US BioEnergy, the latest ethanol startup to test the market, hopes to raise $300 million in an initial public offering to build plants that would produce hundreds of millions of gallons of the fuel additive. However, those plans could go up in smoke.

Two other ethanol companies—VeraSun and Aventine Renewable Energy—entered the market in June as the price of oil oozed pass $70 a barrel. But investors have watched both stocks falter ever since.

VeraSunwas the first ethanol producer out the door. It priced its shares June 13 at $23 and closed on its opening day at $30, a healthy 30 percent pop. But the stock has since fallen. It closed at $21.86 on Friday, down $1.85 for the day.

VeraSun’s initial success, however, set the stage for others. Pekin, Illinois-based Aventine Renewable Energy Holdings stepped up in late June, pricing shares at $43—higher than the original filing price of $37 to $41 per share. But it closed its opening day at $38.37, 10.8 percent below its IPO price. And the stock has continued its fall. It slid $1.08 on Friday to $27.31.

Some of Friday’s decline in both stocks may have reflected the price of oil. Light sweet crude closed Friday at $74.76 in New York, down $0.70.

Surely, the demand for oil is likely to rise as the booming economies of China and India spur price competition with the United States and Europe for a limited global supply. Some expect oil prices to reach $100 to $200 per barrel within a year or two, and that would give the fledgling ethanol industry a lift.

However, an easing of global tensions—notably Israel’s incursion in Lebanon, the war in Iraq, and the threat of terrorism—would likely cause oil prices to fall, at least for the short term. And that would make ethanol less attractive as a fuel additive.

According to UBE’s filing on Thursday with the U.S. Securities and Exchange Commission, CHS, a marketer of grain an fuel products, has invested $70 million in the startup and holds a 23 percent stake. UBE markets ethanol as well as biodiesel produced by third parties through UBE Fuels, a joint venture with CHS.

Plant Plans

UBE plans to use the proceeds to finance a portion of its construction costs of facilities costing $620 million. The joint book-running managers of the offering are UBS Investment Bank, Credit Suisse, and Piper Jaffray. The managers are William Blair & Co. and A.G. Edwards.

UBE operates one ethanol plant in Central City, Nebraska. The Brookings, South Dakota, energy company acquired the plant in April 2006 and is in the process of expanding. It has three ethanol plants under construction. Once construction is complete, UBE expects the four plants to produce 300 million gallons of ethanol per year.

The company also has in development five more plants that it expects to produce 400 million gallons of ethanol per year. The company hopes to be one of the largest U.S. ethanol producers by end of 2006.

According to the Renewable Fuels Association, U.S. ethanol production was about 4 billion gallons in 2005, accounting for about 3 percent of the total U.S. gasoline supply.

The ethanol company hopes for favorable economic conditions for ethanol production, with costs lower than those for producing gasoline. It also expects to benefit from the phasing out of the fuel additive methyl tertiary butyl ether, or MTBE. Refiners are expected to phase out 2 billion gallons per year of MTBE, opening additional demand for ethanol.

Fueling Competition

It’s a highly competitive market. World ethanol production rose to 12 billion gallons in 2005, of which 65 percent came from source outside the United States, according to the RFA.

The U.S and Brazil are the largest producers. While the U.S. industry is made up of about 100 production facilities that use corn, the Brazilian ethanol industry works primarily with sugar cane.

Companies that compete against UBE include Archer Daniels Midland Company, the largest producer in the industry, as well as large producers VeraSun, Hawkeye, Aventine, and Cargill.

And they’re all betting the price of oil will keep rising.

Contact the writer:SMartin@RedHerring.com