To be honest, I’m not really sure what to think of T. Boone Picken’s “plan”.  He’s been showing up fairly frequently on T.V. as of late pushing his plan for energy independence.

A noble cause, to be sure, and I don’t think he’s too far out of line here.  At least on the surface.  But look a little bit deeper.

Mr. Pickens is a business man at heart and he’s certainly done well for himself as an oil man.  Now he’s looking to capitalize on the alternative energy push.

Why does he want you to buy into his plan?  Because he’s got a ton of his own money dumped into wind energy.  And I’m talking billions of dollars going towards wind farm development in Texas.  Then there’s drilling for water in West Texas and shipping it to Dallas via pipeline, all funded by, you guessed it, Pickens himself.  So the real incentive for Pickens plan is to make money.  Naturally.

If he can get you on board, he certainly reaps the benefits.

As I mentioned, PickensPlan (on the surface) is a good step in the right direction, and we can all certainly benefit if we gain an independence from foreign oil.  However, all you have to do is follow the money to find the true incentive behind the message.

Of course, this should all sound eerily familiar.  Remember Sir Al Gore, Nobel Prize winner?

I believe his message went something like this:  Man has caused global warming, global warming is melting the ice caps, will flood the shorelines and cause drought and famine all across the world…

And oh by the way, be sure to see my movie on this topic, buy carbon credits from my company, and try and look past the fact that I consume more energy in one month than you do in seventeen…

My good buddy MJ over at Dyslexic Research forwarded me an article on how President Bush signed a bill to increase fuel efficiency standards to 35 MPG by the year 2020. Also lumped into the bill was a required ramp-up of the use of ethanol at refineries from about 6 billion gallons a year this year to 36 billion gallons by 2022 and additional mandates that by then at least 21 billion gallons are to come from feedstocks other than corn.

I like the fact that we’re raising fuel efficiency standards, finally. However I don’t think we’re exactly pushing technology with 35 MPG. Why don’t we shoot for something a little higher? Why not 40 MPG, or even better, 45 MPG?

We’re 12 years away from the new legislation being put into place, I’d like to think that the big three could ramp up R&D to meet a higher standard than 35 MPG in 12 years.

I like the push for ethanol, even though I think it’s still a farce. If we can figure out a way to produce ethanol with a net energy gain, I’m all for it. I also think it’s smart to require an increasingly larger percentage of ethanol be produced from something other than corn.

All in all, I like the concept, but I have to wonder how serious this move really is. Is the President signing this to appease Democrats and empower Republicans in an election year, or does he really think this is good for the United States, all politics aside.

Recently our good buddy Winston mentioned a few stock ideas in a discussion about Walgreens. He mentioned that Archer Daniels-Midland (ADM: chart, web, Y!) was his buy-it and forget-stock. So I thought I’d dig into the numbers a bit to see if I agree.

Archer Daniels procures, transports, stores, processes, and merchandises agricultural commodities and products primarily in the United States. They operate in three segments, namely oilseeds and corn processing, and agricultural services. Effectively they refine seeds and beens into vegetable oils for the food (i.e. salad dressing) and feed industries.

The AG-services side of the company engages in buying, storing, cleaning, and transporting agricultural commodities, such as oilseeds, corn, wheat, milo, etc, and reselling these commodities to the agricultural processing industry.

An interesting, yet lightly publicized aspect of Archer Daniels is their interest in processing corn. For those of you who regularly read The Corner Office Blog, you know that I view the ethanol boom as nothing more than a farce. However, if you can make money in the face of a farce, by all means, run with the bulls!

Financial Summary

For the most recent quarter, Archer Daniels first quarter (FY08) net sales increased to $12.83 billion, up 35.8% from $9.45 billion for the same quarter in FY07, stimulated by commodity prices, and strong product demand in processing and AG-services segments. Oilseeds Processing sales increased 42.4% to $4.61 billion, boosted by higher prices and volumes due to strong demand for vegetable oil and soybean meal, and the higher average selling prices of fertilizers and oilseeds exported from South America. Corn Processing sales increased 12.6% to $1.52 billion, due to higher average selling prices in sweeteners and starches despite lower sales volumes and lower average selling prices for ethanol, whose current capacity exceeds customer demands.

AG-services sales increased 39.4% to $5.54 billion, also stimulated by higher commodity prices and increased sales volumes. Commodity market prices of corn, soybeans, and wheat increased approximately 44.0%, 36.0% and 26.0%, respectively, from market price levels a year ago.

Gross profit margin declined 228 basis points to 8.69% from 10.97% a year ago. The cost of products sold jumped 38.7% to $11.90 billion, due to higher agricultural commodity prices and increased sales volumes. Manufacturing costs increased $52.00 million, due to increased employee-related costs, and higher plant maintenance and depreciation costs. Operating margin also contracted 139 basis points to 4.49% from 5.88%.

ADM pays a $0.115 per share dividend, and the company recently bought back 1.84 million shares for roughly $32.63 per share.

Insider Activity

There has been a healthy dose of insider selling going on in the last couple months, which isn’t really a strong indicator of how well insiders think the company will do in the future. Remember, insiders sell for many reasons (hey, they gotta pay the bills too), but they only buy for one.

Industry Peers

There are a couple key players in the farm products industry. Bunge Ltd. (BG: chart, web, Y!), Cargill, and Corn Products International (CPO: chart, web, Y!) are probably the closest to ADM when comparing technicals. Cargill is a privately held company that is nearly twice as large as ADM in terms of revenue, but on nearly equal ground when looking at net income. Cargill also has significantly more employees, hence more overhead and less net income.

ADM has a P/E ratio of 11.49 as compared to 18.93 for Bunge and 16.13 for CPO.

Operating margins for Archer (4.4%) are nearly double that of Bunge (2.8%) but not quite as healthy as CPO’s 9.9% margin.

The Corner Office Thoughts

I think Archer Daniels is a fairly safe bet considering the stability of our current economy. They’re in a industry that is fairly insulated to drastic swings in economic sentiment, as their products will be in demand regardless of how Bernanke and Company screw things up. The fact that they are truly a global player in the farm and food industry makes it look that much more attractive.

They do have significant risk in that their overall financial health is tied largely to commodity prices, but in this day in age, this is fairly common. I don’t see the grain markets falling through the floor anytime soon. I like the fact that they are taking part in the ethanol boom, but don’t have such a large part of their business plan at risk when the boom turns bust.

Currently, I’m still in a wait and see mode, but I’ll take another look at ADM when things start to calm down a bit. As I mentioned the global exposure that this company delivers is very appealing.

All in all, I think Winston is right, this could be a good candidate for a buy-it and fagedaboudit stock…

I’ve always been skeptical of the true value of running a vehicle on ethanol. I feel that the next great propulsive fuel must have a net energy content greater than gasoline. Scientifically, this means that the energy content of a given amount of future fuel must be greater than gasoline. Currently, I believe the prime candidate for this is hydrogen.

But I digress. Back to the ethanol farce.

I came across a Consumer Reports revelation from 2006 presenting the results of their gasoline vs. ethanol tests. They ran a battery of tests on a new (2007) flex-fuel Chevy Tahoe, which can run on E85 or gasoline, and found that the SUV’s mileage dropped from 14 mpg to 10 mpg on E85. They went on further to say that the results of this test could be applied to any flex-fuel vehicle, because naturally, ethanol has a lower energy content than gasoline.

Ethanol has 75,670 BTUs per gallon instead of 115,400 for gasoline, which means that you would have to burn more fuel to generate the same amount of energy.

Additionally, if you adjust for the lower fuel economy, it’s also more expensive to fuel up with E85 than with gasoline. The price of E85 was about $2.91 per gallon in August of 2006, so if you adjust for the ~28% decrease in fuel economy, you’re actually paying upwards of $3.90 for a gallon of E85. Compare that to the national average of gasoline, and you can see that the economic attractiveness is not all that great.

But ethanol will lower our dependence on foreign oil… won’t it?

Not so fast.

The government credits vehicles that can run on E85 with about two-thirds more fuel economy than they actually get using gasoline, even though they may never run on E85. For example, the two-wheel drive version of the Tahoe used in the study would normally be rated at 21 mpg. But because it can run on E85, it earns a 35 mpg credit, even though the Consumer Reports shows it achieves 30% LESS fuel economy on E85!

The net effect is that consumers are being lured into buying bigger, flex-fuel vehicles like the Tahoe based on the fuel economy sticker on the window, which is highly misleading.

Couple that with the fact that the majority of the country can’t buy E85, and you’re back to burning straight gasoline…

Sounds like you’re a typical anti-alternative energy guy!

Not really. I’d love to be able to stick it to the foreign oil producers like Chavez and Ahmadinejad. To all up and go cold turkey on oil imports would tickle me to death.

However, I think our science in the United States is being driven more by politics than it is by scientific facts. We’ve bought into the ethanol farce in the name of foreign oil and global warming (another scientific farce driven by politics). Now that we’re burning corn in cars, our politicians can gloat that they’re making “great efforts” to curb our dependence on foreign oil and simmer our influence on global warming.

The average misinformed American consumer buys their plight hook, line and sinker.

On Friday, legendary oilman T. Boone Pickens predicted that oil will hit $100 a barrel, possibly in the fourth quarter, but definitely by sometime next year.

The reasoning behind is prediction is that he believes worldwide demand has outpaced global output of 85 million barrels a day. Consequently, Boone, as a believer in supply and demand (as am I) says oil prices have nowhere to go but up.

“I think you’ll reach $100 (a barrel) before you go back to $80,” Pickens said before speaking at a gathering of the Association for the Study of Peak Oil and Gas at a downtown hotel. “It could happen in the fourth quarter, but you’ll see it within a year.” -Source

The jury is still out though on whether daily oil output has reached its maximum level. The federal GAO reported in March that most studies have found oil production will reach a peak between now and the year 2040.

In regards to alternative energy, Pickens is big on wind, although he said that any alternative fuel has a chance to offset petroleum.

You can’t discount Boone Pickens, his history in the oil and gas sector speaks volumes.

I think he’s right, oil will probably see $100 before it comes back to $80, however I believe the 100 dollar mark will be a psychological event that could stimulate a bust in the oil industry.