Sector Snap: Ethanol

NEW YORK (AP) -- Ethanol stocks traded higher Friday on analyst reports highlighting the sector's growth prospects, despite expectations of continued weakness in ethanol prices as the summer driving season comes to an end and the market faces a glut.

Although BioFuel Energy Corp. is not yet producing ethanol, it "compares favorably" to more established companies because of its growth prospects, Raymond James & Associates analyst Pavel Molchanov said in a note on Friday. He initiated its rating at "Outperform."

"The ramp-up in capacity to 230 million gallons per year by March 2008 could be sufficient to place BioFuel Energy among the top 10 U.S. ethanol producers," Molchanov wrote.

BioFuel shares rose 6 cents to $6.20. Molchanov gave the company an $8.50 price target.

At the same time, UBS echoed a familiar sentiment that the price spread between ethanol and gasoline will further narrow or reverse in the near term as ethanol supplies have outpaced blending capacity and summer road trips come to a halt.

Analyst Chris Shaw cut share price targets and earnings expectations for ethanol companies, as well as ethanol price forecasts.

"Pricing weakness which we thought would be at its worst in 2007, now looks likely to extend into 2008," Shaw wrote. He expects capacity to nearly double before the end of 2009, adding 5 billion gallons to the current 6.5 billion.

Bank of America analyst Eric Brown wrote in a May report that the "relentless supply" of new ethanol production will lead to a 70 percent decline in margins by 2009.

Shaw lowered his ethanol price forecast to $1.87 per gallon from $1.99 per gallon. He also lowered earnings and sales estimates for VeraSun Energy Corp., US BioEnergy Corp. and Aventine Renewable Energy Holdings Inc., though he said sales declines will likely be offset by lower costs for corn and natural gas.

Among the gains:

VeraSun shares rose 30 cents, or 2.4 percent, to $12.95

Andersons rose 95 cents, or 2 percent, to $47.58

Aventine rose 28 cents, or 2 percent, to $14.44

Pacific Energy rose 8 cents to $11.59