Ethanol producer Pacific Ethanol (PEIX: Nasdaq) is staging a follow-on offering this week, trying to raise about $75 million through the sale of common stock and warrants. At least 5.0 million common stock shares along with 3.8 million warrants are going out at $8.00-plus change. The warrants are pre-funded and carry rights to get an additional 8.9 million common stock shares. With warrants exercised the offering represents 19% dilution for existing shareholders.
Use of proceeds, not dilution, is on the minds of new shareholders. After paying the investment bankers and lawyers, Pacific Ethanol will take home about $70.0 million. Management has already said the proceeds will be used to pay off debt and anything left over will be used for working capital and capital expenditures. At the end of September 2020, the company had about $38.7 million in the bank and $162.9 million in long-term debt. The offering will bring net debt to $54.2 million from $124.2 million where it stood at the end of the last quarter.
In 2019, the global
ethanol market was valued at US$89 billion.
In early 2020, industry analysts such as Grandview Research were calling
for 4% to 5% compound annual growth in this large market over the next five to
ten years. That growth rate does not
seem plausible from the vantage point of the coronavirus pandemic. However, it will eventually pass and economic
activity is expected to resume in the years ahead.
The industry has
been under pressure in the last few years as the Department of Environmental
Protection has made it a practice to grant small refinery exemptions from the
Renewable Fuel Standard that would otherwise mandate ethanol blending with
fossil fuel. Ethanol prices have also
reflected the coronavirus economic stall, collapsing well below $1.00 per
gallon in March 2020, and not recovering until September to pre-pandemic levels
nearer $1.50. It is price erosion that
has sent ethanol producers like Pacific Ethanol scrambling for other markets.
The effort seems
to have paid off. As the offering has
unfolded, the company disclosed that in the quarter ending September 2020, the
company scored $204 million in total sales and approximately $43 million in
cash earnings. That represents a
significant decline at the top line, but an eye catching flip to profitability
compared to the same quarter last year when the company reported as loss of
$27.3 million on $365.2 million in sales. In the first nine months of 2020, cash
earnings totaled $50.6 million on approximately $727 million in revenue. This compares to a loss of $48.1 million on
$1.1 billion in sales in the comparable period of the previous year.
Improved profit
margins may have been driven by sales of higher-margin alcohols to food,
beverage and essential ingredients markets.
Decisions to idle unprofitable production plants may have also helped
reduce costs. Management has recently
indicated some of those idled assets are to be put up for sale, with proceeds
also earmarked for reducing debt balances.
Candidly, the
timing of the offering could have been better.
The U.S. equity markets are expected to be volatile for the next couple
of weeks as the country works through an exceptional presidential
election. With one candidate complaining
about election fraud and at the same time fomenting violent demonstration to
suppress and intimidate voters, it promises to be a difficult time for
traders. The coronavirus pandemic news
has not been favorable and is likely to also fuel volatility. Attentive traders may be able to grab shares
of PEIX at favorable prices. The company
looks more interesting with plenty of coin coming in from capital raises and
from operations and plans to shift emphasis to more lucrative target markets.
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.
No comments:
Post a Comment