Investments in Cellulosic Ethanol

"But for the next five years or so, corn will remain a key component of the ethanol industry . . . until cellulosic ethanol comes online commercially.

"And that's when you're going to see the kind of production necessary to make a significant dent in foreign oil consumption."

Those are two quotes taken from my very first Energy and Capital article back in March. I referenced those quotes again in July, and feel it's relevant to do so again here in this article.

You see, if the current US ethanol market was built on corn, then the future US ethanol market will have to be built off corn.

And not just because of adverse effects on corn prices, but because there simply isn't enough farmland in the US to grow enough corn to support skyrocketing demand for ethanol.

As the president announced in this year's State of the Union address, the US is to produce 35 billion gallons of renewable fuel per year by 2017.

Now, granted, biodiesel and other nominal fuels will meet some of that 35 billion gallon requirement, but the majority of the fuel will most certainly come in the form of ethanol.

In biofuel circles, it is generally accepted that corn will be able to sustainably contribute only 15 billion gallons annually by 2017. That leaves a heck of a lot of expansion room for cellulosic ethanol. (Last week I wrote about the possibilities of biobutanol, but rapid expansion of production capacity for that fuel is unlikely to occur by 2017.)

Now's the Time to Buy

Normally, I illustrate my points by showing you charts that show above-average growth of stocks in the sectors I'm discussing. But with cellulosic ethanol , those charts don't yet exist.

That's because the major players in the cellulosic ethanol market, at least at this point, are privately held companies like Range Fuels, Poet, and Iogen.

There are only two producers that I know of which are publicly traded. And those two companies have been relatively unloved by the Street. I, however, think these two stocks will have to perform well if institutions are ever to play the cellulosic game.

The first company is Verenium (NASDAQ:VRNM ), which was formed by the merger of chemical company Diversa Corp. and cellulosic ethanol company Celunol. The merger of those two companies made Verenium the first public company with the integrated end-to-end capability to make cellulosic ethanol a commercial reality. So you can see why I'm so bullish on it.

It hasn't performed too well lately, as you can see from the chart, which may be an indication that it could soon be a good time to buy.

Their Jennings, LA facility is 66% complete and will come online by the first quarter of 2008. When that happens, the price will almost certainly increase overnight.

The other company flying under Wall Street's radar is BlueFire Ethanol Fuels Inc. (OTCBB: BFRE ). Despite being one of the six companies to receive federal funding to construct a production facility, this stock has been underappreciated by the investment community. But I have a feeling that is about to change.

It was recently announced that the U.S Department of Energy has continued its support of BlueFire by inviting the company to participate in its loan guarantee program. The company will receive guaranteed funding to build a commercial-scale facility that, among other low-cost feedstocks, will use landfill waste to produce cellulosic ethanol at an adjacent California landfill.

According to the CEO Arnold Klann, "The Department of Energy's continued encouragement of BlueFire Ethanol's innovative clean energy technology is a key step toward full-scale commercial production of cellulosic ethanol and a testament to the management team's work over the past 15 years to deploy an economic cellulosic ethanol technology using an array of low-cost cellulosic waste feedstocks."

With the federal government at its back, and a proven method to covert waste to cellulosic ethanol, it won't be long until this stock catches fire.

Paper, Pulp, and Profits

One of the other ways to capitalize on the imminent ascendance of cellulosic ethanol is through the companies that will be providing the various feedstocks.

And so far it seems as though waste from paper and pulp manufacturers may turn out to be one of the most economical feedstocks for the production of cellulosic ethanol. That's because cellulosic conversion equipment can be attached right to existing paper and pulp production facilities.

Forestry companies may also benefit from a cellulosic boom because they have to get rid of their waste anyway. So instead of paying to get rid of their byproducts, paper companies can now turn them into an additional revenue stream.

Not to mention that forestry companies are naturally equipped for feedstock generation. In addition to their waste, they can also become feedstock growers. Trees are an excellent feedstock for cellulosic ethanol, producing up to 1,000 gallons per acre per year.

Plus, sustainable forests require less management and incur fewer costs than other feedstocks, because they require less fertilizer, tilling, and have longer growth times.

All of this information will soon merge to catapult forestry and paper and pulp companies to the upper echelon of cellulosic feedstock producers.

Companies to watch in this sector are Domtar Corp. (NYSE: UFS ), Potlach Corp. (NYSE: PCH ), and (a little more pricey) Weyerhaeuser Co. (NYSE: WY ).

As the cellulosic industry continues to evolve, trust Green Chip guide you through all the most profitable emerging plays.

Until next time,

Nick