Pacific Ethanol: Potential Buyout Target

PEIX is an operator of a handful of ethanol plants in the western states. They are trying to emerge from bankruptcy, and have recently arranged a line of credit to become a credible ethanol producer. Their current stock price is about $1 per share and they have about $80M in debt:

Stock Price	$ 1
Shares Outstanding	83,000,000
Debt (Bal Sheet)	$ 25,000,000
New Debt	$ 53,000,000
Total Cost to Buy Co	$ 161,000,000
Capacity Gal/Yr	240,000,000
Capacity Gal/Day	657,534	gallons per day
Capacity Barrels/Day	15,656	barrels per day
Acquisition Cost	$ 10,284	$ per BOD

A couple of things on this: The acquisition cost of just over $10K per BOD is right now about twice that of the average cost of petroleum refining capacity in the US.... however, keep in mind that on average, the margin for ethanol is about twice that as well, so as an investment, someone would be equally likely to get into the ethanol business as they would the petroleum refining business....

Stock Price	$ 1
Shares Outstanding	83,000,000
Market Cap	$ 83,000,000
Debt (Bal Sheet)	$ 25,000,000
New Debt	$ 53,000,000
Total Cost to Buy Co	$ 161,000,000
Capacity Gal/Yr	240,000,000
Capacity Gal/Day	657,534
Capacity Barrels/Day	15,656
Margin@.25/gal	60,000,000
Acquisition Cost	$ 10,284
One year ROR	37%

The potential buyout scenario suggests that if Valero or some other refiner wanted to, given the margins that exist in the industry and knowing what the investment per BOD of capacity is, you could expect a really attractive ROR.... In fact, to make this an equal investment to a greenfield oil refinery project, Valero or someone else would be willing to pay up to $6 per share, and still get the same rate of return....

So based on the current margins in this industry, the really interesting way to look at PEIX is as a potential takeover target..a buyer of PEIX could make on the order of 37% in the first year on such an investment. This is comparable to the ROR that Valero could see when it did its original ethanol deal at the end of 2009. Valero, or anybody else that wanted to get into ethanol, would be delighted to get this deal done.

Chances are the management knows this. They recently took on some debt with the idea of buying back some of their stock, and the debt itself will make the potential takeover less likely....

However, at the current margins for ethanol, and the current price of refining capacity in the oil industry, PEIX is a potential opportunity, of course much more so than it was when the plants were originally built.