The future of BioFuel Energy Corp. (NASDAQ: BIOF) may rest in the balance when the Environmental Protection Agency announces their decision regarding a proposal to approve a 15 percent blend of ethanol in gasoline, an increase from the current accepted blend of 10 percent. That EPA decision is expected by mid-October but investors are already placing their bets as BIOF shares jumped from 1.33 on September 21 to 2.10 the following day and has since climbed up to the 2.86 – 2.94 range and showing no signs of slowing.
If the EPA, which was to receive test results from the Department of Energy by Sept. 30, gives the green light to the ethanol industry shares in BIOF could easily surpass their 52-week high of 4.40 set back in January. Already the share price, currently 2.94, is well above its 50-day moving average of 1.49 and 200-day moving average of 2.23. Of course this has been heavily aided by bets and negative news could send the stock price crashing.
BIOF has a lot riding on the EPA decision. Owning and operating two of the largest dry mill ethanol facilities in the United States they produce 230 million gallons per year of fuel grade ethanol and 720,000 tons of distillers grains at these facilities and deliver these products to fuel blenders and agricultural users both locally and nationwide. An increase in percent blend would obviously increase demand for ethanol and provide a tremendous benefit to the company.
As aggressive as the ethanol industry has been in lobbying for a higher percent blend the petroleum industry has countered with their own arguments against such a move. While the ethanol industry has been relying heavily on the federal government’s Renewable Fuel Standard requirement for 36 billion gallons of renewable fuel by 2022, something it says it could reach if given greater access to gas tanks, the petroleum industry has insisted there could be risks to increasing the percent blend.
The ethanol industry has refuted that argument, saying a 15 percent blend would be safe for all cars. Regardless, the EPA has said their upcoming decision would only apply to 2007 model years and newer, what they are calling “Tier 2” vehicles.
It is that detail that should be a bit concerning for BIOF investors as it creates a wealth of questions surrounding the public’s acceptance of the blend. That’s something not lost on Brian Jennings, Executive Vice President of the American Coalition for Ethanol, who has argued that an EPA decision to approve E-15 for particular model years will only cause problems for the ethanol industry as well as drivers.
Jennings has said giving the green light to E-15 would eliminate those problems and instill trust among consumers. It would also open the door to a significant number of customers as more and more older model cars remain on the road. Testing on 2001-2006 model vehicles are already being conducted and those results are expected by the end of 2010.
Of late investors in BIOF have shrugged off those concerns which could lead to an even greater spike in share price if the EPA eventually approves E-15 for all model cars. That could very well happen as the EPA is certainly aware of the importance of ethanol in meeting the Renewable Fuel Standard requirement and while they wouldn’t turn their head if a higher blend did cause problems to later model cars they likely won’t be looking to uncover problems.
Recognizing the potential Greenlight Capital Inc and an affiliate of Third Point LLC, the two largest shareholders in BIOF, have agreed to provide a six-month bridge loan of $19.4 million which would help the struggling ethanol company repay $17.9 million in working capital loans under its senior debt facility.
In addition, the two hedge funds have also agreed to conduct a $40 million rights offering which would allow all BIOF shareholders the right to buy up to four million of the company’s convertible preferred stock at $10 per share. Proceeds from the offering would go toward paying off the bridge loan as well as cutting into the company’s long term debt which was placed at $221.3 million as of June.
News of the loan was a shot in the arm for BioFuel Energy as it gave investors peace of mind knowing that the company could actually benefit from a positive EPA decision. It also softened the blow from some disappointing second quarter figures showed a decrease in revenue for the same period in 2009, dropping from $106.5 million to $96.4 million. BIOF’s net loss for the quarter stood at 412 million compared to a net loss of $9 million in the same quarter 2009. There was also a significant increase in operating loss for the second quarter, jumping to $9.4 million from $5.1 million.
BIOF looks to be in a position where they could challenge their 52-week high and with its volume nearly ten times its average it appears as if investors are banking on such an occurrence.
