Description
Aventine Renewable Energy ("Aventine")
Situation Overview:
Aventine is a cheap option on ethanol. The restructured equity (Ticker - AVRW) trades at $0.79 per gallon of pro forma ethanol capacity, which is a sizable discount to recent transactions and public comparables in the $1+ per gallon range.
For some history, Aventine filed for bankruptcy in April 2009 as high leverage coincided with industry overcapacity, higher raw materials and shrinking gasoline demand. The company emerged from bankruptcy in March 2010 with a cleaner balance sheet and new management.
Recently, Aventine completed a secured term loan to refinance 13% senior secured notes. The term loan provides the company with plenty of liquidity to ramp up the new plants to full production and to fund any near-term operating losses. As evidenced by the pricing of the new term loan - L+850 bps with a 2% floor, this investment is not for the faint of heart. I am not going to argue that ethanol is a good business, but that Aventine shares have been punished too harshly and represent an interesting trade.
Company Overview:
Aventine is a corn-based ethanol producer with plants in Pekin, IL, Aurora, NE and a recently purchased a facility in Canton, IL. The company is nearing completion on two new plants (Aurora and Mt. Vernon). Existing capacity of 202 MM gallons will increase to 460 MM gallons by 2Q 2011.
Pekin, IL 157 MM gallons
Aurora, NE (East) 45
Total Current Capacity 202
Canton, IL 38
Aurora, NE (West) 110
Mt. Vernon, IN 110
New Additions 258
Pro Forma Capacity 460 MM gallons (Aurora and Mt Vernon were completed in 4Q)
Ethanol is an additive to gasoline, which reduces emissions and enhances octane. The fuel is currently blended up to 10% with gasoline (or 15% for post 2007 cars) and has 35% less energy content than gasoline. US ethanol production uses ~33% of the US corn crop. Pursuant to the Renewable Fuel Standard, minimum ethanol demand is mandated at 12.0 BN gallons in 2010 and 12.6, 13.2, 13.8, 14.4 and 15.0 BN gallons in 2011-2015.
According to the RFA, the annual ethanol production capacity in the US for plants in operation and under construction is 14.0-14.5 BN gallons annually. As noted above, this compares to 12.6 BN gallons of mandated demand plus any additional overseas demand (currently 0.5 BN gallons). Assuming all plants are completed and no plants are shutdown, the capacity utilization is in the low 90s.
Aventine's plants do use inferior technology (Delta-T vs. ICM-Fagen), which results in higher conversion costs, although its barge access for >58% of capacity and other transportation advantages plus certain energy savings should partially negate this disadvantage. Additionally, Delta-T produced ethanol is more advantageous for European export. I should note that the company claims it is a low cost producer, but this remains to be seen.
Other major industry players include POET Biorefining, Archer Daniels, Valero, Green Plains, Hawkeye and Andersons. The top 10 producers account for nearly 50% of production.
See Aventine website for further information - http://www.aventinerei.com/investor.html
Capital Structure (9/30/10):
ABL Facility ($20 MM) $0 MM
Mortgages $0
Secured Term Loan $200
Total Debt $200
Cash ($77)
Net Debt $123
Equity (8.6 MM @ $28.00) $240
Enterprise Value $364 MM
EV/gallon $0.79
Comparables $1.08
Recent Transactions $0.90-$1.10 (peak transaction is August 2010 Flint Hills purchase @ $1.25)
Replacement Cost $1.60-$2.00 (management claims $1.85-2.05)
EV/PF EBITDA 8.3x ($0.15 "crush margins" / in-line with LTM EBITDA per company)
6.8x ($0.17)
5.4x ($0.20 Piper Jaffray Green Plains 2H 2011 estimates) 4.8x (POR estimates - EBITDA/gallon of $0.22)
4.0x (Hawkeye POR estimates - EBITDA/gallon of $0.25)
EV/ EBITDA - Comps ~6x 2011
*Limited capex post plant completion, so EBIT multiples are only slightly higher.
Now why do I think this commoditized business with historically few barriers to entry is cheap?
- Trading levels. The stock trades at $0.79/gallon. This compares to recent transaction costs of $0.90-$1.10/gallon area (see Global Ethanol and Flint Hills-$1.25/gallon) and replacement cost of $1.60-$2.00/gallon. On an EV/EBITDA basis, a reversion to the mean on crush margins results in a ~5x EBITDA multiple with limited ongoing capital requirements.
- Demand growth from the higher mandate and gasoline volumes.
- Potential for a movement to E15 from E10 (i.e. 10% of gas is ethanol). Already, the EPA ruled in favor of E15 for 2007+ cars (16-18% of fleet) and a ruling on 2001-2006 cars is expected near-term.
- Export option. This has the potential to both increase margins and sop up excess supply, thereby tightening supply-demand conditions as high sugar prices have cut Brazilian exports.
- Higher construction costs given "Renewable Fuel Standard 2" which sets certain limits on GHG emissions for new plants. Existing plants are grandfathered, but new plants will cost more to build. This should limit new construction.
- More consolidation expected.
Risks:
-New supply additions
-Rising corn and energy prices
-Motor fuel demand declines
-Build out of infrastructure to facilitate any movement to E15 from E10
-Any change in regulations; Extension of blender tax credit (Volumetric Ethanol Excise Tax Credit) beyond 2011
-Agricultural lobby is very powerful
-Falling sugar prices, which could re-direct sugar to ethanol in Brazil
-S-1 filed to register shares for potential selling shareholders
Catalyst
Completion of plants
EPA ruling on E15 for 2001-2006 cars
M&A
Ethanol margin improvement