Seasick from Aventine's stock

Aventine Renewable Energy Holdings, Inc. (NYSE:AVR) shares have been all over the map these past few months making investors quezzy .  On Monday ethanol stocks were the rage, then a day later ethanol stocks were a death sentence.  But yesterday AVR rallied 10%, so how to you invest in AVR?

Ethanol has been under fire lately due to corn prices that continue to be out-of-control. It's no surprise that Aventine's stock has been pushed down due to the rising price of corn, the stock is down 75% in the past 52-weeks.  Let's face it, the ethanol industry needs the U.S. government to throw them a bone, otherwise all these guys are going out of business.

Back in January AVR shares started their big decline, falling from $12 a share to were we sit today in the $4 range.  However the last 3 months have been even more volatile as traders keep placing their bets for finding the bottom of this stock:

Aventine Renewable Energy Holdings Inc. 4.60  -0.15

The last set of numbers we saw on Aventine came out on May 2nd when AVR reported a Q1 net loss of $10.8 million, or 26 cents a share, compared with a profit of $14.9 million, or 35 cents a share, a year earlier.  That made AVR shares rally that day but the glory was short lived.

The big problem with Aventine is how long can they keep going, when will the cash burn out and more importantly, how will they pay back their loans and can they get more funding?

On May 5th,  Lehman Brothers analyst Mansi Singhal estimated, in a client note, that Aventine faces a cash shortfall of $60 million.

Given the company's reluctance to delay the construction of its plants, none of the other options seem favorable right now," the analyst wrote. "The company is talking to banks to extend its credit line; however, we understand such rescue financing can be expensive, to the tune of 15 percent."

Singhal also said the shares' 26.3 percent gain since first-quarter results, which beat analysts estimates by 1 cent, was "overdone."

Calyon Securities analyst Kelly Dougherty wrote that the reputation of the Brookings, S.D., company may enable it to obtain favorable treatment from companies engaged in expanding capacity.

"It is possible that contractors, who have increasingly seen projects canceled due to tight market conditions, may be more flexible with an established player like (Aventine)," Dougherty wrote.

"We therefore think it is likely that (Aventine) is granted some leeway on its payment terms and likely an increase in credit from its lenders to keep the expansion on track."

Both Dougherty and Singhal have a "Neutral"-equivalent rating on the shares, which fell 42 cents, or 7.7 percent, to $5.01.

Earlier this month Moody's Investors Service indicated that Aventine Renewable Energy Holdings Inc.'s liquidity position has slipped to 'weak' from 'adequate', after the disclosure that the company's auction rate securities (ARS) remain illiquid and that it recorded an unrealized $21.6 million charge to income in the first quarter of 2008.

The charge is to reduce the carrying value of the $127.2 million (face value) of the ARS on the company's balance sheet as of March 31, 2008, to $105.6 million.

The agency downgraded the U.S.-based ethanol producer's speculative grade liquidity rating to 'SGL-4' from 'SGL-3'. It affirmed the 'B2' corporate family rating and 'B3' rating on the senior unsecured notes due 2017. The outlook remains negative.

Fellow Masters, as much as we want to believe in Aventine and the ethanol story, it's a roll of the dice until we get some good news on the industry or government backing.  Aventine is running out of money and until they have a clear direction for future profitability, it's a gamble to invest in them.

Disclaimer: No positions in AVR.

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