VeraSun Energy Corp., the nation's second-largest ethanol producer, said Friday it plans to produce biodiesel, a clean-burning renewable fuel, from oil extracted from distillers grains, a co-product of the ethanol production process.

VeraSun said it will be the first company to develop a large-scale, commercial facility for biodiesel production from a co-product of ethanol making -- creating two biofuels from the same feedstock.

Removing oil from distillers grains increases the value of the oil for fuel use, the company said, and enhances the resulting distillers grains as a livestock feed by concentrating protein and reducing fat content.

"This opportunity is a natural extension to our business and consistent with our objective to be a leader in the production of renewable fuels," said Don Endres, chairman and CEO of VeraSun. "This technology is particularly strategic to VeraSun because it allows us to extend our large and low-cost producer strategy from ethanol to include biodiesel."

VeraSun is evaluating locations for a 30-million-gallon-per-year biodiesel production facility, with plans to begin construction in 2007 and production in 2008. The company also filed a provisional patent application with the Patent Office covering the production process.

Shares of VeraSun rose 29 cents, or nearly 2 percent, to close at $17.06 on the NYSE, where the stock has ranged between $14.88 and $30.75 since going public in June with an offering worth nearly $420 million.

A move toward diversification is attractive for VeraSun, as ethanol stocks have recently shifted from darlings of Wall Street to laggards as the price of crude declined. Earlier Friday, Thomas Weisel analyst Kevin Monroe started coverage of VeraSun with an "Underperform" rating, saying that although he sees the company maintaining its position as one of the top ethanol producers through 2008, VeraSun's fortunes are tied to unleaded gas prices, which are "extremely volatile."

Biodiesel can be blended with petroleum diesel to run in existing diesel engines. According to the National Biodiesel Board, production grew to 150 million gallons in 2006 from 75 million gallons in 2005. The Energy Information Administration forecasts that biodiesel demand will rise to more than one billion gallons by 2010, and double to two billion gallons by 2020.

"Creating another renewable fuel from an existing co-product of the ethanol production process makes good economic, business and environmental sense," added Endres, "We are adding to the renewable fuel supply, enhancing the content of a valuable animal feed, and creating additional value for our shareholders."

Raymond James analyst Pavel Molchanov, who rates VeraSun a bullish "Strong Buy 1," was encouraged by VeraSun's announcement, particularly as its move toward biodiesel would make the company the first to directly link ethanol and biodiesel production on a commercial scale.

"In effect, VeraSun wants to create a brand new profit center, likely increasing the profitability of its ethanol co-products," Molchanov wrote in a note to clients. "VeraSun is entering a market that is growing even more rapidly than the ethanol market."