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Barclays on U.S. Independent Refiners: Update: Ethanol Tax Rebates

June 21, 2011 1:28 PM EDT
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Barclays on U.S. Independent Refiners: Update: Ethanol Tax Rebates

Barclays analyst, Paul Y. Cheng, said, "Earlier last week, the U.S. Senate voted to repeal the $6 billion per year ethanol tax subsidy provided to refiners blending ethanol and gasoline. Although it's too early to tell how legislation will ultimately pan out, we now believe that this vote will have a minimal impact to a slight negative overhang (largely based on policy uncertainty risk) to the refinery industry."

"Based on our discussion with several key refiners, the subsidy benefit is mostly competed away and absorbed by the retail stations/wholesalers. As an industry standard, ethanol blenders typically deduct the entire subsidy as a line item on the sales invoice when selling the blended gasoline to the retail stations/wholesalers, thereby passing the full blender's credit to the end consumer via deductions on their invoices. As a result, the removal of the subsidy policy should not materially affect the refiners, and instead could potentially see slightly higher pump prices."

"In our view, the ethanol tax rebate will not go away entirely next year and we believe it will survive in some shape or form. Remember, this is only the first step in a several month long process of getting this repeal approved. It will be attached to a larger bill that will be presented and negotiated in the House and then finally to the President to be signed into law. It is important to note that the current administration does not support ending the ethanol subsidies at this time (Bloomberg, "US Senate Votes to Shut Down Tax Break, Tariff for Ethanol," 06/16/11). In any case, the current state of the repeal signals that the status quo of supporting domestic ethanol programs is transitory and will likely undergo additional debate/change."

Stocks of note - Pacific Ethanol, Inc. (Nasdaq: PEIXD), Synthesis Energy (NYSE: SYMX), Flexible Solutions (NYSE: FSI), Kronos (NYSE: KRO), Westlake Chemical (NYSE: WLK), Mosaic (NYSE: MOS), LyondellBasell (NYSE: LYB), and Gulf Resources (NYSE: GFRE)


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