$2 or higher gas - Can ethanol make a comeback? Message Board

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Non-Tech : $2 or higher gas - Can ethanol make a comeback?

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From: Dennis Roth	11/28/2007 8:07:06 AM
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Pacific Ethanol, Inc. (PEIX) Sell: Adding PEIX to Americas Sell List in place of Petro-Canada Goldman Sachs Note Stock rating: Sell Coverage view: Cautious Price: US$4.66 November 27, 2007 United States Source of opportunity We are adding Pacific Ethanol to the Americas Sell List, as we believe that ethanol equities will continue to lag both the energy sector and broader stock market as ethanol markets are entering what appears to be the most challenging period of new supply growth relative to discretionary demand. In terms of the timing of our ratings change, Pacific Ethanol effectively replaces Petro-Canada on our Sell list, as we now see the risk/reward for Petro-Canada as more balanced and have upgraded it to Neutral (see separate report published today). We see 5% potential downside to our price target. Catalyst All three ethanol companies we cover continue to pursue aggressive growth strategies despite weak crush spreads and negative cash flow, which to us suggests risk/reward remains unfavorable even following significant underperformance year-to-date (see our November 18, 2007 report, "Lowering target prices to 25% below RCV; reiterate Cautious view"). Given that shares of ethanol producers have lagged significantly we see the potential for a "dead cat bounce" which we would view as the key opportunity to short the stocks. In particular we continue to believe that noise around a potential new RFS before year-end 2007 could cause volatility within the sector, though with December approaching this appears to be increasingly unlikely. Without a new RFS we may not get the short-term rally that we would otherwise think is possible. Valuation Pacific Ethanol is trading near our $4 RCV-based 12-month price target. Key risks Ethanol crush spread volatility is the key risk for ethanol producers and Pacific Ethanol.

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