Wednesday, January 24, 2007

Ethanol stocks rally ahead of State of the Union speech

Ethanol stocks rally ahead of State of the Union speech

Shares of ethanol producers rallied on Tuesday ahead of President George W. Bush's State of the Union speech tonight in which he's expected to urge for a big increase in the amount of ethanol that refiners mix with gasoline.

The president might call for a rise of over 60 billion gallons of ethanol annually by 2030, according to reports. The ethanol industry received a significant boost after Bush advocated alternative fuels in his 2006 State of the Union address.

Ethanol, an alcohol-based alternative fuel produced from starch or sugar-based
feedstocks, has gained popularity in response to rising oil prices and concerns that the United States is overly dependent on imported oil.

Ahead of tonight's presidential speech, the stocks of ethanol producers surged.

Shares of VeraSun Energy Corp. (VSE, Trade ), one of several ethanol producers to go
public last year, were last up 5.21% to $18.80.

Pacific Ethanol (PEIX, Trade ), a California-based refiner of corn-derived ethanol, jumped 6.24% to $17.87. FBR upgraded the stock to Outperform from Market Perform citing positive expectations based on an increasingly favorable regulatory environment, particularly in California, as well as the company's recent operational achievements.

"We believe that the stock is now ideally positioned for upward movement and recommend investors take positions in the stock ahead of Tuesday night's State of the Union address," said analysts Jacques Rousseau and Eitan Bernstein in a research note on Tuesday.

The analysts added that while most of their colleagues rate the stock a hold or a sell, that sentiment should be reversed.

Shares of Xethanol Corp (XNL, Trade ), an ethanol maker, rallied 17.41% to $3.17.

Shares in Aventine Renewable Energy (AVR, Trade ) gained 2.63% at $20.33.

Shares of Archer Daniels Midland (ADM, Trade ), the largest producer of fuel ethanol in the U.S., went up 3.39% to $32.90.

Shares of Monsanto Co. (MON, Trade ), which sells corn seed to farmers, were up 2.03% to $54.38.

Green Plains Renewable Energy (GPRE, Trade ) was up 1.07% to $23.70.

Shares of MGP Ingredients (MGPI, Trade ), a producer of ingredients and distillery
products, including ethanol, added 7.27% to $23.30.

The Andersons Inc (ANDE, Trade ), which has an ethanol division, was up 2.89% to $41.67.

Despite today's rally, some analysts urged caution. While alternative energy stocks
eventually have to become a bigger part of the world energy mix, these stocks "are
momentum plays with generally mediocre financials and high valuations," said Dan
Pickering, an analyst with Pickering Energy Partners in Houston, in a note on Tuesday.

Alternative energy stocks have declined between 30% and 60% since they last gained
momentum last spring, Pickering added.

On Wednesday, Bush will visit E. I. du Pont de Nemours & Co.'s (DD, Trade ) biofuels
programs in Wilmington, Del., said DuPont CEO Charles Holliday in a Tuesday conference call. Bush will visit three programs: one on higher-yielding grain ethanol; one on cellulosic ethanol, which makes fuel from stalks and non-food crops and other parts of the corn plant; and a program partnering with BP Plc (BP, Trade ) to make biobutanol.

Ethanol is produced by converting crops into simple sugars. Crops include corn, sugar
cane, barley, wheat, and biomass. Ethanol is blended with gasoline to improve its
emissions quality. One blend, called E85, contains 85% ethanol and 15% gasoline. Several car manufacturers make flexible-fuel vehicles, which run on E85.

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