Despite rising corn prices in the second half of 2010, Green Plains Renewable Energy (GPRE: Nasdaq) posted 91% year-over-year EPS growth for the full year 2010, compared to 2009, according to a recent company press release. Growth in 2010 was driven primarily by flawless execution of accretive acquisitions of ethanol plants, increasing its total ethanol production capacity to a run rate of 700+ million gallons per year, including its latest acquisition, according to public company information.


Prudent, disciplined, and intelligent commodity hedging strategies protected margins in Q4 2010, when corn prices ran up dramatically. Furthermore, the timely installation of an important new add-on technology called Corn Oil Extraction Systems ("COES"), from a technology development company called GreenShift Corporation (GERS: OTCQB), began to contribute to profits in Q4 2010, according to GPRE management.


The U.S. ethanol industry is emerging from an extremely tough downturn, a downturn that began in 2007 when the investment boom of the 2002 - 2006 time period produced a glut of ethanol production capacity, as well as a run-up in the key input to the industry, namely #2 Yellow Corn. Like the computer industry of the past 5 decades, the U.S. biofuels industry is growing in waves. The industry is just now entering the second, major upleg of its growth, which will be marked by both consolidation of capacity into strong hands like GPRE, as well as the implementation of important, new value-added technologies that increase profitability.


Todd Becker, and his team at GPRE, have demonstrated a consistent track record of disciplined risk management and excellent execution skills, producing profitability both during good times and during bad. As a result, Todd and his team, have been rewarded by the capital markets with substantial, new financing in the form of increasing credit lines, convertible debt, and equity capital. The company is now well capitalized and liquid, with a year-end cash balance of over $300 Million, including unused credit lines.


Having substantial experience in the industry as well as the confidence of investors, Green Plains has reviewed the large basket of new technologies available to the ethanol industry. Of the many new technologies and approaches available to this well-managed and well-financed company, Green Plains selected Corn Oil Extraction Systems ("COES") from GreenShift Corporation (GERS: OTCQB) as its best bet for near term profit enhancement.


GreenShift's "COES" technology includes two different levels of product offering, according to GERS company filings. Method I extracts about 2 gallons of 'crude corn oil' per 100 gallons per year of ethanol production capacity. Method II can extract another 1.75+ gallons per 100 gallons per year of ethanol production capacity, according to information published by GreenShift. GPRE is currently focused on implementing Method I.


Based on GPRE's expected production capacity of 700+ million gallons per year, Method I will extract a total of approximnately 14 million gallons per year of crude corn oil; and management expects the Method I COES to contribute over $30 Million in incremental profits, annually, according to GPRE's recent, public conference call.


Crude corn oil is an inedible oil product that can be used for a variety of purposes including biodiesel production. As an oil product, its price is closely correlated with other oil products like soybean oil and crude petroleum products like West Texas Intermediate and Brent Crude. With crude oil prices trading around $100 per barrel, the crude corn oil is trading around $5.00 per gallon. Under its contract with technology provider, GreenShift, GPRE finances the installation and operation of the COES technology, gives an intellectual property royalty stream to GreenShift, and keeps the rest of the profits. Industry veteran, ICM Inc., has been awarded the construction contract.


Assuming that GPRE goes on to implement Method II in 2012, investors can expect another $26+ Million of incremental profit contribution to kick in during 2012, driving further EPS growth beyond 2011, using prevailing market prices.


This technology add-on, developed over the past several years at an R&D cost of well over $100 Million by GreenShift, is not only an important driver of profit growth for ethanol companies like Green Plains, but it also represents an important hedge against rising commodity prices, for ethanol producers. The corn oil cash flows key off of oil prices, which typically rise with corn and other agricultural commodities. So, in an environment of rising corn prices, ethanol producers with the COES technology can offset their higher corn cost with a corn oil revenue stream that rises with oil prices.


With a 2010 EBITDA of $130 Million and assuming a growth multiple of 15X, based on the expectation of profit growth driven by the implementation of the Corn Oil Extraction Systems, the enterprise value of Green Plains is $1.95 Billion. After subtracting $528 Million in Long Term Debt, the total equity value of this growth company is north of $1.42 Billion; and the stock appears to be extremely undervalued at its current market capitalization of less than $500 Million.


GPRE is still a relatively undiscovered growth stock in this new economic cycle and this new upleg of the biofuels industry. It currently trades at a deep value multiple, but it has above average growth prospects. Between multiple expansion and profit growth driven by the Corn Oil Extraction Systems, accretive acquisitions, and the top notch execution skills of this quality management team, investors who get in now are likely to benefit handsomely over the coming 2-3 years, as the story gains visibility, the profits grow, and the multiple expands.


Looking even further out, Green Plains is also developing another new technology add-on, which may provide even more incremental profit growth above and beyond the acquisitions and the corn oil. Known as the "Grower Harvester" technology, the new system captures and utilizes the substantial carbon dioxide emissions from an ethanol plant, converting them into algae biomass, which can then be further processed into ethanol, biodiesel, farm fertilizer, and farm feed products, as well as other specialty products. Additional revenue and profit may also come from carbon dioxide credits.


GPRE has not yet issued numerical guidance, but the algae could generate an additional cash flow stream of more than $500 Million per year on GPRE's current ethanol production capacity and at current market prices, according to estimates by Texas Clean Fuels, another algae fuels industry participant.


Copyright 2011. The Galatian Free Press. All Rights Reserved.


Jonathan L. Gal, Editor-In-Chief

The Galatian Free Press

http://thegalatianfreepress.blogspot.com/


Jonathan L. Gal, graduated from Harvard University with a degree in Biology in 1990 and completed his MBA at Babson in 1999. Jonathan owns stock in both GPRE & GERS, which he purchased on the open market; but he is not receiving any compensation from either of those companies for publishing this article or any other article. Jonathan L. Gal is also the majority shareholder, President, Inventor, and R&D Manager of Texas Clean Fuels.


Neither The Galatian Free Press, nor Jonathan L. Gal, nor Texas C