The honeymoon for oil refiners seems to be at an end. As per the Energy Information Administration (EIA), motor gasoline and diesel consumed for transportation in the U.S. during 2015 emitted a total of 1,545 million metric tons of carbon dioxide. This accounted for almost 83% of U.S. transportation industry’s total CO2 discharge. This is where the urgent need for reducing pollution and saving the environment rises.    

Keeping this in mind, the U.S. Environmental Protection Agency (EPA) has come up with a mandate that more refiners will be required to mix more renewable fuel with gasoline in an effort to lower emission and save the planet. This can only result in gains for companies dealing with ethanol and investors need to closely observe the performance of ethanol stocks given the rapidly growing biofuels market.  

What Does the New EPA Requirement Mean?

The EPA has come up with a new requirement specifying the increased amount of renewable fuel that should be added by refiners to their gasoline supply. For 2017, EPA increased the level to 19.28 billion gallons of renewable fuel from the prior 2016 mark of 18.11 billion gallons.  

Most importantly, the newly proposed mark for 2017 is higher than EPA’s earlier figure of 18.8 billion gallons and the 18.1 billion gallon target for 2016. The blending of more renewable fuel with gasoline will mostly be done by mixing corn-based ethanol.

Following this announcement, the market has witnessed opposition from oil industries citing that a higher amount of ethanol in gasoline will harm the engines of vehicles. In fact, Frank Macchiarola – director of American Petroleum Institute (API) downstream group – said: "We are disappointed that EPA has taken a step backwards with this final rule."

Oil Refiners Hit, Ethanol Players to Gain

For sure, the EPA’s directive is unfavorable for oil refiners as greater volumes of ethanol in gasoline will increase the blending cost to unfeasible levels. This is already being reflected in stock prices of refiners, which have started slipping. Leading oil refiners like Tesoro Corp. TSO, Valero Energy Corp. VLO, Marathon Petroleum Corp. MPC and Western Refining Inc. WNR saw share prices falling 1.4%, 0.8%, 0.3% and 2.2%, respectively.

On the other hand, it is time for ethanol companies to celebrate as more ethanol – a clean burning, high-octane renewable fuel – should be produced or transported to favor the new EPA mandate. We have employed our proprietary screening methodology to pick ethanol players that are worth watching.

5 Ethanol Stocks

Headquartered in Cupertino, CA, Aemetis Inc. AMTX is primarily involved in the production of advanced fuels and chemicals that include ethanol. For the last two quarters, the company’s average positive earnings surprise was 13.04%. Moreover, over the trailing three months, the stock rose 14.5%. Aemetis currently carries a Zacks Rank #2 (Buy), implying that it will outperform the broader U.S. equity market over the next one to three months.

Green Plains Partners LP GPP is primarily involved in operations like operating and developing ethanol and fuel storage tanks, terminals and transportation properties. The company delivered an average positive earnings surprise of 1.8% over the last four quarters.The company carries a Zacks Rank #3 (Hold).

Cosan Limited CZZ - based in São Paulo, Brazil - is engaged in the cultivation, harvesting and processing of sugarcane, which is the main raw material for producing sugar and ethanol. Over a period of three months, this Zacks Rank #2 company rose almost 5%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Headquartered in Omaha, NE, Green Plains Inc. GPRE involved in producing, marketing and distributing ethanol both in the U.S and global markets. The company carries a Zacks Rank #3. It is to be noted that, the company’s stock price jumped more than 10% over the last three months.

Headquartered in Sacramento, CA, Pacific Ethanol Inc. PEIX business involves marketing of ethanol in the western U.S. The stock gained more than 25% in the last three months. Currently, the company carries a Zacks Rank #3.