Investing in Ethanol

A “New” Stock Play on Soaring Energy Prices and Why Now is the Time to Invest in this “Fuel of the Future”
An Investment U White Paper Report
By Angela McKee and the Investment U Research Team

The U.S. is in the midst of a frightful energy crisis.

The national average price for a gallon of gasoline is $2.89 which is 77 cents higher than this time last year.

In September of 2003, the price of standard crude oil was less than $25 per barrel. By April 21 of this year, it reached a record of $75.35 per barrel.

And given the mounting tensions between the U.S. and Iran the dawn of another potentially busy hurricane season and the increase in world demand there’s no indication that this strain will be eased any time in the near future.

Strap on your seatbelt an alternative energy source is set to take the world by storm. In this research report, we’ll take a close look at the booming ethanol industry and how investing in ethanol could prove to be an extremely profitable move for investors.

Ethanol the Advantages

Ethanol, or ethyl alcohol as it is also known, has recently been flooding onto the market. Derived from starch crops, such as corn and sugar, ethanol offers advantages to our current gasoline.

And people in power are taking note.

President Bush announced that alternative fuels are a solution to America’s insatiable “addiction” to oil. He declared, “Ethanol will replace gasoline consumption. The ethanol industry is on the move, and America is better off for it.”

In fact, Bush not only made this statement, he backed it up with his signature on the Renewable Fuels Standard (RFS) of the Energy Policy Act of 2005. This measure requires that the production and use of renewable fuels be increased from presently 4 billion gallons to 7.5 billion gallons in 2012.

Then, just last month, the U.S. government ordered that the current gasoline additive, MTBE, be replaced by a renewable, safer, more eco-friendly additive. What additive is that?

You guessed it ethanol.

In addition to its imminent application as an additive, many government officials as well as the U.S. auto manufacturers believe that ethanol holds promise as a total substitute for gasoline. As a matter of fact, the car manufacturers seem to be betting on it. By the end of this year, GM, Ford and DaimlerChrysler AG will have 6 million flex-fuel vehicles on the road. These vehicles are capable of running on gasoline or E85 - an 85% ethanol, 15% gasoline fuel.

Without a doubt, these factors will have a huge impact on the market. The Wall Street Journal predicts that U.S. ethanol demand will likely increase by at least 50% this year alone. There are currently 97 American ethanol refineries, with nine of those expanding and an additional 35 plants under construction. The total number of refineries is expected to double within the next couple of years, clearly indicating a market on the move.

With a mandate from the U.S. government and the obvious need for change, we see this as a fantastic opportunity for investors to earn serious profits.

Who’s Investing in Ethanol These Days?

Take a look at recent investments made by some of the richest and most successful people in the world:

• Bill Gates, the richest man in America, allocated $84 million into Pacific Ethanol, Inc. (Nasdaq: PEIX), a company poised to control a considerable share of the ethanol industry.
• Sir Richard Branson, chairman of the Virgin Group and worth an estimated $3 billion, has plans to invest $300 to $400 million to produce and market this promising alternative fuel. He says, “This is the win-win fuel of the future.”
• Vinod Khosla, “guru” of Silicon Valley, co-founder of Sun Microsystems, and one of ethanol’s most vocal advocates, has invested millions of his own dollars in private companies involved in the development of ethanol.

What’s more, industry titans are recognizing the value of providing the American public with an alternative.

• Wal-Mart announced that it is considering offering corn-based ethanol at its 383 gas stations throughout the U.S.
• Not to be left behind, several Big Oil companies, including Shell and Exxon Mobil, are funding ethanol research.

A booming industry, to be sure. Now let’s take a look at why ethanol will only get bigger from here

Four Factors Driving Ethanol Higher Now

• FREEDOM FROM FOREIGN OIL: Ethanol could free America from its reluctant dependence on foreign oil. This is not a pipedream, conjured up by some pro-U.S. idealists. Not at all. Brazil has turned that vision into reality, where 70% of the vehicles in that country are sustained on ethanol. Brazil’s ethanol plan has successfully replaced imported oil worth an estimated $120 billion. To put it into perspective, this would translate to a savings of about $2 trillion for an economy equivalent in size to the U.S.
• INCREASED INCOME TO U.S. FARMERS: In terms of economics, there is no clearer choice for the American public. It would mean higher farm incomes and we would see a steep increase in rural employment.
• THE TECHNOLOGY’S IN PLACE NOW: The technology to run cars on ethanol already exists. General Motors alone has built more than 1.5 million ethanol-compliant vehicles.
• IT’S RIDING THE “GREEN WAVE”: And let’s not ignore the fact that ethanol is believed to be much more environmentally friendly than our current petroleum. Many experts agree that a switch from gasoline to ethanol could significantly reduce our carbon dioxide emissions, some say by as much as 80%.

Ethanol’s appeal extends throughout interest groups. The U.S. government, American car manufacturers, environmentalists and the agriculture industry are all strong supporters of this alternative fuel.

And “They” Said It Couldn’t Be Done

Naturally, this burgeoning industry is not without its detractors and rightfully so. The American public has witnessed its fair share of fads and empty promises throughout the years, so a touch of skepticism is understandable. However, even under close examination, ethanol remains the leading contender among alternative fuels. Here’s why

One of the most controversial subjects surrounding the debate is referred to as the “net energy” of ethanol production. This describes the amount of energy generated by ethanol as compared to the amount of energy needed to produce it. Critics argue that there is a negative balance. But the Department of Energy disagrees. Their studies conclude that for every unit of energy spent, 1.4 units of ethanol energy are created. And as production technology improves, the energy yield will increase dramatically.

Many of the current arguments simply ignore the rapid advances being made in the field. For instance, “they” say that the U.S. cannot produce enough corn to both feed and fuel the nation. But the latest innovations include cellulosic ethanol, a biofuel that differs from corn-based ethanol only in the way it is produced. Cellulosic ethanol can be made from almost any organic matter - switchgrass, trees, even animal and forest byproducts. A shortage of those common products is highly unlikely.

And while it can’t be denied that ethanol burns faster than gasoline, would motorists really care about filling up more if they are paying as little as a dollar a gallon? Probably not.

Finally, for those who steadfastly maintain that ethanol isn’t sustainable on a mass level, the millions of motorists in Brazil would wholeheartedly disagree

In less than 30 years, Brazil has transformed itself into the model of energy independence - and it’s done it with ethanol.

400%-Plus Gains by Investing in the Ethanol Boom

The market already reflects growing momentum behind ethanol investing. Take a look:

• Since March of this year, three companies involved in ethanol production have filed for IPO’s with the Securities and Exchange Commission - VeraSun Energy Corp., Hawkeye Holdings Inc. and Aventine Renewable Energy Holdings Inc.
• Pacific Ethanol, Inc, is currently trading at mind-boggling levels. Since Bill Gates made his investment, shares jumped from about $10 to a high of $44.50. It now seems to have leveled off around $25/share.
• Archer-Daniels-Midland Co., the largest ethanol producer in the U.S., has seen its stock double in one year.

Fueling an Alternative Revolution

Only time will tell if ethanol will fulfill its expectation as the replacement fuel of the future. As an industry still in its relative infancy, there are obstacles to be overcome. However, with the widespread backing it has received and the initiatives that are already in place, the ethanol industry is revved up for enormous growth and one that presents to you, as an investor, new and exciting opportunities. And the Investment U e-letter is where we’ll alert these opportunities to you as soon as they surface. (You can sign up for free below.)

In the meantime, it’s important to focus on companies generating profits right now. And while ethanol - and even solar power - companies are on the verge of reporting black ink on their income statements, one fact remains: the traditional energy sector is swimming in cash. And they’re putting it to good use, too - paying down long-term debt, buying back shares, investing in R&D, and increasing their dividend payments.

For more information about the company boasitng the oil sector’s best balance sheet, see our recent analysis: Conoco Phillips: Big Oil’s Cash-Flow King Is the Fastest-Growing “Crude Chip” - Tap $2.2 Billion of Petro-Profits And Another 9 Years of 37%-Plus Growth.

Good investing,

Angela McKee and the Investment U Research Team

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