USA Energy bill creates winning ethanol stocks

Energy bill's winners and losers
Ethanol wins, Detroil loses, Big Oil dodges the bullet
By William L. Watts, MarketWatch

WASHINGTON (MarketWatch) -- Like most pieces of sweeping legislation, the energy bill passed late Thursday by the Senate offers a variety of winners, losers and those that fall somewhere in between.

If any industry clearly comes out ahead, it's the ethanol business, analysts say. The Senate bill massively boosts the mandate for ethanol use from 7.5 billion gallons in 2012 to 36 billion gallons by 2022.

The Senate easily brushed aside concerns raised in some quarters that ethanol-related demand for corn could translate into higher food prices for consumers and higher feed prices for livestock producers. Proposals to rescind a tariff on ethanol imports and to reduce the ethanol production mandate if the Agriculture Department determined there was a corn shortage were both turned back during debate.

The ethanol mandate is "the part of the bill that has the broadest consensus to it. It's a good initiative for the ethanol industry. It's a nice growth driver ... and I think one way or the other the Congress will help facilitate the growth of that industry before the next election," said Mark McMinimy, an agribusiness analyst at Stanford Group Co.

A boost in government-mandated demand offers another dose of long-range good news for ethanol producers such as industry giant Archer Daniels Midland Co. (ADM), VeraSun Energy Corp. (VSE), Aventine Renewable Energy (AVR), and US BioEnergy Corp. (USBE).

"Certainly the consumption mandate ... is a real nice growth driver for the industry and for a lot of companies that are leveraged to ethanol either as input suppliers or service providers," including seed, fertilizer and farm-equipment makers, McMinimy said.

Ethanol producers have seen their stock prices flag in recent months amid concerns about a near-term supply glut and the impact of rising commodity prices.

Detroit setback

While ethanol producers, hailing from clout-heavy farm states, appear likely to score another round of political gains if an energy bill eventually ends up on President Bush's desk, Detroit's Big 3 automakers were unable to stave off a major change to corporate average fuel economy, or CAFE, standards.

Under current CAFE standards each automaker's fleet must average 27.5 miles a gallon for cars and 22.5 miles a gallon for light trucks for model-year 2008. Automakers fought hard against the energy bill's original provision calling for a uniform fuel-economy measure requiring practically all vehicles to average 35 miles a gallon by 2020, with a 4% a year boost in mileage after that.

Automakers had lobbied furiously against efforts to combine truck and auto standards, arguing such a measure would be too onerous. But efforts by Michigan's two Democratic senators -- Carl Levin and Debbie Stabenow -- and others to forge a compromise CAFE increase that maintained separate standards for cars and trucks fell short.
Instead, senators united behind a compromise that dropped the call for a 4% a year boost beyond 2020.

Calling the standard "overly aggressive and unachievable," Levin charged that the bill "may have a particularly harmful effect on those manufacturers that produce a high percentage of light trucks and produce small cars in America."

But the measure delighted proponents of stiffer standards, who expressed relief at seeing the first significant rise in CAFE standards in decades, and assuaged the concerns of other auto-state lawmakers and rural-state senators concerned about the impact of increased standards on pickup trucks.

The battle is far from over, however. House Energy and Commerce Committee Chairman John Dingell, a Michigan Democrat who has long fought efforts to boost fuel-economy standards, has said his panel won't take up CAFE until the fall. Other Democratic lawmakers, however, have vowed to try to attach an increase to an upcoming House energy package.

Big oil dodges bullet

In another dramatic turn, Republican senators blocked an amendment that would have provided $32.1 billion in tax incentives over 10 years to alternative energy producers, offsetting much of the impact by rescinding tax breaks and boosting other revenues collected from big oil and gas firms.

Republicans charged that oil producers would have passed the cost along to consumers at the pump. Democrats insisted the package would have stripped the biggest oil companies of tax incentives no longer necessary amid high oil prices and record industry profits, while re-ordering the tax code to favor renewable energy companies.
The amendment, which had cleared the Senate Finance Committee earlier in the week, was blocked when supporters fell two votes short of the 60-vote supermajority needed to limit debate.

But that doesn't mean the battle is over. Analysts noted that several senators were absent. Moreover, the tally "confirmed strong majority support for extracting funding from petroleum companies to fund clean and green energy," wrote energy policy analysts Kevin Book and Patrick Hughes of Friedman, Billings, Ramsey & Co.
A smaller package -- in the $10 billion to $15 billion range -- would likely prove more palatable, they said, which indicates a smaller package of alternative-energy subsidies is likely to come out of any House-Senate negotiations on a final energy package later this year.

William L. Watts covers Congress and politics for MarketWatch.

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