- The Washington Times - Wednesday, February 11, 2009

SIOUX FALLS, S.D.

If federal renewable fuel mandates require ethanol to be mixed into gasoline, the nation’s largest independent oil refiner figures it might as well just do it itself.

The ethanol industry is under duress partly because of overcapacity, and biorefineries can now be had for pennies on the dollar.

Valero Energy Corp. became the first conventional energy company to test the waters last week, bidding $280 million for five ethanol plants owned by VeraSun Energy Corp., which is under bankruptcy protection.

It would be the largest ethanol buyout in U.S. history in terms of production capacity, according to Raymond James & Associates.

Cory Garcia, a senior research associate with Raymond James, said it was only a matter of time before the petroleum industry got into ethanol, much like agribusiness giant Archer Daniels Midland Co. did years ago.

“This is the first time we’ve seen a refiner get out there and do this,” Mr. Garcia said. “If they’re bullish long term on the blending ability of ethanol, you can’t beat this price.”

The nation’s renewable fuel standard ensures demand for ethanol by calling for 11.1 billion gallons of renewable fuel to be blended into gasoline this year, with that number climbing to 36 billion gallons by 2022.

“To this point, we’ve just been buying it, not producing it,” said Bill Day, Valero’s spokesman. “But once we realized that ethanol is likely to remain an important part of the fuel mix here in the United States, we decided to start looking at opportunities to produce it as well.”

The ethanol industry has been hammered during the past year by volatile commodities and shrinking profit margins.

Those market conditions pummeled the stocks of many smaller publicly traded companies and forced VeraSun, the nation’s second-largest producer, to seek Chapter 11 bankruptcy protection.

Raymond James estimates that Valero is buying the plants for about 25 percent to 33 percent of book value.

“With all the plants and the capacity that they had, it was basically a fire sale at this point,” Mr. Garcia said. “And Valero stepped in and got a very, very attractive price, in their opinion.”

Valero during its history has taken advantage of opportunities created by distressed assets and bankruptcy filings, Mr. Day said.

“Right now, ethanol assets can be purchased at significant discount to what they would cost to build new because of the state of the industry,” he said.

Valero’s bid is for production facilities in Aurora, S.D.; Charles City, Fort Dodge, and Hartley, Iowa; and Welcome, Minn.; as well as a development site in Reynolds, Ind.

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