Pacific Ethanol Incorporated (NASDAQ: PEIX)

Pacific Ethanol Inc. (PEIX) produces and markets cellulose-based ethanol and bio-diesel in the United States.  The Company intends to take advantage of the Energy Independence and Security Act of 2007 which mandates the use of 36 billion gallons of ethanol in the United States by 2022.  Founded in 2003, the Company is headquartered in Sacramento, California.

Source: Reuters.com, SEC Filings.

Financial Summary

Source: Reuters.com, SEC Filings.

Analyst Consensus

No analyst rates shares of PEIX at this time.

Investment Highlights

Globally, governments have mandated and legislated funding for alternative energy development, including biofuels technology.  By volume, Brazil and the United States dominate the biofuels market, accounting for 89% of world production in 2008, according to Renewable Fuels Association.  Brazil’s transportation runs mostly on either hydrous alcohol (E100) or gasohol (E25 blend), with a minimum of 25% anhydrous ethanol mandated by the state.  Although small in percentage terms of total transportation fuels consumed in the  United States and European Union, in terms of volume consumption, these two combined regions are larger than total consumption of Brazil.

A recent biofuels industry report recently issued by Pike Research revealed expected long-term and rapid growth in biofuels consumption through 2022, with estimates suggesting the global market will reach $280 billion by that time.  The report also estimates the growth rate of the industry to approach 15% per year through 2022.  With growth rates similar to the PC industry of the 1990s and nominal revenues rivaling today’s largest global industries, investment opportunities should continue to be abundant in the market for alternative forms of energy.

The Company’s ability to develop its biofuels technology may track investor investment flows into the sector in response to rising spot prices of oil and natural gas, the prices, of which, exploded to $147 per barrel of oil and $13.5 per mcf (million cubic feet) of natural gas in late June of 2008, then dropped to $35 per barrel and $3.50 per mcf, respectively, in December of 2008.  Since December of 2008, oil recovered to $80+ per barrel, while natural gas is now expected to reach more than $6 per mcf during 2010, according to the Energy Information Administration (EIA).  Other private analysts, such as Matt Simmons of Simmons & Company hold a more bullish price target for oil and natural gas, citing evidence of world peak oil production.

In the United States, biofuels production was 500,000 barrels per day in 2007, but is expected to reach 2.3 barrels per day in 2030, according to the EIA, with ethanol production growing to 1.9 million barrels by 2030.  To meet future requirements of the Renewable Fuel Standard (RFS), 60% of new light-duty vehicles sold in the U.S. will run on E85, flex fuel or hybrid fuels, the EIA projects.

According to the Brazil Institute of the Woodrow Wilson Center, ethanol prices are competitive without federal or state subsidies in the United States at an oil price of more than $60 per barrel.  In Brazil, ethanol is competitive at approximately $30 per barrel of oil.

Global production remains a key driver of fossil fuels prices, with production in both OECD and ASEAN countries weighing heavily on total world production outputs.  Most economists expect a rebound in durable goods production in Asia, especially China.  China’s real GDP growth is expected to reach 8% in 2010, officially, while GDP growth in the OECD countries is anticipated to be flat or rise slightly.  Since the demand for energy correlates strongly with overall economic activity,  oil and natural gas prices may continue higher as excess inventories are depleted and diminishing new supplies struggle to satisfy increasing demand beginning early in 2010, according to the Energy Information Administration (EIA).  The condition of growing GDP dependent on increasing demand for a increasingly more expensive energy source is very bullish for the demand for biofuels.

The nature of most transactions made in the oil market is another bullish factor of future oil and natural gas prices and, indirectly, demand for biofuels.  Since the majority of oil and natural gas transactions are conducted in the U.S. Dollar, an anticipated continuation of the Dollar’s decline will attract hedge funds and institutions into purchasing oil and natural gas as a hedge against further declines in the Greenback.  As the Dollar reached record lows on the USD Index, oil and natural gas prices soared to record highs.  A re-test of the lows of the U.S. Dollar increases demand from institutional and hedge fund managers  for oil and natural gas, as these markets are the deepest and most liquid in the commodities space.  Companies engaged in biofuels production and technologies are expected to rally in sympathy with rising fossil fuels.

PEIX Re-opens Idaho Ethanol Plant

On January 6, the Company announced that production has resumed at its southern Idaho ethanol plant following a nearly year-long hiatus and a federal bankruptcy protection filing in May 2009 of the Company’s subsidiary that runs the plant.

The Company said that it intends to add 35 workers at the plant built to process as much as 60 million gallons of ethanol per year.

Technical Analysis

Source: http://stockcharts.com/h-sc/ui?s=PEIX

PEIX trades above its 13-day moving average. This bullish sign is significant because the 13-day moving average is upwardly sloped.

The MACD for PEIX currently indicates a bullish signal.  The MACD is above the signal line, a 9-day moving average of the MACD.  The MACD is above the critical level of 0, which implies the past price action had been positive.  Overall, the chart is bullish.

Comparative Analysis

Source: Thomson Financial

Insider Trading Activity

Source: Yahoo Finance

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