Valero Plunges Into Ethanol

I've been attempting to teach an old dog new tricks lately, and I can confirm that the old adage is tried and true. But Valero Energy (NYSE: VLO  ) proved it's no old dog this week, by delving into the ethanol business in a major way.

Beating out ethanol giant Archer-Daniels-Midland (NYSE: ADM  ) with a $477 million bid, Valero is the proud new owner of seven ethanol plants in the American heartland, facilities which formed a major chunk of operations for the now-bankrupt VeraSun Energy.

I must admit, I have little regard for corn-based ethanol as a fuel source. Last year's enormous surge in corn prices alone was enough to convince this Fool that having humans and cars competing for the same fuel source can't possibly end well.

Alternative energy was a hot topic in the CAPS blogs last summer when oil prices surged, and the case against corn-based ethanol was convincingly argued through some excellent posts. Oil refiner Tesoro (NYSE: TSO  ) recently challenged ethanol requirements in California on the basis of reports showing that ethanol production actually increases greenhouse gas emissions … a point conceded by a spokesman for the California Air Resources Board.

Corn continues to trade above historical price levels, and gasoline demand remains depressed, making the business of ethanol production tenuous at best. Aventine Renewable Energy Holdings (NYSE: AVR  ) has indicated a risk of following VeraSun into bankruptcy. Even Verenium (Nasdaq: VRNM  ) , which is partnering with BP (NYSE: BP  ) to build a $300 million cellulosic ethanol facility in Florida, has expressed uncertainty about its ability to proceed with operations. For the record, I consider cellulosic ethanol a far more promising technology than its corn-based predecessor, and I avidly track the progress of companies like BP and DuPont in its development.

Despite the obvious shortcomings of corn-based ethanol, the government seems to have assured steady demand for it and other biofuels. New regulations require 11.1 billion gallons of renewable fuel to join the nation's fuel supply this year, increasing to 36 billion gallons by 2022. Given those standards, and Valero's expectation for additional requirements in the future, the purchase of these assets at distressed valuations could prove strategically significant.

With integrated producers like BP and independent refiners like Valero paving the way, I see giants like ConocoPhillips (NYSE: COP  ) among potential bidders for any remaining ethanol assets that might move onto the auction block. In other words, a lot of old dogs could soon be learning new tricks.

Further Foolishness:

More than 4,100 CAPS members, including 1,025 All-Stars, expect five-star pick Valero to outperform the S&P 500. Will you follow the Fools, or blaze your own trail? Join the free CAPS community today and share your own thoughts about Valero.

Fool contributor Christopher Barker is all for alternative energy sources, but thinks food is best utilized as food. He can be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He owns shares of Valero Energy. The Motley Fool's disclosure policy is processed from the cellulosic remnants of sugarcane bagasse.


Read/Post Comments (4) | Recommend This Article (24)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 20, 2009, at 3:05 PM, retry77 wrote:

    I'm sticking with VLO purely on the diversity now. Valero is also an ethanol buyer, which means now they can make their own.

    I had some coal positions, but the current administration is bent on killing the coal industry, so I bailed.

    It seems my tax dollars are going to be spent on alternative fuels, so VLO is my choice. Though the corn aspect, I believe, is not the way to go.

  • Report this Comment On March 20, 2009, at 4:31 PM, Renergie wrote:

    It's fair to say the State of Louisiana has proven it's an old dog capable of learning new tricks.

    The Louisiana legislature found that the proper development of an advanced biofuel industry requires implementation of the comprehensive “field-to-pump” strategy:

    (1) Feedstock other than corn;

    (2) Decentralized network of small advanced biofuel manufacturing facilities;

    (3) Variable blending pumps, in lieu of splash blending, will offer the consumer E10, E20, E30 and E85; and

    (4) Hydrous ethanol.

    "Field-to-Pump" is a unique strategy created by Renergie, Inc. to locally produce and market advanced biofuel (“non-corn ethanol”) via a network of small advanced biofuel manufacturing facilities. The purpose of “field-to-pump” is to maximize rural development and job creation while minimizing feedstock supply risk and the burden on local water supplies.

    For more information on this new trick, please feel free to visit: http://en.wikipedia.org/wiki/Field-to-Pump

  • Report this Comment On March 20, 2009, at 4:36 PM, XMFSinchiruna wrote:

    Renergie,

    Very interesting... thanks for posting!

  • Report this Comment On March 29, 2009, at 4:28 PM, zanemiller wrote:

    Valero proving they are not fools. Spend money when the price is right. VeraSun to bad you couldn't managed better. ADM how could you miss a deal like that? Conoco what did I tell you? Now give us a Valero E-85 branded Flex Fuel product and your signs will be popping up all over town.

    Thanks Valero for thinking ahead of the curve and showing some smarts.

    Zane Miller

    Atlanta

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