Creating a feasibility analysis and due diligence packet for an investment opportunity
Evaluating an investment for a private equity firm.
A feasibility analysis was needed by a fuel ethanol project sponsor which was proposed with an investment opportunity to construct a corn ethanol producing plant located in a U.S. Midwest corn belt state.
The market feasibility analysis centered around (1) major historical and legislative factors that contributed to the U.S. ethanol market’s existence, (2) recent events that have influenced industry profitability, and (3) future trends that are likely to have a deep impact on ethanol’s continued participation in fueling U.S. vehicle mobility. A parallel effort devoted to analyzing pro forma plant profitability under a variety of operating, economic, competitive and legislative scenarios was undertaken as a “stress test” to determine the ranked durability of sponsor-claimed future profits.
The feasibility analysis left little doubt that the headwinds facing the future prospects for fuel ethanol are strong and getting stronger each year, and likely to outweigh tailwinds by a significant degree. Product prices have plunged, raw material feedstock prices, which are completely unaffected by realities in the fueling or automotive market space, have not responded in kind with gasoline or ethanol fuel price erosion. Vehicle miles driven have grown slowly ― less than 1% per year ― in concert with the growth in U.S. adult population, and will likely remain in that range for many years to come. ICE engine efficiency has totally erased any fuel volume growth impact from the slow growth in vehicle miles driven. Unit auto sales have been flat for decades and will likely remain so well into the future. The states that have imposed the most stringent rules favoring low-carbon ethanol have also enacted the most aggressive mandates that favor electric vehicle adoption, which will erode ethanol market share. The probability that ethanol blend ratios above the 10% level currently in place will be mandated in U.S. motor fuel blend pools is seen by veteran industry observers to be very low. And the collapse in profitability among producers in the fuel ethanol market space in recent years is unlikely to change for the better in the foreseeable future.
The result was that the investment was not made, and the proposed ethanol plant was not built.
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