Ethanol may still be popular with US policy makers, but investors are increasingly leery. Ethanol's lack of visibility at gas stations is fuelling scepticism about the scheduled initial public offering of US BioEnergy Corp, a producer of the alternative fuel.
Record high costs for crude oil led to higher gasoline prices this the summer, sparking intensified support for ethanol or ethyl alcohol to reduce dependence on foreign oil. Ethanol producers tried to latch onto the renewable energy fervor, but have generated mixed IPO results due to uneven valuations for producers and volatile prices for the "green" fuel itself, analysts said.
An autumn decline in oil prices also softened the summer's outcry to increase use of alternative energy. That dropped prices for the fuel and dampened the outlook for US BioEnergy, which is scheduled to float on Thursday.
"The question is, 'What is so different about US BioEnergy that is going to turn this around?'" said David Menlow, president of IPOfinancial.com. "We are not especially confident that it is."
President George W. Bush and other US officials continue to support ethanol, which is manufactured domestically from corn, in an effort to reduce oil imports from the Middle East 75 percent by 2025. On Tuesday, the federal Energy Information Administration forecast US ethanol demand would more than double to 11.2 billion gallons a year by 2012 and 14.6 billion gallons a year by 2030.
But despite the rosy outlook, investors are hesitant to buy without clearer signs of public acceptance, including pumps at local gas stations that carry E-85, a fuel blend that is 85 percent ethanol, Menlow said. "Ethanol is still a little too much of a novelty for people to take seriously," he added.
Ethanol is already mixed with gasoline, whether consumers know it or not, said Raymond James analyst Pavel Molchanov. While flex-fuel vehicles can use the higher fuel blend, the oil industry already uses lower levels of ethanol as a replacement for gasoline additive MTBE, a suspected carcinogen banned in several states.
"When a consumer buys gasoline, chances are it has a small percentage of ethanol in it," Molchanov said. "Because ethanol producers deal primarily with commercial buyers, the issue of brand recognition is less significant to them."
The US BioEnergy float and of ASAlliances Biofuels Inc, which also has registered for an IPO, is complicated further by the checkered performance of recent IPOs from ethanol companies.
VeraSun Energy Corp floated shares in June when US crude oil prices rose over $70 a barrel and its stock soared to a year high of $30.30. The strong debut set the stage for Aventine Renewable Energy Holdings Inc, but after pricing at $43, the top of a raised range, the shares sank 10 percent on opening day. Aventine shares closed at $22.60 on Friday, while VeraSun closed at $22.58.
The falling fortunes led Hawkeye Holdings Inc, the third largest US-based ethanol producer, to withdraw its IPO in September, just days before the offering.
Pacific Ethanol Inc, the first US ethanol company to float shares, made its debut in 2005 at $9.30 and the stock rose as high as $44.50 earlier this year. But the company, which lists Bill Gates as an investor, met the same fate as VeraSun and Aventine and its shares closed on Friday at $17.56.
"The issue is valuations," said Ian Horowitz an analysts with Soleil Securities Group. "People are trying to get their arms around what these companies are worth."
US BioEnergy is attempting to raise about $150 million with an offering of almost 9.4 million shares. A pricing at the midpoint of a $15 to $17 forecast range, would value the company at about $1 billion. The company also has a price-to-book value of 2.3, below Aventine at 3.3 and VeraSun at 3.5, said Francis Gaskins, president of IPO Desktop.