Author: Mark Henwood
Emerging markets, EAFA, and commodities (DJP) fell while the US market (S&P 500) was flat.
While Biofuels is the forth largest strategy behind Renewable Electricity, Solar, and LED-Lighting it highlighted an all too familiar risk for energy producers. Many energy producers seek to reduce their risk associated with volatility in commodity prices by entering into hedging strategies. The key point of these actives is to reduce risk, not profit from speculative positions. After all, the largest, professionally managed financial institutions are proof even the pros get burned by speculation and I certainly don’t want any sustainable energy companies I invest in engaging in speculative positions.
Apparently, even engaging in hedging involves a certain amount of skill. If management doesn’t get it right the hedging strategy can wipe out the value of a company faster than the worst operational decisions. BioFuel Energy (BIOF) is a case in point. On Tuesday the company opened at USD 2.60/share. After reporting at 12:46 pm that it had insufficient current liquidity to cover USD 46 million in hedging losses on corn contracts, roughly equal to its market value, the stock started plunging 64% to close at USD 0.94/share. While the stock rebounded some late in the week, shareholders lost 38.5% of their value for the week. Coming after Aventine’s (AVR) February problems with the not-so-safe auction rate securities, I hope management of biofuel companies devote enough attention to their financial dealings to avoid crises.
Mark is the founder of Camino Energy, an information provider specializing in globally traded sustainable energy stocks.