Other than the U.S. motorists filling up their thirsty new trucks and SUVs, no one has benefited from low oil and gasoline prices more than the country’s ethanol producers.

Low prices have translated into record gasoline demand, dictating record consumption of ethanol. Ethanol’s roughly 10% — and growing – share of the U.S. motor fuel supply is secured by federally mandated quotas for renewable fuels. Ethanol blending at the same 10% rate is also essential to boost the octane content of  gasoline to auto manufacturer specifications; while there are alternative high-octane additives, ethanol is currently the most practical and economical.

An industry that doesn’t need any more tailwinds is currently enjoying two more. Corn prices have been depressed by a succession of bountiful harvests, improving ethanol producers’ margin, known as the crush spread.

At the same time, global sugar prices have soared, making corn-based ethanol more cost-effective than that derived from sugar cane. That’s been a boon for U.S. ethanol exports. Brazil, the world’s second-largest ethanol producer and a big consumer, has turned into a major destination for U.S. biofuel of late alongside China, Canada and India.

Source: Nasdaq.com

A few years ago, conditions this favorable might have been expected to precipitate construction of new U.S. ethanol plants left and right, followed inevitably by oversupply and plummeting prices. But the industry, while still fragmented and subject to commodity volatility, has matured.

Since consumer resistance to E85 fuel with 15% ethanol content is eroding only slowly, ethanol demand is likely to grow only a little faster than nationwide gasoline consumption. Meanwhile, new market entrants must cope with serious logistics bottlenecks while competing against much larger and efficient rivals. As a result, companies found it cheaper and more practical to grow by buying out ailing competitors rather than building new plants.

No one has recently benefited from this strategy more than Green Plains (NYSE: GPRE), which has increased its production capacity by nearly 50% over the last 12 months by means of opportunistic take-outs and incremental improvements at its plants. Its acquisition of three Abengoa Bioenergy plants out of bankruptcy last month made Green Plains the third-largest U.S. producer with a 10% market share.

Green Plains’ relatively low-cost expansion is likely to continue given the company’s solid balance sheet, which in turn cements the distribution outlook for its sponsored logistics MLP Green Plains Partners (NYSE: GPP). Green Plains Partners declared a quarterly payout of 42 cents a share on Oct. 22, for an annualized yield of 8.4% at a recent unit price just shy of $20. The payout has risen 5% in the year since GPP’s market debut, but would grow nearly 10% over the next 12 months at the pace set by the latest increase.

Excludes three recently acquired Abengoa Biofuel plants. Source: Green Plains Partners

Distribution coverage improved in the second quarter to 1.16x, and to 1.06x for the past year. Debt was below annual EBITDA until GPP borrowed $90 million to pay its sponsor for the logistics assets of the acquired Abengoa plants last month. Following that transaction, leverage likely rose to roughly twice the pro-forma EBITDA. The partnership retains plenty of financial flexibility to grow alongside its sponsor.

Like its refinery logistics counterparts, Green Plains Partners is insulated from short-term commodity and throughput swings by multi-year volume and margin guarantees from its sponsor.

Refinery logistics is a good comp for GPP. While ethanol production has traditionally been a more volatile enterprise than refining, it’s becoming less so as a result of industry consolidation. And ethanol’s profitability is on the rise even as the gasoline refining margins have weakened.

With so many things going right for ethanol producers at the moment, a less favorable environment down the road is certainly a major risk. But there is also a good likelihood that ethanol consumption growth will continue to outpace demand for gasoline as E85 becomes increasingly common.

Flush with ethanol blending profits dramatically boosted by inefficient enforcement of the federal biofuel quotas, some blenders and retailers are luring consumers to E85 with prices as low as $1.15 a gallon, and most of the new cars sold in the U.S. can now run on the 15% ethanol mixture.

We’re adding Green Plains Partners to the Aggressive Portfolio. Buy GPP below $24.