Xethanol's Grainy Picture

A CEO change adds a twist to the waste-to-fuel story.
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At this point, the only analyst who follows

Xethanol's

(XNL)

stock seems driven mostly by morbid curiosity.

Ian Horowitz, the alternative energy expert at Soleil Securities, has been recommending that investors sell Xethanol's shares for months. Now, though, he sounds like someone covering the equivalent of a train wreck.

To be fair, Horowitz's latest report starts out conventionally enough. During the latest quarter, he begins, Xethanol's revenue fell short of his estimate but losses came in narrower than expected. He then switches gears in the third sentence.

"The true story for this name, however, lies beyond the income statement," Horowitz says, adding later, "There are a multitude of other issues with XNL that warrant scrutiny and give us pause."

For example, he wonders why Xethanol is collecting so much less for its ethanol than are other suppliers in the company's alliance. He questions the company's expensive expansion plans as well.

In its latest quarterly filing, Horowitz notes, Xethanol revealed that the company must raise another $250 million to execute its strategy.

"With approximately $25 million in cash and a significant negative free cash flow, any additional funding that could be raised would be immediately and significantly dilutive to current shareholders," Horowitz writes. "We do feel though that this type of capital-raise is virtually impossible for a company that has seen such tumult in recent months."

Still, Xethanol isn't exactly acting like a company that might go broke. Rather, Horowitz points out, the company has given former director Jeffrey Langberg some $760,000 in fees and perks over the last nine months alone. Moreover, he adds, the company has inked a new deal that could generously reward ousted CEO Christopher Taylor as well.

Horowitz dwells on Taylor's consulting agreement in particular.

"In all, this represents a cash compensation plan of as much as $508,000 (potential) for a 'C-level' executive who seems to have been terminated for apparent misrepresentation," he writes. "It is curious to see that the recent departures of interim CEO Louis Bernstein and board member Marc Oppenheimer were not handled in such generous fashion."

In contrast, Bernstein and Oppenheimer -- viewed by some as the most independent and credible members of the board -- recently departed without so much as a public thank-you from the company. Since then, Bernstein has claimed that Xethanol misled investors about the recent leadership shake-up -- which Xethanol denies.

By now, of course, Xethanol has been down that road before. Lawsuits accuse the company of misleading investors about its business strategy, which relies on converting waste to fuel. It has denied any wrongdoing.

Xethanol's stock continues to suffer in the meantime. The shares -- which fetched more than $15 earlier this year -- rose a penny to $2.93 on Friday.

Horowitz expects the stock to keep on falling. This week, he lowered his price target on the shares from $1.35 to $1.20.

Meanwhile, Horowitz sees a Xethanol sequel in the making. He points to

H2Diesel

(WLHO)

-- a company with ties to Xethanol -- as the coming attraction. Already, he says, H2Diesel has seen its market value explode to $270 million, delivering part-owner Xethanol a seven-month return of nearly 1,500% in the process.

But "we have seen no indication that there are any assets, technology or legitimacy to H2Diesel," Horowitz cautions. "This simply appears at first blush to be XNL Part II. And we could go on ... but we think you see what is happening here."