Businessman leaping photo via BigStock
“The first cut is the deepest” goes the old saw no more so than in first commercial, first-of-kind advanced biofuels projects – especially when they are undertaken by newly-public companies under extraordinary scrutiny.
In short, the KiOR (KIOR) story. And, as allegations fly, we look at the data on the ground and find that things are not always as they seem.
Earlier this year, Phil New, the always interesting CEO of BP Biofuels, gave a rather extraordinary address in which he suggested that the extraordinary days of technological innovation were behind the advanced biofuels revolution, and what lay ahead were the “hard yards” of commercialization primarily, the pursuit of operational excellence.
New’s speech came to mind this week as KiOR has been struggling with a certain amount of panic on the part of biofuels observers and investors who had handed out an extraordinary punishment to the stock this summer when the company missed (substantially, and suddenly) a 300,000-500,000 gallon production forecast for the second quarter.
Though Raymond James energy analyst Pavel Molchanov observed that the company was roughly 4-5 months behind its production ramp-up schedule and that “we can think of plenty of liquefied natural gas (LNG) plants and offshore oilfields that had delays much worse than this.”” nevertheless, the stock dropped by well above 50%, and the plunge in equity has alarmed shareholders, made future financings more difficult, and in general spooked the advanced biofuels sector, which has frankly been on tenterhooks anyway give the delays and difficulties seen at Gevo, Amyris, Range Fuels and the like.
The Seeking Alpha controversy
A online discussion on the KiOR situation, at the popular investor site SeekingAlpha.com, attracted the following extraordinary post.
The SeekingAlpha update itself was relatively benign, noting “KiOR +1.7% premarket after providing Columbus facility update…As of Aug. 31, Columbus has shipped ~199K gallons of fuel YTD, with about half (~99K gal.) shipped in July and August, and the company expects to continue shipping fuel produced in July and August during September…In July and August, Columbus produced ~172K gallons of fuel, bringing YTD production to 357.5K gal. through Aug. 31.”
The response from a SeekingAlpha.com reader, Mark Henry, writing in the comment box, set alight a wave of web traffic with a series of stunning allegations.
I worked on the maintenance, and these numbers have to be incorrect. During July and August the plant was on a shutdown and never ran anywhere near capacity. They have 2 systems (a train and B train) B train never ran the whole time. They had a PR stunt and had a tanker come in for the video…the tanker was empty coming in and it was EMPTY going out. The plant was buying few logs during the shutdown and the log yard was only about half full. They did start chipping logs near the end of august and began producing fuel, but on my last day the last tank that the product goes through before going to the tank farm was discovered to be full of tar like substance that should not be there at this stage of production. Also the plant manager has his wife working there making a 6 figure income and she does nothing. If you want to find out how much they know about the production ask them how many BTU’s of energy does it take to produce a BTU of product. They don’t know, so without government money this plant will lose money so take your money and RUN!”
Let’s parse this into separate allegations.
1. During July and August the plant was on a shutdown and never ran anywhere near capacity.
2. “They had a PR stunt and had a tanker come in for the video…the tanker was empty coming in and it was EMPTY going out.”
3. The last tank that the product goes through before going to the tank farm was discovered to be full of tar like substance that should not be there at this stage of production.
4. Also the plant manager has his wife working there making a 6 figure income and she does nothing.
5. A provocative bu unspecific allegation relating to the BTUs.
So, let’s go through them one by one.
We did confirm that, indeed, Mark Henry was onsite this summer working for one of the KiOR’s contractors. But, what about these allegations? Particularly the saga of the empty truck.
1. Spiking the numbers? On the production side, KiOR observes:
“The BFCC (our core technology) produces oil; we then move that to the hydrotreater which produces our fuel. Or, we can hold the oil in on-site storage and process into fuel at a later date. The BFCC and the hydrotreater are capable of running separately from each other and often do particularly during our on-going start-up phase.
Ironically, we issued the September 19 release to help external stakeholders have more of our data and not create confusion. Since the EPA reports shipments and not production, we wanted it to be clear that KiOR had in fact been producing even though the EPA report would not reflect activity.
“So, for the September 19 release (copy attached), we used detail contained in our production/shipment that is part of our normal business recordkeeping. In the release, we focused on total fuel production which is what we base our guidance on, and includes all three of our products – gasoline, diesel and fuel oil.
This is different than what EPA reports on a monthly basis through EMTS for two reasons: first, the reports do not reflect any of KiOR’s fuel oil shipments, as that product is not a RIN generating product under RFS2 (although we do sell it to customers); and second, EPA reports volumes and RINs generated in their EMTS, which for us at KiOR does not occur until the product is actually shipped from the facility, even if it is in our product tanks ready for shipment.
“We said that Columbus produced 172,398 gallons of fuels in July and August. In his note, mhenry stated that “during July and August the plant was on a shutdown and never ran anywhere near capacity.” I think part of the erroneous information revolves around the fact that this individual, in his role as contractor, may not have an understanding of the independent operations in various parts of the facility, and, as such, has assumed (incorrectly) that if any part of the facility is not in operations, then fuel cannot be produced. As I mentioned above, the BFCC does not have to run for us to produce our fuel, but it had to run at some point to produce the oil which we processed in the hydrotreater. So, the plant was producing fuel at the volumes reflected in the press release – period.
“With respect to shipments, through the end of August, we had shipped 199,071 gallons of fuel; that compares to the 141,569 reflected in the EPA report for D3’s and D7’s for the year. We are fairly certain that all or most of those D3’s and D7’s are from KiOR and the main difference can be attributed to the fact that we also shipped un-RINable fuel oil which would
not appear in the EPA report.”
The Digest adds: Some of the confusion may clear up shortly, with the EPA’s new heating oil rule released today.
The new definition of heating oil adds a category to include all fuel oils that are used to generate heat to warm buildings or other facilities where people live, work, recreate, or conduct other activities. All fuels previously included in the original definition of heating oil continue to be included in the expanded definition. Fuel oils in the new category of the expanded definition that are used to generate process heat, power, or other functions are not approved for RIN generation.
Mike McAdams, president of the Advanced Biofuels Association, said:
“The Advanced Biofuels Association applauds EPA for expanding the definition of heating oil to include renewable fuel oil used to warm buildings or other facilities where people live, work or recreate. This newly expanded definition will help sustain growing renewable fuel production, particularly of advanced or cellulosic biofuels, in the heating oil market. This rule will allow actual gallons of advanced and cellulosic heating oil to be delivered this year to the market. The change also underscores EPA’s continued leadership administering the Renewable Fuel Standard (RFS) program.”
2. The video shoot. According to KiOR, “the video shoot was not a “stunt” but merely an opportunity to obtain b-roll footage of the plant. Obviously, we had to pay to bring a truck in for the day to be able to show the fueling section of the plant, but this was the safest route to take for these purposes. We had a local firm do the video for us on July 30, and there wasn’t anyone else on the grounds besides employees and contractors.
A note to readers: b-roll, that’s the generic kind of footage that is routinely provided to television stations to assist them in their news coverage. Virtually every major company in the world has a hopper full of b-roll.
3. The “tar-like substance”. We regard this at this stage as a indicative of normal start-up processes and particularly before steady-state operations are achieved. Let’s all keep in mind that this is a first-in-kind facility even a mature facility might have excessive heavy oils during the start-up year. One to keep a sharp eye on, though – those incidents are supposed to fade away in time.
4. There’s the allegation about the padded payroll. True enough, according to KiOR, the “plant manager’s wife does indeed work for KiOR, but she works in a corporate function and reports to Pasadena. This individual is the Director of Health, Safety & Environment and Quality, and has also been leading our Continuous Improvement process. I can assure you that with a degree in Chemical Engineering, and leadership roles in plant management, quality management and business program management that she came highly qualified to the role and she is a real asset to KiOR.”
A further note to readers: the need for a “baseline level of staffing consisting of process engineering, monitoring staff, testing personnel, health safety and environmental personnel” is routinely disclosed and discussed in KiOR’s 10-Q SEC forms.
5. The BTUs allegation. Here in Digestville, we’d generally steer readers away from a focus on energy returns and focus on economic returns. Why? First of all, fuels need to compete on economics. Few would pay more for a gallon of fuel because it is more energy-efficient. At the same time, we make a distinction between useful energy and useless energy. For example, using flared natural gas is an attractive option in terms of the economics, if you can capture it. A process could have a low energy return but have a positive and attractive economic return because of the problem of and opportunities with residues or feedstocks that have low value in their natural state.
The bottom line
It’s always important with early-stage companies to put informal crowd-sourced commentary from well-meaning (or perhgaps not) amateur reporters into context. Take for example the b-roll footage. It’s like alleging that United Airlines doesn’t carry passengers because they shoot some generic take-off- and landing footage using a plane not carrying any passengers.
At the same time, it’s important to keep a close eye on all early-stage companies particularly those who have gone public and are raising equity from investors with less access to the kind of data and the means to understand it that sophisticated early-stage investors like venture capitalists generally have.
So, it’s probably a good thing that all these questions and allegations arise, so that we all have an opportunity to get a little more “in the weeds” of start-up operations that, in looking at pilot and lab-level operations, we generally do.
As Phil New cautions, these are the hard yards. And with those, along come the Monday Morning Quarterbacks who seem to have all the answers.