With slim profit margins already weighing on the biofuels industry, VeraSun Energy Corp. this month found itself in a liquidity crisis after locking in at higher-than-market prices for the corn that it turns into fuel.
After a mid-September announcement of an expected third-quarter loss of $63 million to $103 million, the Sioux Falls-based company tried to raise $20 million in a public offering. VeraSun then said several companies had expressed a "strategic interest," a phrase typically associated with buyouts or a substantial sale of assets.
Spot corn prices by mid-August slumped below $5 per bushel but in the preceding months, as commodities prices spiked, VeraSun locked into an average per-bushel price of $6.75 to $7 for the quarter.
Denver-based Biofuel Energy Corp. found itself in a similar predicament in August.
"Hedging can be a useful tool for managing risk, but it can hurt as well as help, depending on whether or not the commodity moves in the direction that the company had expected," said Raymond James analyst Pavel Molchanov.
VeraSun's shares, which had traded as high as $17.75 in the past 52 weeks, slumped 92 percent to $1.33.
There are signals that Wall Street anticipates a takeover. On Monday -- a day in which the Dow lost 778 points -- VeraSun's stock jumped by more than 80 percent to $4.
Molchanov said a company would have to be of decent size to take on VeraSun's assets and debt. He said some possibilities include privately held ethanol producer Poet LLC or agribusiness giants Archer Daniels Midland Co. or Cargill Inc.
Although not every oil and gas company wants to run ethanol plants, some refiners may look at it as an opportunity as they're already using ethanol for blending. And such a deal would make sense from a purely financial standpoint, Molchanov said.
"Right now these ethanol stocks are trading below replacement costs," he said. "So in other words, it's cheaper to buy an ethanol company in the equity market than to build new ethanol plants."
When Biofuel Energy announced its hedging miscue in August, shares that reached a one-year high of $7.75 in January plummeted to an all-time low of 93 cents.
The company said it didn't have enough liquidity to cover some $26.1 million of losses resulting from closing out various corn, ethanol and natural gas hedges and another $19.9 million of unrealized mark-to-market losses.
Biofuel Energy shares were trading at 54 cents on Tuesday afternoon.
Shares of Pacific Ethanol Inc., which reached a 52-week high of $9.88 last September, fell 54 cents, or 26 percent, to $1.54. Aventine Renewable Energy Holdings Inc. shares, which hit a one-year high of $13.65 in December, rose 8 cents, or 2.6 percent, to $3.18.
Molchanov said there's no obvious near-term answer for liquidity-strapped companies, but supply and demand will eventually become more balanced.
"Ultimately the industry will be a little more concentrated, but that's healthy in the long run," Molchanov said.