ANALYSIS-Battered ethanol stocks saved by energy bill

NEW YORK Dec 18 (Reuters) - The new U.S. energy bill that will prop up the battered ethanol industry has triggered a rebound in the shares of ethanol makers, but hurdles to growth and volatile commmodity prices will keep them on rocky path into 2008.

Shares in VeraSun Energy VSE.N have rallied 58 percent since November 20, while U.S. BioEnergy Corp USBE.O has jumped 90 percent, Aventine Renewable Energy Holdings Inc AVR.N 49 percent and Pacific Ethanol Inc (PEIX.O) 73 percent.

"We've seen Congress telegraphing their intent to raise the (usage mandates). It's been very positive for the ethanol stocks," said Kevin Book, analyst with Friedman, Billings, Ramsey.

"What we don't know is if these are long-term believers ... or fast money looking for a buck," Book said. "The Cramer effect is just waiting to happen here," he added, referring to popular stock picker Jim Cramer whose recommendations can drive a company's stock sharply higher.

The U.S. House of Representatives on Tuesday passed an energy bill that expands the annual mandate for U.S.-grown biofuels, including ethanol, to 36 billion gallons in 2022 from the current level of about 6.5 billion gallons.

The White House has said President George W. Bush will sign the bill into law on Wednesday.

Even with the recent rally, ethanol company stocks remain down between about 25 to 50 percent since the end of 2006 as profit margins for the fuel faded because of a supply glut from the fleet of newly constructed plants.

Analysts remain bullish on the sector for the longer term, but expect those companies' share prices to remain choppy in 2008, largely because of the volatile price of corn, the main source of the fuel.

"Corn prices are likely to remain high. On the other hand, ethanol prices are likely to go higher as well," said Kelly Dougherty, analyst with Calyon Securities.

The new energy bill will offer investors more certainty that the government will continue to support the nascent industry, and could attract more private funding to improve the transportation infrastructure that has prevented ethanol from extending its reach outside the corn-growing regions.

"There is more visibility in the market, which should help," Dougherty said.

A year-ago, ethanol was widely hailed an antidote to the U.S. addiction to foreign oil and a tool toward cutting carbon dioxide emissions.

But that glow faded because of the 40 percent jump in production capacity to 7.4 billion gallons per year that depressed margins, a subsequent rise in food prices that has been blamed on the industry's huge appetite for corn and only modest carbon reductions compared to traditional oil refining.

The industry also needs to improve the efficiency at its production plants at the same time it develops the next generation of fuel technology, including cellulosic-based sources such as switch grass.

For now, ethanol makers' stocks will depend largely on whether volatile commodity prices keep gasoline prices high enough to cover the high corn costs.

The surge in oil prices to more than $90 a barrel this year has helped make ethanol more competitive, even as corn prices rallied to record levels above $4 per bushel.

"You're exposing yourself to risk in a real unprecedented way," Book said. "It's a great (investment) idea, but not for the faint hearted."