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By Robert Rapier on Aug 10, 2006 with no responses

Xethanol Story

Xethanol Debunked (Updated 8-11-06 to dissect XNL News Release)

In case you didn’t see it, earlier this week the website Sharesleuth.com posted a blistering exposé of Xethanol (XNL: AMEX):

Xethanol Corp

A recent press release from Xethanol describes the company as follows:

Xethanol Corporation’s goal is to be a leader in the emerging biomass-to-ethanol and biofuels industry. Xethanol’s mission is to optimize the use of biomass in the renewable energy field and convert biomass that is currently being abandoned or land filled into ethanol and other valuable co-products, especially xylitol. Xethanol’s strategy is to deploy proprietary biotechnologies that will extract and ferment the sugars trapped in these biomass waste concentrations. Xethanol’s strategic value proposition is to produce ethanol and valuable co-products cost effectively with ethanol plants located closer to biomass sources.

The company has announced that it will be the first to commercialize cellulosic ethanol, despite spending very little on R&D. I was contacted for comments before the Sharesleuth.com story was published. As my comments in the article indicate, the difference in ethanol from corn and ethanol from cellulose is like the difference between traveling to the moon and traveling to Mars. Travel to Mars is probably an order of magnitude more difficult than traveling to the moon, but here you have a company like Xethanol already selling tickets, while spending little on R&D. In comparison others, including the government, have spent millions on R&D over the past 30 years and still don’t have a commercial cellulosic ethanol process.

While I think cellulosic ethanol will eventually be commercialized, I don’t believe it is going to be by a company who just recently jumped into the game with essentially no experience, and then doesn’t invest heavily into R&D. Sharesleuth.com didn’t think so either, hence their investigation. I encourage you to read it to see how some companies capitalize on hype to fleece investors. Xethanol has responded to the article (after their stock fell 40%), but they didn’t address the many serious issues brought up by Sharesleuth:

Xethanol Responds to ShareSleuth.com Posting

One quote that I gave that did not make it into the article is that if Xethanol does manage to produce any cellulosic ethanol, it will be the most expensive ethanol in the world. I think they are capitalizing on the hype, just like they did during the dot com days.

UPDATE 8-11-06 – Examining the Xethanol News Release

I read a Yahoo headline this morning that said “XNL Denies Sharesleuth Allegations.” We must not be reading the same news release, because they didn’t really address the allegations at all. First, let me make it clear that I do not have any financial interest in XNL. I am interested in alternative fuels because I am concerned about Peak Oil and the direction of our energy policy, and I want to see us pursue options that make sense. But I don’t like to see people taken advantage of, and I think that’s what XNL is doing.

Let’s look at Xethanol’s news release:

Xethanol states for the record that its Blairstown, Iowa, facility is producing ethanol at the rate of 450,000 gallons per month currently generating a gross profit of over $.50 per gallon.

This seems to be a complete red herring. The Sharesleuth article indicated that the Blairstown facility is operating at a capacity of 6.6 million gallons a year (550,000 gallons per month). It looks like Sharesleuth somewhat overestimated the capacity of the Blairstown facility. It is unclear why Xethanol threw out this claim, other than to confuse investors with the impression that they had addressed an allegation. And consider that capacity for a moment. 450,000 gallons a month is less than 360 barrels a day! That’s demonstration plant size. Tiny. It seems to me that they bought into the smallest producer they could find, just to get their hooks into the ethanol hype, and are now trying to capitalize.

Furthermore, Xethanol wrote:

In addition, Xethanol has announced a planned expansion of 50 million gallons per year in Augusta, Georgia and 35 million gallons per year in Spring Hope, North Carolina.

That’s the key issue. They “announced” a 35 million gallon per year cellulosic ethanol plant. However, people have been pouring money into cellulosic ethanol for 30 years without coming up with a commercial process. XNL is clearly capitalizing on cellulosic ethanol hype, but in my opinion they are unlikely to have a commercial cellulosic ethanol plant running any time soon. And if they are just a conventional ethanol producer, they are a pretty small producer.

They also wrote:

Xethanol further states for the record that it has research and development agreements in effect with two Federal Laboratories…

For a very small contribution, you can get an R&D agreement with a federal lab. I have worked in R&D. I could get an agreement for a few thousand dollars of funding. I have seen this done before. The question is just what are you getting for your funding? If I happened to be an unscrupulous sort, I could donate a few thousand dollars, drop a few names, and buy apparent credibility by claiming that I have an agreement.

Xethanol further states for the record that criticisms of its low level of research and development expenditures are misleading. Though our expenditures are increasing, Xethanol considers it a source of pride that it has obtained the benefit of what it believes to be valuable technology without either the time delay or the expenditure of the cash necessary for internal research and development.

Right. All of these other companies, including Iogen with millions of dollars of backing from Shell, have been unable to commercialize cellulosic ethanol. But Xethanol will do it while spending very little money. Consider me skeptical.

So what did the news release actually address? None of the substantive issues. They didn’t address the fact that many people involved with Xethanol have been involved in shady behavior. They didn’t address any questions at all about the plant with no utilities. Their “response” was a complete sleight of hand.

For the record, I hate to see people lose money. I make no predictions on whether XNL will go up or down. I have seen very good companies trade lower and really poor companies skyrocket on hype. I tend to believe that XNL falls into the latter category, but time will tell. Some investors will get in and out at the right time and make money. But my prediction is that XNL will continue to be a very small conventional ethanol producer, and will offer up a litany of excuses and delaying tactics for why their cellulosic ethanol plant is not up and running.

Crossing Paths with Billionaires

Finally, it was only after the story was published that I realized that Dallas Mavericks owner Mark Cuban (and like Vinod Khosla, another billionaire) is the majority partner in Sharesleuth.com. He is quoted at the end of the story:

Based on the information that Sharesleuth has uncovered, I have chosen to short shares of this company. My personal approach to investing, and in this case shorting , is very consistent. When there are a lot of individuals with pasts that include sanctions from the SEC, there is a good chance they are up to their old tricks again. Which leads me to want to short the stock.

When a company says they are operating a plant to produce a product, and that plant has no utilities, I want to short that stock.

So I am short 10,000 shares of Xethanol. I would like to short more, but I haven’t been able to borrow any more. I am currently in the money on the shares.

Had I known this, I might have hit Mark up for some Mavs tickets. :-) Having grown up not far from Dallas, my favorite professional teams are the Dallas Cowboys, the Dallas Mavericks, and the Texas Rangers. One piece of unsolicited advice for Mark, though. The next time the Mavs are up 2-0 in the NBA Finals, make sure it doesn’t get out that the city of Dallas is planning the victory parade. It just gets your opposition fired up.

On Tap

The next two articles I plan to write are one dealing with California’s clean energy initiative, and then one detailing which technologies I believe will be the winners and losers in the energy sector going forward.