UPDATE 2-Pacific Ethanol quarterly loss widens, shares fall

* Larger-than-expected loss on worsening margins

* Sales up 56 percent

* Shares drop more than 16 percent (Adds details, CEO and analysts’ comments, share price)

NEW YORK, Nov 10 (Reuters) - Pacific Ethanol Inc PEIX.O posted a deeper-than-expected quarterly loss as volatile corn and fuel prices pushed the ethanol maker further into the red, sending its stock down sharply.

Ethanol makers have suffered in recent months as a drop in gasoline and ethanol prices have outpaced the downturn in prices of corn, the main component of U.S. ethanol. That has pushed margins in many parts of the country into negative territory for the nascent industry.

Late last month, VeraSun Energy VSUNQ.PK, the largest publicly traded ethanol maker, filed for Chapter 11 bankruptcy protection, citing harsh market conditions.

Pacific Ethanol Chief Executive Officer Neil Koehler said the company had operated its plants at about 10 percent below capacity because of the weak margins and to conserve cash.

“As we previously stated, we will continue to adjust our production levels according to market conditions,” Koehler told a conference call with analysts.

Still, Koehler said the increasing mandates for use of ethanol in the gasoline market and the slowing pace of ethanol output growth should help margins in 2009.

Ian Horowitz, analyst with Soleil Group, said it could take longer. “I think Koehler’s trying to hold out through 2009, but it’s going to take a whole lot of time to see balance sheet improvement.” he said.

The company faces a $30 million construction loan payment in the first half of 2009, which Koehler said the company would likely seek to restructure. But analysts say that with other interest payments estimated to be higher than free cash flow, its future remained uncertain.

“I think there are legitimate concerns about the company’s liquidity,” said Pavel Molchanov, analyst with Raymond James. “It’s going to be pretty tight.”

Sacramento, California-based Pacific Ethanol posted a third-quarter loss of $54.9 million, or 98 cents per share, compared with a loss of $4.8 million, or 15 cents per share, in the year-ago quarter.

Excluding a charge related to asset impairments, the company posted a loss of 51 cents per share, compared with analysts’ forecast of a loss of 15 cents per share, according to Reuters Estimates.

Net sales rose 56 percent to $184 million in the quarter as volumes of the fuel sold rose 30 percent to 65 million gallons.

Still, prices for corn rose 54 percent from a year earlier, more than triple the rise of the ethanol prices, pushing the company’s margins during the period to negative 11 percent.

Shares in Pacific Ethanol were down 16.7 percent, or 18 cents, to 90 cents per share in afternoon trading Monday on Nasdaq. (Reporting by Matt Daily; Editing by Steve Orlofsky and Tim Dobbyn)