also took a significant hit in operating costs, producing an $8.0 million loss for the three-month period compared to a loss of $2.8 million during the same frame last year.
Unfortunately for PEIX many of the problems that are directly affecting their business are completely out of their control. The well documented drought that has depleted the corn supply is probably the most evident of these problems. With this lower corn supply available prices have shot through the roof and when that is added to the fact that gasoline demand in the U.S. has dropped PEIX is finding it harder and harder to make things work.
Despite the problems Neil Koehler, President and CEO of PEIX, stated in the company’s press release detailing the second quarter results, “In response to the current adverse market conditions for production of ethanol, we have moderated production at the Pacific Ethanol plants to better optimize plant efficiencies and meet our customers’ needs. Looking ahead, the underlying industry fundamentals remain sound and we expect results to improve in the second half of the year.”
Moderating production at their plants is about the only thing PEIX can do to slow their losses. That’s kind of a bitter pill to swallow for shareholders given the fact that PEIX acquired an additional 33% ownership in those four ethanol plants in the Western United States that have a combined operating capacity of 200 million gallons, pushing their ownership interest to 67%. While they managed to get that additional 33% at a discount to their last purchase price and at an even greater discount to replacement costs the fact is those plants aren’t making a profit so the financial rewards aren’t there.
With the obvious problems in ethanol prices PEIX has made efforts to diversify their revenue stream in production. Koehler pointed out that this is taking place “with the implementation of corn oil separation at the first of our four plants.” What kind of financial impact that will have on PEIX really isn’t known at this point but for the company to be successful it is clear that market conditions will have to improve dramatically.
At the end of the day PEIX can improve net sales as much as they want but if they aren’t producing a profit from those sales then it means little to the shareholder. It would seem wise to scale back production and operate more efficiently given the climate, hoping that things take a turn for the better. If there are more favorable conditions then PEIX could be in a strong position with the additional ownership interest in those plants but those conditions are being determined by something nobody can really control, Mother Nature.