Ahead of the Bell: Lehman cuts alternative fuels

Lehman Brothers analyst Mansi Singhal, in a client note, downgraded the sector to "negative," saying ethanol margins will continue to be under pressure.

The corn price is now below its pre-flood level and upside risks remain between now and harvest season, Singhal said, but even if the corn price falls further margins are unlikely to expand.

"Producers will likely have to pass on any savings in the corn cost to their customers given the structural over supply situation in the ethanol market," Singhal wrote.

He added that any short-term improvement in margins would likely be followed by increased production with delayed plant openings coming online.

Singhal downgraded VeraSun Energy Corp. and Aventine Renewable Energy Holdings Inc. to "Underweight" and lowered his price target on both companies from $5 per share to $4 per share.

Lehman has lowered its oil price and ethanol price forecasts for the remainder of 2008 and lowered its ethanol price forecast slightly for 2009 through 2012.

Using discounted cash flow analysis, Lehman has calculated price targets for 2012 onward at $90 per barrel for oil and $6 per bushel for corn. Its ethanol price assumption for 2008 and going forward is between $2.55 and $2.69 per gallon.