Biofuel stocks advanced yesterday after news that

Biofuel stocks advanced yesterday after news that the EPA proposed increasing the required use of renewable fuels. The EPA called for a mandate of 16.55 billion gallons for renewable fuels such as ethanol for this year, up 8.9 percent from 2012 and in line with a target set by Congress. The EPA stated it is looking to stop price scams in the RIN market for biofuels and this too should help strengthen prices. There are not many stocks in the biofuel sector so we will go over them here as this appears to be just the beginning of strength in the sector.

1.) Verenium Corporation ( VRNM )

Verenium produces DELTAZYM® GA L-E5 glucoamylase. It is obtained from a classical strain of Aspergillus niger designed to provide optimum ethanol yields in fuel ethanol production resulting in cost performance benefits. DELTAZYM® GA L-E5 glucoamylase is used to saccharify liquefied mash from various substrates including corn, wheat, milo, barley and cassava. It can be used in simultaneous saccharification fermentation (SSF) processes by adding directly to the fermentor with yeast. This biofuel stock was once the leader of the sector after they announced a partnership with BP ( BP ) back in 2010. Last year under falling ethanol prices BP backed out of the deal and this resulted in a steep drop in Verenium's stock price. Ethanol companies need Verenium's product to manufacture ethanol so a renewed interest in ethanol production should greatly benefit them. However, with the renewed interest again in biofuels Veremium should benefit. VRNM's chart looks to be moving towards the 200-day moving average at $3.20.

2.) BioFuel Energy Corp, ( BIOF )

BioFuel Energy Corp . produces and sells ethanol and its co-products in the United States. The company offers dried and wet distillers grains with solubles, corn oil, and carbon dioxide. It operates 2 ethanol production facilities located in Wood River, Nebraska and Fairmont, Minnesota with a combined production capacity of approximately 220 million gallons per year. The company sells its products to independent third party marketers and distributors. BioFuel has gained much of the attention over the last few months after it was disclosed David Einhorn has been accumulation shares in the company. As of September, 2012 he owned approximately 13.6%. The EPA mandate for increased biofuels will directly benefit companies like BioFuel.

3.) Pacific Ethanol, Inc ( PEIX )

Pacific Ethanol, Inc. produces and markets low carbon renewable fuels in the United States. It sells ethanol to gasoline refining and distribution companies; provides ethanol transportation, storage, and delivery services in the Western United States. A manufacturer of ethanol, they too will benefit from increased sales due to the EPA mandate. The stock has been crushed over the last year, falling 75%. During that time however Pacific has reduced its debt load, while at the same time increasing its ownership in ethanol plants. Increasing ethanol sales is bullish for them.

4.) Syntroleum Corp ( SYNM )

The EPA mandate announced yesterday could be a big win for this company. Refiners, per the EPA, have to make or purchase credits for 2.75 billion gallons of advanced biofuels, such as biodiesel. Syntroleum product is a synthetic diesel fuel produced by Dynamic Fuels, a 50/50 venture formed with Tyson Foods, ( TSN ) the world's largest processor and marketer of chicken, beef, and pork. Utilizing fats and oils feedstock from Tyson, coupled with Syntroleum's Bio-Synfining™ technology, the Dynamic Fuels' plant is designed to produce 75,000,000 gallons per year of ultra-clean and high performing renewable synthetic fuels. The first facility of its kind in the United States began commercial operations in November of 2010. The diesel meets ASTM D975 standards, including higher cetane levels, near zero sulfur and superior stability. The unblended diesel fuel can be used in existing conventional fuel infrastructure and engines. The synthetic fuel can also be blended with petroleum diesel to help those fuels achieve superior environmental and performance characteristics. In 2011, Syntroleum contracted with the U.S. Navy to provide fuel for a new fleet of green ships. The fuel is also being tested in shuttle buses operated by Alamo and National Car Rental.

Syntroleum as of the most recent earnings report had $17m in cash. The recent Fiscal Cliff deal was a boon for Syntroleum. In their December 13, 2012 SEC filing the company stated they would receive $23m for 2012 production. The Tax Extenders Bill passed and will give the company $40m approximately once the monies are received.

With oil prices approaching the $100 a barrel mark yet again, there is no surprise biofuel stocks are gaining attention. The EPA mandate looks to have also put a floor in these stocks. There are only a handful of players in this biofuel market and that in turn could lead to outsized gains as both investors and traders chase. Much like the 3-D sector, when there are only a few stocks those stocks typically see larger gains than normal. The sector is not without risk but with biofuel prices bouncing off their lows and a government mandate set on keeping the sector viable, the rewards here appear to outweigh the risks!