Sector Snap: Analyst says end of ethanol oversupply in sight

Oppenheimer & Co. analyst Joseph A. Gomes Jr. began covering Verasun Energy Corp., Aventine Renewable Energy Holdings Inc. and Pacific Ethanol Inc.

Although he a "Perform" rating to all three ethanol producers, he said the sector's "overcapacity situation should resolve itself within the next six to 12 months."

His "Perform" rating, which means he expects the shares to perform in line with the broad-based S&P 500 stock index during the next 12 to 18 months, reflects "the difficult near-term operating environment resulting in limited upside to near-term operating results caused by rising corn prices and a glut of capacity supply.

"Corn prices are more difficult to get a handle on in terms of where they will go in the longer term," he said.

In a client note, Gomes called Brookings, S.D.-based Verasun the leading pure play ethanol producer and said its acquisition of St. Paul, Minn.-based U.S. BioEnergy will be "a game changer."

The combined business is expected to have more than 1.6 billion gallons of capacity by the end of this year. He projects 2008 earnings of $80 million, up from last year's $26.6 million.

Shares of VeraSun rose 20 cents, or 3 percent, to $6.80 in afternoon trading.

The analyst said Aventine could become a "long-term winner" but faces a liquidity crunch as well as challenges common to the entire sector. Gomes expects 2008 profit to decline.

Shares of Aventine rose 9 cents, or 2.2 percent, to $4.13.