February 14, 2007

 

US BioEnergy bullish on ethanol despite tighter margin

 

With US BioEnergy Corp. emerging as the largest independent ethanol producer in the US, Gordon Ommen, the company's chairman and chief executive, sees plenty of opportunity despite the rising cost of corn and likely consolidation in the industry.

 

"We're not some people that came running to the party when it was a hot game a year ago," Ommen said. "We've ingrained ourselves and built the company to last."

 

A former banker and venture-capital investor in South Dakota, Ommen had been working as a private-equity executive specialising in renewable energy investment. Using contacts made during those years, Ommen, who is now 47 years old, teamed up with Fagen Inc., a leading ethanol-plant builder, and CHS Inc., the largest US grain marketer and energy cooperative, to form US BioEnergy in 2004.

 

With 250 million gallons a year now on line, US BioEnergy ranks ahead of VeraSun Energy Corp. as the largest free-standing ethanol producer, second to conglomerate Archer Daniels Midland Co., he said.

 

The company executed its IPO at US$14 a share on Dec 14, offering 10 million shares to raise US$140 million. The stock trades at US$11.91 now, falling with the overall sector as oil prices dipped in recent weeks.

 

Ommen said that the business worked when oil was at US$28 a barrel and works now, with oil at about US$59 a barrel.

 

The US BioEnergy executive said he sees the industry expanding to as much as 14 billion gallons of ethanol a year, up from about 6 billion now.

 

With US BioEnergy's alliances with CHS Inc., it has access to corn farmers and also ethanol transport via railroads such as Burlington Northern Santa Fe Corp.

 

The company is also positioned to take part in likely consolidation, Ommen added.

 

Ommen said the company plans to keep opening plants as the nation's gas supply continues to tap into ethanol as a fuel additive.

 

"We believe that bio-fuels are here to stay as a part of the fuel stream," he said. "We're here to do our part to bring our country towards energy independence."

 

Despite jitters over whether the corn supply will be adequate to fuel America's ethanol expansion, Ommen said very little of the corn needed for ethanol goes directly to America's table, with most used for cattle feed.

 

However, the corn used to make ethanol gets converted to distillers grain, which in turn is used to feed cattle and reduces the impact of making the fuel.

 

"What comes out of the back of the plant is distillers grain. And that's high-protein animal feed," he said. "That's part of our revenue. We believe the corn supply is there and will continue to be there."

 

Piper Jaffray, one of the underwriters of the IPO, issued a market performance rating to US BioEnergy on Jan 24.

 

"The near-term operating environment is challenging; gross profit spreads are narrowing as ethanol prices decline and corn prices rise," analyst Eric Larson said in a note to clients.

 

However, the company's relationships with Fagen Construction and CHS help ensure that US BioEnergy's new plants will hit construction schedules and CHS will enable US BioEnergy's low-cost-producer status, Larson said.