Gediminas Jasionis

BioFuel Energy Corp. (NASDAQ: BIOF) - a newbie in ethanol market, makes the first steps

by Gediminas Jasionis November 14, 2008
CornEthanol.jpgBioFuel Energy Corp. (NASDAQ: BIOF) announced their quarterly results for the third quarter 2008. The company has incurred a net loss of $33.1 million or $2.18 per share. Such a loss was recorded on $90.5 million revenue for the quarter.

The company has only recently started commercial operations so it is still hard to predict if their loss will widen or contract in the future. Of course the company is working towards profitability, but under current conditions it looks like it will be rather difficult for them.

BioFuel engages in the production of ethanol from two plants in Nebraska and Minnesota. The company has a commercial relationship with Cargill, Inc - a large agriculture concern. Not bad for a starting business, but that might not be enough to become profitable.

What is interesting - people usually like alternative energy stocks. But in these intense times, I doubt the company will be able to benefit from this. And here's why: ethanol is used as an alternative to gasoline. With current price of oil falling, the demand for gasoline will increase for sure. And logically, it should decrease for the alternative fuel.

There have been considerable research that proves that gasoline is currently superior to ethanol in terms of energy omitted per gallon. Ethanol is supposed to be cheaper but, once again, the falling oil price will make this a miniscule advantage. Moreover there have been doubts about ethanol as a clean fuel all in all - as there are many cleaner alternatives in the market.

Further, the company is running through their cash reserves pretty quickly, and with additional losses from operations, their money will diminish even faster. Since, the company still has a loan facility to borrow from, it would be no big problem in normal economic environment. But remembering how difficult it may become to get a new loan today, funding might become a difficult issue for them, if they continue operating with losses.

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Seems like the company has chosen at least bad timing (or maybe also a wrong market) to start their business. Their stock price chart reflects that pretty well. With the announcement of negative earnings and with the current crisis driving most stocks down, there is virtually no chance the company's stock will get over the $1 barrier anytime soon.

References:

http://www.bfenergy.com/ http://www.hotstocked.com/companies/b/biofuel-energy-corp-BIOF-70004.html#summary

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