Pacific Ethanol’s Short-Lived Reprieve

For a few days there, things were starting to look up for Pacific Ethanol (PEIX).

Corn costs are surging. Demand is slack. And biofuels are being blamed for everything from toxic sludge to movie-ticket inflation. Pacific Ethanol, which recently suspended plans to build a new California plant, saw its stock drop 64 percent so far this year until it reported its first quarter earnings last week.

Excluding a one-time charge (related to an interest-rate hedge, which saw a decline in fair value), Pacific Ethanol posted a profit of 6 cents a share – a lot better than the 9-cent loss analysts had forecast. The company also hinted at a new plan to raise badly needed capital. CFO Joe Hansen explained:

We recently entered into a forbearance agreement with Comerica whereby our credit limit was reduced from $25 million to $17.5 million as a result of non-compliance with certain financial covenants… This coupled with elevated commodity prices has increased our need for working capital. To solve this problem, we are seeking to secure additional working capital credit lines and equity, part of which is expected to include $5 million in a near term capital infusion as to which negotiations are ongoing.

The forbearance plan – similar to those sought by mortgage owners in default – meant Pacific Ethanol would be raising capital just after a strong quarter. The company was shy on how it would get the money, but the answer came a few days later: Pacific Ethanol would sell $34.25 million in new stock and warrants.

The move would indeed raise the needed capital and more, but it would substantially dilute existing investors’ share in the company. The news caused PEIX to drop 20 percent in one day. It’s since lost 36 percent of the value it had immediately after its first-quarter earnings report.

The episode suggests that the pain facing corn-ethanol companies has yet to subside. Pacific Ethanol may be eking out profits in a tough market, but it needs capital to keep it steaming forward. And that is creating a new set of concerns for investors.