KiOR Shows Its Gallons
Landmark cellulosic drop-in biofuels producer releases update on early-stage production: is the increasing gallonage enough to silence the critics?
Today, we head to the Chapel of Hard Data, and get closer to the music.
Nobody walks slower, in public, than at a wedding or a funeral. In the case of KiOR (KIOR), the critics and supporters have been shouting loud as the company makes its slow, public march up the aisle towards steady-state operations.
Most observers, sitting in the pews, have been unsure as to whether to be tossing rice in celebration, or breaking into a chorus of “Nearer My God To Thee”.
So it was highly welcome when the company this week provided an update on the operations at its Columbus, Mississippi, facility in response to the volumes and Renewable Identification Numbers, or RINs, listed in the EPA Moderated Transaction Systems monthly report issued on September 18, 2013.
In July and August, the Columbus facility produced 172,398 gallons of fuel, bringing the 2013 production total from the facility to 357,532 gallons through August 31, 2013. Approximately 83% of production was in the form of gasoline and diesel, with the remaining production as fuel oil. Production from Columbus during July and August exceeded total second quarter production by nearly 40,000 gallons.
As of August 31, 2013, Columbus has shipped 199,071 gallons of fuel since the beginning of 2013, about half of which (99,175 gallons) were shipped in July and August. The Company expects to continue shipping fuel produced in July and August during the month of September.
Reaction from KiOR
“KiOR’s Columbus facility continues to make strides toward steady state operations,” said Fred Cannon, President and CEO. “With the BFCC section of the Columbus facility currently producing additional oil, we believe that we are well-positioned to build on the progress made during July and August and to produce additional volumes of cellulosic fuel for American vehicles consistent with our most recent guidance.”
Lats month. Raymond James energy analyst Pavel Molchanov posted a thoughtful commentary on KiOR’s progress towards regular commercial operations.
Key thought: “We can think of plenty of liquefied natural gas (LNG) plants and offshore oilfields that had delays much worse than this.”
The Molchanov thesis
KiOR’s Columbus plant is North America’s first-ever cellulosic biofuel plant to achieve commercial-scale production. Large energy infrastructure projects always go through a ramp-up process, and of course Columbus uses a novel technology with its own unique set of operational growing pains. Yes, Columbus is behind schedule (by 4-5 months) relative to where management had originally expected to be at this point, hence the cut in 2013 guidance (from 3-5 million gallons to 1-2 million gallons). But this does not imply any structural flaws in the underlying technology, and 4-5 months is hardly a crisis in the grand scheme of things.
“Following last week’s 37% sell-off – an excessive, momentum-driven reaction to previously disclosed information – we are reiterating our Outperform rating on shares of KiOR. Our fundamental thesis is intact, the business model remains valid, and we think that investors open to early-stage stories should look at the current entry point (29% of our DCF estimate) as a buying opportunity. This, of course, has always been a risky stock – hence our Venture Risk suitability rating – but in that context, our stance remains positive.
“Amid a sharp market pullback,” Molchanov continued, “KiOR shares had a particularly rough week, falling 37% to an all-time low. (The small float, 21% of shares outstanding, inherently exacerbates the share price impact of any selling.) In the absence of incremental news flow, this was simply the continuation of the sell-off from August 8 and 9, when KiOR (1) reported below-guidance 2Q shipments and lowered guidance for the rest of the year, (2) raised future production cost estimates, and (3) filed a 10-Q with a going concern statement.”
KiOR vs petroleum
In the company’s August 8 announcement, KiOR signaled that it was increasing its production cost target for its proposed Natchez facility from $1.80/gal to $2.25-2.48/gal.
It’s a substantial increase, but let’s compare that to the price of the incumbent fossil-based gasoline currently pricing at $2.97 (gasoline) and $3.08 (diesel).
Now, let’s review.
1. Priced below the incumbent, without subsidies.
2. Uses cellulosic, non-food feedstocks.
3. Drop-in fuel with no blend wall issues.
3. A here-today technology, producing fuel now and at increasing gallonages.
Would that the world had a few more of these.
The bad news
We’ll not comment on any legal jeopardy that comes from disappointed shareholders filing class-action suits on a “we’ve been had” basis – as better experts on the protections offered in “safe harbor” statements will have a better view.
But, clearly, KiOR had expectations of producing 300-500,000 gallons in Q2 and 3-5 million gallons in Q3. This week’s announcement is consistent with a 300,000 – 500,000 gallon production in Q3 so, a full quarter behind. The September production numbers may well be key, in terms of the company hitting 1-2 million gallons for the year.
Let’s look at this in terms of the plant’s stated capacity – 11 million gallons, or 900,000 gallons per month. Clearly, the company is producing something like 10% of its stated capacity right now.
What we don’t know is – why? Three possibilities.
1. KiOR is fundamentally far behind in terms of the technology’s production rate. Somethiing that would strike at the hearty of the business model.
2. The company is not running the technology full-time, possibly not even close for technical reasons That could simply be a ramp-up problem or related to issues in non-core technology. Or could be a fundamental issue that is being addressed and would be a risk element.
3. The company is not running the technology full-time, possibly not even close for cash reasons. When cash is short, and when production is not yet profitable at this smaller-scale facility, why make and ship money-losing gallons? Why not focus on rate and yield, and go for volume at the full-scale facility planned for Natchez?
Seen in perspective
As Molchanov says “4-5 months is hardly a crisis in the grand scheme of things.”
It’s no surprise that the enemies of biofuels are delighted to spread bad news of KiOR’s delays with the implication that cellulosic fuels are fantasy fuels. Ensuring even more difficulty in other technologies obtaining first-of-kind commercil plant financing – causing further unexpected delays, and further shortfalls compared to cellulosic fuels mandates and expectations.
In short, a self-reinforcing phenomenon.
For now, we await the September production figures or the corresponding RIN numbers from the plant. Should production fall below 100,000 gallons could be a long haul towards full commercial success for KiOR, and its cash-raising opportunities are limited, given the tanked stock price.
Should production hit between 100,000-150,000 gallons good incremental progress, though far from full-scale operations. North of 200,000 would be a good sign that KiOR is on its way.