Best stock to invest in – Green Plains Primes The Pump



Best stock to invest in

by Debra Fiakas CFA

Ethanol producer Green Plains
Renewable Energy, Inc.
(GPRE: 

Nasdaq) announced today plans to build a fuel terminal point in
Beaumont, Texas.  The terminal will be located at a facility
owned by Green Plains’ partner in the venture, Jefferson Gulf Coast Energy
Partners
.    It will be helpful to have a
friend in the project that is expected to cost $55 million to
complete just ethanol storage and throughput capacity.  Planned
storage capacity is equivalent to 500,000 barrels, with the
potential to expand to 1.0 million barrels.  Capacity to handle
biofuels or other hydrocarbon fuels will be added later.  The
terminal should give Green Plains better access to world fuel
markets through railroad, barge and ocean tankers connections at the
terminal.

This is the second terminal project for Green Plains.  In
November 2015, the company announced plans to build an ethanol
terminal in Maumelle, Arkansas for access to the Union Pacific rail
line.  The terminal will have the capacity to unload trains as
long as 110 cars in one day and will be able to store as much as 4.2
million gallons of ethanol.  The price tag is projected to be
$12 million, which will be split equally between Green Plains and a
partner, Delek US Holdings. 
A downstream refining and distribution company, Delek is experienced
in fuel logistics and has connections to convenience stores.

The two projects should smooth the way for Green Plains to
economically reach customers both in the U.S. and around the
world.  Lower cost distribution can also give Green Plains a
competitive edge in striking deals.  Now the company needs to
‘fill the pipe,’ so to speak.  The altered strategic plans of
some competing ethanol producers may be giving Green Plains an
opportunity to do just that.

Abengoa SA
(ABG:  Madrid
or ABGB: 
Nasdaq) has debt issues back home and is putting its U.S. operation
into bankruptcy.  Green Plains has offered $200 million in cash
for Abengoa’s ethanol plants in Illinois and Indiana.  The deal
will give Green Plains another 180 million gallons in production
capacity and elevate it from fourth to third largest ethanol
producer in the U.S., passing up Valero Energy (VLO: 
NYSE)
.


Even top-dog Archer
Daniels Midland
(ADM: 
NYSE), with its 1.7 billion gallon ethanol production capacity, is
rethinking its ethanol priorities.  In February 2016, ADM
announced its two dry mill ethanol plants that grind and crush corn
feedstock were under scrutiny.  At that time ethanol prices had
slumped to the $1.34 to $1.40 range and renewable fuels policy
seemed unclear.  Since then the profit potential in ethanol has
improved as prices have come back to the $1.65 to $1.70 price
range.  ADM may ‘think’ its strategy right back to the starting
point.  In the meantime, Green Plains management can still
speculate about grabbing up even more capacity.

Acquiring production capacity during a market downturn, is a tactic
well known by number two ethanol supplier Poet, LLC (private).  Based
in Sioux Falls, SD, Poet has a long history of buying up bankrupt
and otherwise beleaguered ethanol producers and then installing its
own proprietary technologies to improve efficiency.  Poet
itself might have an interest in ADM’s dry mill plants if either or
both of them get put up on the auction block.  Poet has
patented its proprietary dry mill process and is the largest ethanol
producer in the country in terms of dry mill plant capacity.

Green Plains ambitions may be tempered by the condition of its
balance sheet.  The company has not shied away from debt to
finance its expansion in the ethanol sector.  At the end of
March 2016, long-term debt and notes totaled $765.9 million,
representing an 82.4% debt-to-equity ratio.  A look at assets
helps put leverage into clear focus.  Book value of property,
plant and equipment assets net of accumulated depreciation was
$920.5 million in March 2016, representing a multiple of 1.2 times
debt obligations.  A current ratio of 2.10 should also provide
some comfort to shareholders and creditors.

The company had $383.4 million in cash on the balance sheet at the
end of the last quarter, suggesting nice little treasure
trove.  Unfortunately, during the period of weakened ethanol
prices in late 2015 and early 2016, Green Plains was using cash to
support operations  –  $259 million in the twelve months
ending March 2016.  In my view, a company generating nearly
$3.0 billion in annual sales needs as much as $450 million to $600
million in cash just for working capital purposes.  This is
especially important when at the trough of the business cycle and
profits have been reduced.  Against this ruler the treasure
trove is more like a bare bones reserve.

Green Plains will need to come up with $33.5 million to support
commitments to the two terminal joint ventures.  Then there is
the $200 million bid for the Abengoa assets.  The company has
some alternatives.  Green Plains Partners,
LP
(GPP: 
NYSE), the holder of the company’s downstream assets, could use some
of the $49 million in remaining credit on a revolving line of credit
facility opened in 2015.  The parent company has a revolving
line of credit as well.  However,  to be meaningful in the
current investment scenario, the company would need to petition the
agent to exercise the $75.0 million accordion feature that was built
into the facility.   Of course, new common stock could be
issued through either the parent (GPRE) or the downstream limited
partnership (GPP).   GPRE current commands a multiple of
13.5 times projected earnings, while GPP is trading at 8.3 times
expected earnings in 2017.

Debra Fiakas is the Managing Director of
Crystal Equity
Research
, an alternative
research resource on small capitalization companies in selected
industries.

Neither the author of the Small Cap
Strategist
web log,
Crystal Equity Research nor its affiliates have a beneficial
interest in the companies mentioned herein.

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