Ethanol maker pops in public offering

Shares of VeraSun Energy have climbed about a third since its IPO. Could this spell success for future offerings?

Investors do like ethanol, after all.

Shares of VeraSun Energy, the second-largest producer of ethanol in the United States, are climbing rapidly after its initial public offering and have increased by nearly a third in value.

The company's stock was trading at about $30 a share at about 10 a.m. PDT on Wednesday. The company sold 18.25 million shares for $23 a share in its IPO. The $23 price was higher than earlier expectations. Initially, VeraSun planned to sell only 17.25 million shares for $18 to $20 a share. On June 9, it then expanded the number of shares it planned to sell and increased the anticipated offering price to a $21-to-$22 range.

The South Dakota-based company produces ethanol, an alcohol that can be used as a fuel additive or serve as the primary fuel in some cars, out of corn. The company has a current output of 230 million gallons per year. Facilities on the drawing board will allow the company to increase output to 340 million gallons per year by August 2007 and 560 million gallons per year by the first quarter of 2008.

In the first quarter of 2006, the company garnered $109.9 million in revenue but only $2.7 million in net income.

The first-day gains reflect the recent appetite for investors about alternative-energy sources. Ethanol manufacturers have received funding in recent months from, among others, venture capital firm Kleiner Perkins Caufield & Byers and a venture outfit funded by Microsoft Chairman Bill Gates.

If history is an indication, a successful IPO for VeraSun could help pave the way for other ethanol-related IPOs. Aventine Renewable Energy, which produces and distributes ethanol, filed an S-1, a prelude to an IPO, to sell 7.75 million shares for between $37 and $41 per share. Aventine reported $935.4 million in revenue and $32.1 million in net income in 2005.

The alternative-energy market, though, has its detractors. Governments provide heavy subsidies to solar and ethanol companies. These products would not currently be competitive without them. Ethanol production facilities, meanwhile, cost millions of dollars to build. As a result, a downturn in the price of gas or other factors could make ethanol uncompetitive.

In 2005, for instance, sales at VeraSun increased more than 26 percent to $235.4 million. Net income, however, only came to $253,000, or about 1 percent of revenue. A perceived oversupply of ethanol, rising prices of corn and natural gas, a loss of some governmental assistance and a 17-day production outage caused net income to drop, according to documents filed by the company with the Securities and Exchange Commission. (In 2004, the company reported $14.7 million in net income from revenue of $194 million.)

For all the publicity, ethanol is not yet a huge part of the world's energy diet. The world consumes more than 80 million barrels of oil a day, according to statistics from the International Energy Agency, and each barrel can produce about 20 gallons of gas.

Ethanol also needs to be improved. Currently, most ethanol in the United States is made of corn, while in Brazil, it comes from sugar cane. Unfortunately, processing either material into usable fuel is not very efficient.

Researchers right now are looking at ways to produce ethanol out of superweeds and other plants that can fertilize themselves, consume less water and produce more energy per kilogram.

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