Diversification, size key to GPRE's strong growth, CEO says

By Kris Bevill | September 14, 2011

While speaking at an annual investment conference recently held in New York City, Green Plains Renewable Energy Inc. CEO Todd Becker reassured investors that ethanol will continue to be a profitable industry without tax subsidies. In fact, GPRE is actually an advocate of eliminating the 45-cent per gallon Volumetric Ethanol Excise Tax Credit, currently scheduled to expire at the end of the year. “It’s been a target on our back since the beginning of this company,” he said. “We feel like we can be competitive with gasoline going forward. We have been over the last three years.”

Ethanol currently makes up 10 percent of the U.S. fuel supply. Becker said it would be difficult for refiners to replace that volume, noting that up to 80 percent of the U.S. refining capacity is now producing Conventional Blendstock for Oxygenate Blending, which is a sub-grade 84 octane fuel that cannot be distributed to retailers without first being blended with ethanol. Refiners have made CBOB a “solid part of their strategy” because it is more profitable for them to produce, according to Becker. “If ethanol went away tomorrow they would have a very big problem in the United States supplying 87 octane,” he said. “In fact, “I don’t think they’d be able to do it.”

Since GPRE’s inception in 2007, the company has rapidly become a force to be reckoned with in its respective agriculture segments, generating $3 billion in revenues and $37 million in income just in the last 12 months. The company was recently ranked eighth on Fortune Magazine’s 2011 list of the 100 fastest growing companies, and Becker doesn’t plan to stop the company’s rise in the rankings any time soon. “We’re not done growing and we’ll continue to look for acquisitions along our value chain,” he said during his presentation. GPRE’s value chain of course includes ethanol plants. Becker said the ideal ethanol plant acquisition will possess three qualities: the right technology, the right location, and the right price, adding that there continues to be stiff competition from major refiners also looking to acquire ethanol plants. “And they also write checks,” he said. “They have a lot of cash. I have to figure out more creative ways to buy $120 million assets.”

One creative strategy GPRE recently deployed was the buy-back of 3.5 million shares of stock from its largest shareholder, NTR plc. Becker said GPRE paid $8 per share for the stock, a good buy compared to the book value of $12-$13 per share. “It was one of the best purchases of ethanol assets I could make in the United States,” he said. “We think this was a good transaction for our shareholders and we’ll continue to look for other opportunities in the future.” NTR remains GPRE’s largest shareholder.

Diversification and sheer size play key roles in GPRE’s ability to remain profitable, Becker said. In addition to its grain handling operations, the company owns nine ethanol plants, with a combined capacity of 740 MMgy, markets and distributes more than 1 billion gallons of ethanol annually and owns a fuel terminal business. Bigger is better, according to Becker, who said he believes GPRE is one of the best in the industry at controlling operating costs at ethanol plants.  In fact, one of the company’s recently acquired ethanol plants was able to lower its operating costs just by being purchased by GPRE. “On the Friday when we closed they were 8 cents less competitive than us,” he said. “On Monday, when they came into our platform we dropped those operating costs right out. Scale is meaningful, both on your chemical enzymes and those types of products, but there’s other things you can do and we understand those as we have learned how to manage these plants.”

Corn oil extraction has proven to be a particularly profitable diversification technique for the company. All of GPRE’s plants are now producing corn oil by extracting it from the distillers grains. “You’re taking something that’s worth about 9 cents a pound and converting it to something that’s worth around 36 cents a pound net, so you’re turning a low-value feed product into something that’s a high-value energy product,” Becker said. “We’ve deployed this technology at all nine of our plants at a cost of $20 to $22 million and we’re going to generate somewhere between $30 and $40 million of operating income from these investments in the next 12 months.” Becker expects corn oil production to remain profitable through the next several years, pointing out that if every ethanol plant in the U.S. were to add corn oil extraction technology to their operations only about 250 million gallons of oil would be produced. “That’s not very much product for all the value that we’re able to generate for our shareholders,” he added.