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August 29, 2014

Interview With Nathaniel Bullard On Fossil Fuel Divestment

by Tom Konrad CFA

Renewable Energy World asked me to write a commentary on Bloomberg New Energy Finance's recent report on the difficulties institutional investors are likely to have divesting from fossil fuels.  The report details how the scale, yield, liquidity, and historic growth of the oil and gas sector are impossible to match with any other investment sector.

While this is quite true, much of the other coverage has missed the point.  Ironically, I thought Bloomberg News' coverage was some of the worst, because it focused on the least important aspect of fossil fuels as an investment sector: historical growth.  While a sector's yield, liquidity, and especially scale generally persist for decades, growth trends are prone to sudden reversals.  The fact that oil and gas stocks have done so well over the last five years should prompt all wise investors to start taking some profits, regardless of their attitudes towards the environment.

Instead, I focus on likely future trends for oil and gas stocks, and consider how fundamental factors and the potential growth of the divestment movement may affect the potential future growth of the oil and gas sector.  The prognosis is not good.

You can read the whole commentary here: Divesting from Fossil Fuels: Last One Out Loses.

I interviewed the report's author, Nathaniel Bullard, for the piece.  He had some interesting points that did not fit into my commentary, so I include the whole transcript below.

Nathaniel Bullard Interview

Conducted via email, 8/28/2014


TK: Why do you focus on past performance in your analysis?
NB: The past is where the data are available for analysis (as opposed to forecasts and predictions) and I think this is particularly applicable to older, established sectors such as fossil fuels.

TK: Do institutional investors generally believe past performance is a reliable indicator of future returns?
NB: I do think that oil and gas dividend yields in particular will be viewed in a "past performance is a reliable indicator of future returns" paradigm. US coal, however, has had clear indicators of future change in place for a while, in particular cross-state air pollution regulations, so companies such as Bloomberg have been able to analyze the number of plants which are likely to be removed from market, therefore lowering coal demand.

TK: If you had done this analysis in mid 2011, how would that have changed your conclusions?
NB: US Coal would have performed relatively better if we used the original start position of mid-2009, largely because the US shale gas boom was not yet depressing gas prices and leading to massive fuel switching -  though prices began slipping in 2011. Chinese coal stocks were higher and stable, but would later be hit with overcapacity concerns.  Clean energy equities were in the midst of overcapacity depressing margins and share prices, in particular solar stocks.

TK: Do you have any thoughts on why Coal has so greatly underperformed other fossil fuels over the last 4 years?
NB: In the US in particular, natural gas prices (but also to some extent the price of wind power) have moved coal from the bottom of the merit order.  In China, coal is quite oversupplied and many of coal companies are heavily indebted, often with local debt that is a bit opaque.
China has lots of particulate emissions laws in place around coal, and it's making them more stringent - but 1) they're not always enforced and 2) they're not really making a major dent in coal demand...yet. They are, though, shaping our expectation of future demand.  While China does not have the strong and proximate regulations in place to shift demand away from coal, environmental concerns in China's major cities are forcing coal production to move out of urban areas and there are efforts underway to ramp up domestic gas production (and gas imports) as a substitute.

TK: If coal stocks had not declined so drastically in the last couple years, would they be as easy to divest from now?
NB: In a word, no. Some US coal equities have lost 90% of their value since 2011 (Arch Coal, for instance).  This much-diminished size means that all other things being equal, or not equal in a stock market that is performing well, coal stocks are underperformers and the same number of shares will represent a much smaller portion of an investor's overall portfolio relative to 2011.

TK: If or when one of more of the paradigm shifts you discuss in section 7 take place and the divestment movement reaches scale, what would be the effect on the portfolios of investors who choose not to divest?  What would be the effect on the portfolios of those who are divesting today?
NB: I think we can expect some oil and gas stocks to still generate dividends, meaning that the yield attribute they carry is still in effect and attractive to some investors.  Using the Fossil Free Index which I mentioned in my white paper, historical data suggests that removing fossil fuels from a broad portfolio should not adversely impact returns and could in fact be slightly positive.

TK: Do you have any other thoughts you'd like to add?
NB: I wrote this paper because divestment is a fast-moving idea with the first signs of traction outside of its motivated core of intellectual founders.  The sectors it touches upon are essential parts of our physical energy system, at least today, and are almost as deeply embedded in our financial system due to their scale. I thought that divestment deserved a thought exercise, passed without judgment: if divestment is to occur at scale, what shape might it take?

August 24, 2014

Playing The Advanced Biofuel Lottery

by Debra Fiakas CFA

Over the past six months advanced biofuel producers have raised $450 million in new capital.  The industry has finally gained traction after shifting focus from strictly cellulosic ethanol technologies to a mix of biochemical and renewable fuels.  Few if any of the advanced biofuel companies ‘climbed up out of the red,’ but we suspect the investors who had a chance to participate in these deals thought they had got a whiff of profits.  Indeed, Gevo, Inc. (GEVO:  Nasdaq) promised to achieve breakeven at its Luverne, Minnesota plant this year as the ethanol and isobutanol producer was raising capital for renovations and capacity expansion.  The stock still languishes below a dollar per share.

If we take the view that so-called smart money participated in these transactions and that the capital infusion will have a catalytic effect on operations, then the public advanced biofuel companies could be strong growth stocks.  I looked at each of the public biofuel developers  -  PEIX, MEIL, GEVO, AMRS, REGI and KIOR  -  that have raised capital in the last six months to see which one looks like a strong buy.

None of them have earned a dime in profits for shareholders, so we are unable to make a comparison using a valuation metric such as price to earnings or price to cash flow.  In terms of price-to-sales, Pacific Ethanol (PEIX:  Nasdaq) and Renewable Energy Group (REGI :  Nasdaq) are the most interesting, with stocks that trade at 0.40 times sales.

However, a relatively low valuation metric might not be the most compelling factor.  A short interest has built up in shares of Kior, Inc. (KIOR :  Nasdaq), a developer of cellulosic gasoline and diesel, that is near a quarter of the company’s float.  The stock is trades for pennies per share in modest volumes, largely because by all accounts it is on its last leg so to speak.  KiOR raised $10 million earlier this year, but still needs more capital to stay in business. Reportedly, management miss a loan payment and long-time investor Vinod Khosla seems to have lost interest.  However, a last minute infusion of capital or a sale of the company to a strategic investor would likely drive the stock higher from the current price level.

Amyris, Inc. (AMRS:  Nasdaq) has also won the disrespect of short-sellers who are not impressed with the company’s specialty chemicals and biofene business model.  Just over a quarter of AMRS has been sold short.  Near the end of June AMRS shares formed a so-called ‘low pole warning,’ suggesting the stock could sink lower.  However, the stock almost immediately began trading new momentum and traded dramatically higher in the last week, as the company announced the availability of a new loan facility to support development of farnesene technologies.  A short-squeeze could change things.  I believe a majorty of shares was shorted at prices between $3.50 and $4.20.  Thus any development that might push the shares above $4.20 would likely put some fear into the hearts of short-sellers.  The stock has tested the $4.20 price level twice in recent weeks and failed both times, so it might be worthwhile to watch AMRS closely.

The only stock left on our short-list of advanced biofuel developers is that of Methes Energies International Ltd. (MEIL:  Nasdaq). The company raised $5.0 million in new capital through the sale of common stock in May this year.  The shares were sold at $2.00 per share, leaving everyone who participated in the offering under water as the stock has steadily downward ever since the deal was priced.  The company has announced a string of accomplishments over the past couple of months and appears to be on the cusp of delivering its first shipments of biodiesel valued t $6.0 million.  Investors have not been impressed, but it is possible they are missing an important turn.

In my view, the odds a bit better with any of these stocks than lotto…and a few a priced better than a lottery ticket! 

Debra Fiakas is the Managing Director of
Crystal Equity Research, an alternative research resource on small capitalization companies in selected industries.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

August 22, 2014

3 Stocks For The Coming Solar Shortage

By Jeff Siegel

An impending glut of solar panels was going to be the death knell for the industry.

Or at least that's how the solar bears framed the argument just a few short years ago.

Today, however, it's a different story...

A shortage of solar panels is now going to kill the industry.

Or at least that's how the bears are framing the argument this time.

Meanwhile, I'm grinning ear to ear. Because just as opportunity existed during the great solar glut, opportunity exists as the solar industry gears up for a potential shortage.

So don't hate, my friends. Participate!

Solar Goose Bumps

On Tuesday morning, Bloomberg published a pieced entitled, “Solar Boom Driving First Global Panel Shortage Since 2006.”

Ah, that headline gives me goose bumps.

According to Bloomberg New Energy Finance, the solar industry may install as much as 52 gigawatts this year and 61 gigawatts in 2015. That's up from 40 gigawatts in 2013 and more than seven times what developers demanded five years ago.

Bottom line: The smart money is doubling down on the solar manufacturers gearing up for the shortage.

Easily Worth $75

Right now, Canadian Solar (NASDAQ: CSIQ) is building a new solar cell factory that, when completed, will be able to pump out 300 megawatts of annual capacity.

SunPower (NASDAQ: SPWR) has a new facility in the works, too. Production at this new factory is expected to begin in 2017 and will pump out 700 megawatts per year.

And of course, there's SolarCity (NASDAQ: SCTY). This financing and installation company announced in June that it would be acquiring solar panel manufacturer Silevo (as well as building a new manufacturing plant) in an effort to lock in a steady supply of product to meet demand.

We are in discussions with the state of New York to build the initial manufacturing plant, continuing a relationship developed by the Silevo team. At a targeted capacity greater than 1 GW within the next two years, it will be one of the single largest solar panel production plants in the world. This will be followed in subsequent years by one or more significantly larger plants at an order of magnitude greater annual production capacity.

Given that there is excess supplier capacity today, this may seem counter-intuitive to some who follow the solar industry. What we are trying to address is not the lay of the land today, where there are indeed too many suppliers, most of whom are producing relatively low photonic efficiency solar cells at uncompelling costs, but how we see the future developing. Without decisive action to lay the groundwork today, the massive volume of affordable, high efficiency panels needed for unsubsidized solar power to outcompete fossil fuel grid power simply will not be there when it is needed.

Even if the solar industry were only to generate 40 percent of the world’s electricity with photovoltaics by 2040, that would mean installing more than 400 GW of solar capacity per year for the next 25 years. We absolutely believe that solar power can and will become the world’s predominant source of energy within our lifetimes, but there are obviously a lot of panels that have to be manufactured and installed in order for that to happen. The plans we are announcing today, while substantial compared to current industry, are small in that context.

I remain extremely bullish on SolarCity, and I do hope you picked some up after I suggested you do so following the free fall that took the stock down to below $50 back in March.

sccty

Today, SolarCity trades for around $70 a share. On the low end, I maintain that this is easily a $75 stock, while Goldman puts it higher at $85 and Deutsche Bank at $90.

Of course, if you prefer a little more action and the opportunity for an even bigger gain in the solar space, consider one of the up-and-coming solar tech plays that don't get much attention in the mainstream but that are poised for major gains as the solar market continues to soar.

To a new way of life and a new generation of wealth...

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Jeff Siegel

Full Disclosure: I currently own shares of SCTY.

Jeff Siegel is Editor of Energy and Capital, where this article was first published.

August 20, 2014

REG Sells More Biodiesel, Earnings Drop, Acquisitions Are Future Wild Cards

Jim Lane REG logo

Biodiesel giant Renewable Energy Group (REGI)  is up on gallons, down on dollars as market prices weigh on results.

In Iowa, REG announced net income of $10.8 million for the second quarter on revenues of $332.9M, a drop from its Q2 2013 net income of $19.6 million, and a 13% drop in revenue despite an 11% lift in gallons produced. The company noted that net income was boosted by a tax benefit of $11.9 million, recognized primarily from the release of a valuation allowance resulting from recording deferred tax liabilities related to the acquisitions of Syntroleum and Dynamic Fuels and the convertible debt offering. The company recorded adjusted EBITDA of 6M.

In announcing results, the company highlighted:

  • 77 million gallons sold, up 11% y/y, 56 million gallons produced, down 1% y/y
  • Total assets surpassed $1 billion
  • Completed acquisitions of Syntroleum Corporation and Dynamic Fuels, LLC
  • Executed $143.75 million convertible debt financing

At June 30, 2014, REG had liquid assets, which includes cash, cash equivalents and marketable securities, of $125.9 million, a decrease of $10.2 million during the quarter. REG raised $139.2 million in cash from the convertible debt financing. Of those funds, $101.3 million was put in escrow as restricted cash supporting REG Geismar’s obligation on $100 million of Gulf Opportunity Zone Bonds issued for Dynamic Fuels in 2008, $30 million was used to acquire Tyson Foods, Inc.’s interest in Dynamic Fuels, LLC and $11.9 million to acquire a capped call relating to the convertible debt.

Expansion: new facilities

In addition, the company gave updates on three acquisitions in Mason City, New Boston and Geismar. Specifically, REG noted:

The Company’s two most recent biodiesel acquisitions, REG Mason City and REG New Boston, are now able to run at nameplate capacity. All upgrades are complete at REG Albert Lea, while previously announced upgrades to increase feedstock flexibility are progressing at REG Newton and REG Mason City. The Company also prepared for future improvements at its Danville, Illinois facility with the acquisition and rezoning of adjacent land. Finally, REG maintains a toll manufacturing arrangement that offers additional production capacity flexibility.

As announced in early June, the Company launched REG Synthetic Fuels, LLC with the acquisition of Syntroleum Corporation, which included Syntroleum’s 50% interest in Dynamic Fuels, a 75-million gallon per year nameplate capacity renewable diesel biorefinery located in Geismar, Louisiana. REG Synthetic Fuels acquired the remaining 50% of Dynamic Fuels from Tyson Foods a few days after the Syntroleum acquisition. Dynamic Fuels, LLC was renamed REG Geismar following the acquisition.

“Our second quarter results demonstrate the resilience of our business in the face of challenging market conditions,” said REG CEO Dan Oh. “We believe the industry has worked through the excess inventory from year-end and we have seen demand increase since the first quarter. During second quarter, REG demonstrated its ability to operate an expanding business while also investing for future growth. On top of ramping up gallons sold 63% from first quarter, we executed a complex series of transactions in order to acquire Syntroleum and Dynamic Fuels. Integration of both are underway and we are excited about the new employees, technology and products added to REG. With these acquisitions, our total assets now exceed $1 billion.”

The Digest’s Take

It’s been a rough ride for biodiesel prices this year to date — and as the industry leader, REGI has been taking it on the chin, suffering through three downgrades from Piper Jaffray, Stifel Nicolaus and Cannacord Genuity in the process. Considering the run-up in the stock last year and the price environment, REG’s been doing quite well from an operating POV to maintain an average rating of “buy” from the Street, according to NASDAQ.com.

If the biodiesel tax credit makes a comeback — that’ll be a major company windfall, but we’re not expecting anything on taxes from Congress, in an election season, until the lame-duck session beginning in November.

For the longer term, we’ll be watching progress with the newly-renamed REG Geismar, the former Dynamic Fuels facility that offers the company an entry in the drop-in renewable diesel market. REG Life Sciences — the former LS9 — remains a significant wildcard upside option for REG in 2015 and beyond — given that LS9 was generally focused around sugar as a feedstrock, we’ll be watching REG’s expansion into that area of feedstock acquisition to see if their proven ability to play strong in upstream works well on the sugar side, too.

Jim Lane is editor and publisher of Biofuels Digest where this article was originally published. Biofuels Digest is the most widely read  Biofuels daily read by 14,000+ organizations. Subscribe here.

August 19, 2014

Amyris Aims For Huge Second Half

Jim Lane amyris logo

The Pharaohs of Farnesene continue to pick up momentum.

In California, Amyris (AMRS) reported a net loss of $35.5M for the second quarter of 2014 on sales of $9.3M, with a 5.4 percent increase in sales over Q2 2013. Renewable product sales were $4.4M for the quarter, while “Recognized grants and collaborations revenues” reached $4.9M.

In announcing results, the company highlighted:

• End of quarter cash, cash equivalents and short-term investments balance of $90.2 million.
• Lowest farnesene production costs to date and successful start of fragrance molecule production.
• Addition of Braskem as a new collaboration partner for renewable isoprene and Natura for cosmetics sector.
• Produced and shipped jet grade farnesane, now in use in commercial flights at 10% blends with Jet A/A1.

In addition, the company affirmed guidance for doubling renewable product sales year-on-year and achieving cash flow positive from operations in second half of 2014. Specifically, Amyris expected for 2014:

Inflows. Renewable product sales to be over $32 million, doubling our 2013 renewable product sales, and to achieve positive cash margin from products. In addition, we continue to expect collaboration inflows, a non-GAAP measure, in the range of $60 million to $70 million by the end of the year.
Expenses. Cash operating expenses for R&D and SG&A in the range of $80 million to $85 million and capital expenditures less than $10 million in 2014.
Earnings. Positive cash flow from operations during the second half of the year and to achieve positive EBITDA in 2015.
Payback. Cash payback for our Brotas biorefinery in the next two years (following 2013 start-up year), based on plant cash contributions of $10 million to $15 million in 2014 and $40 million to $50 million in 2015.

“With two new collaboration partners, continued progress on renewable product sales, and our best operational performance to date, we’re well positioned to double our renewable product sales this year over 2013 and deliver positive operational cash flow in the second half of this year. In May, we completed a $75 million convertible note financing and, since quarter-end, increased our cash balance sheet with payments from our ongoing collaborations as well as additional inflows from new collaborations,”said John Melo, Amyris President & CEO.

“We rounded out our developing product portfolio for the tire industry when Braskem joined our collaboration to develop and produce renewable isoprene, and our expanded collaboration with Kuraray for liquid rubber. With TOTAL, we obtained industry certification for sales of our renewable jet fuel and have begun sales of jet fuel. We continue to experience strong demand for sustainable products that perform better than the alternative and are cost competitive, while solving the supply challenges our customers face in growing their business,” concluded Melo.

The analysts react:

Rob Stone and James Medvedeff, Cowen & Company

Q2 non-GAAP loss was 36c (vs. St. 30c) on $8.2MM (vs. St. $12.4MM). Product costs are improving, but COGS reflected higher-cost inventory. New collaborations and product segments are encouraging, raising our PT to $3.50 (vs. $3.00), but expected product sales for 2014 are heavily H2-weighted. Execution risk on a steep ramp and potential dilution from converts keep us at Market Perform (2).

Product revenue of $4.4MM missed our $7.0MM estimate. A new fragrance molecule was not yet shipping. Three new products should launch in 2015, and a total of 10 molecules supports expected growth.

Adjusting Our Model for Smaller 2015 Ramp, Slower Cost Reduction. We now project 2014-15E losses of $1.01 and $1.23, on sales of $76.3MM and $115MM, vs. prior ($0.64) and ($0.35) on $76.5MM and $196MM.

Pavel Molchanov, Raymond James & Company

After a period of retooling while in the “overpromise and underdeliver” penalty box, 2013 and 2014 have been Amyris’ first years with operations truly in commercial mode, and the outlook for the rest of 2014 (and beyond) is encouraging. There is visible commercialization progress, but the top line’s reliance (for now) on partner-based R&D revenue makes quarterly results very choppy. We maintain our Market Perform rating.

* Brotas: steady as she goes. The 50 million liter Brotas plant in Brazil made its first farnesene shipment over a year ago and is back online (following its 1Q downtime). Recall, as of last November, the initial 2014 target has been for product sales to at least double – likely conservative after last year’s shortfall. This target remains in place, and our current “guesstimate” for product sales is $38 million for 2014, up ~2.5x.

* $3.50/gal diesel: intriguing target, but we’ll believe it when we see it. It is on the Total front that the most interesting revelations came out of yesterday’s call. Amyris is working on a framework for producing renewable diesel in Europe – as part of the fuels JV with Total – with a long-term target cost of $1.00/liter, or $3.50/gallon. The feedstock is… to be disclosed later, so we can’t help but feel some skepticism. The working assumption is that the first large diesel plant will start up in 2017, with two or three by decade’s end. If true, this would solidify Total’s status as one of the most active strategics in bioindustrials.

Valuation. Consistent with peers, we apply a discounted cash flow approach to arrive at a DCF value of $2.90/share.

The Digest’s take

The analysts don’t see much upside in the stock for now — a ramp-up in price over the past year has absorbed most of the short-term potential. It’s highly intriguing that the company is targeting $3.50 diesel with a Total/Amyris plant as soon as 2017. That’s big news, if it materializes — but we would expect a move away from the spot Brazilian sugar market in order to facilitate this. Cellulosic sugars would be appropriate targets for anything sold in the aviation to avoid food vs fuel debates.

Jim Lane is editor and publisher of Biofuels Digest where this article was originally published. Biofuels Digest is the most widely read  Biofuels daily read by 14,000+ organizations. Subscribe here.

August 18, 2014

Hannon Armstrong's Strong Q2 Keeps It In My Top Picks

By Jeff Siegel

Hannon Armstrong (NYSE:HASI), one of my top picks for 2014, just made me very happy.

Yesterday, the company announced its Q2 Core Earnings of $4.7 million or $0.22 per share. On a GAAP basis, the Company recorded net income of $2.9 million.

Here are some other highlights. . .

  • Raised approximately $70 million in April, 2014 in a follow-on offering.
  • Increased the flexibility and expanded the capacity of its existing credit facility by $200 million.
  • Completed more than $200 million worth of transactions, including the acquisition of a $107 million portfolio of land and leases for solar and wind projects.

CEO Jefferey Eckel commented on earnings, saying. . .

April 23, 2014, marked the first anniversary of HASI's initial public offering (IPO) and we are pleased to continue our success with the accomplishments of the second quarter of 2014. Since the IPO, we have completed nearly $1 billion of transactions. For the quarter, we generated and paid a $0.22 dividend, completed a follow-on equity raise and closed more than $200 million in transactions. This includes acquiring a portfolio of long-duration lease streams for solar and wind projects as well as the rights to finance additional transactions from this new platform client. As we have demonstrated over the past few quarters, we continue to execute on high credit quality transactions that should translate well into dividend growth for our shareholders.

Opportunities for HASI continue to be robust. The recently announced Presidential initiative calling for an additional $2.0 billion of federal energy efficiency projects and the EPA proposed regulations to cut carbon emissions from existing power plants will encourage more investments in energy efficiency and clean energy throughout the country. HASI is well positioned to capitalize on these opportunities and will continue to seek projects generating attractive risk-adjusted yields.

Hannon Armstrong remains one of my top long-term picks in the alternative energy space. With top-notch management in place, continued demand for alternative energy financing, and a solid 6% dividend, this is a must-own stock for any savvy energy investor.

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Jeff Siegel is Editor of Energy and Capital, where this article was first published.

August 15, 2014

How the Don Quixote Principle Drives Solar

by Paula Mints
416px-Honor__Daumier_017_Don_Quixote-via-wikimedia-commons[1].jpg
Don Quixote by Honore Daumier via Wikimedia Commons

For decades the photovoltaic industry has been driven by its beliefs, hopes, the availability of incentives, and what it is willing to ignore in terms of market realities and technological barriers. The apparent achievement of grid parity, even at drastically low margins, was hailed a victory. Continued deployment of multi-megawatt installations in the face of low margins for developers and likely gigawatts of poor quality installations has been regarded as proof of the inevitability of the industry’s success.

Given the competitive landscape for energy technologies and the short attention spans of many, it is courageous to continue the slow, iterative process of technology development in the face of naïve and easily disappointed investors and well-meaning government investment in technologies that, in some cases, have defied the laws of physics. The solar industry (and all of its technologies) continues to push ahead on hope — and this hope is a brave and necessary industry personality trait that must continue to be nurtured.

Don’t Tread on my Unwillingness to Face the Facts

Though there are many examples of companies/individuals/governments/investors persevering despite facts that indicate a change in direction might be a good idea, one of the best examples of unwillingness to fact facts is the prolonged period of negative margins during the late 2000s. 

From 2009 through mid-2013 aggressive pricing for PV cells and modules pushed manufacturer margins to dangerously low levels while losses pushed many companies into bankruptcy.  Low prices for PV technologies led to lower system prices, which were celebrated as proof that the industry had achieved grid parity.  As PV manufacturers began failing these failures were accepted as normal casualties of consolidation.  Figure 1 below depicts average module prices (ASPs) and costs, along with shipments and the delta between costs and prices from 2003 through 2014.

Figure 1: Module ASPs, Costs, Shipments and the Cost/Price Delta, 2003 through 2014  

Ignoring Political Risk, Margin Risk, Incentive Risk and Economic Risk Just May be a Survival Technique

Strong markets in the solar industry continue to be incentive driven.  Denying this fact does not make it any less of a fact.  In the mid-to-late 2000s the FiT driven markets in Europe surged, giving the region an >80 percent share of global demand.  During those days, incentive risk was largely ignored.  Following the retroactive changes that drove system in some countries into bankruptcy, demand into Europe began decreasing (dramatically). 

Currently, the incentive driven and government supported markets in Japan and China, at a combined >50 percent of global demand, are (essentially) providing a base on which the global solar industry can seek out its next dominant market. 

Expectations for strong markets typically ignore incentive risk (the risk that an incentive will be reduced drastically or end abruptly), political risk (in extreme cases war, in less extreme cases tariff interference), margin risk (the risk that a sale will result in loss instead of gain) and economic risk (the risk that a change in the regional/country economy will trigger lower demand).  Monetary risk (the risk of currency devaluation as is the case with countries in Latin America and India) can derail a project’s profitability.  It is common to assume that unpleasant or unprofitable outcomes have a lower probability of happening than do positive or profitable outcomes.  It is also normal to assume that today’s small regional or country market will be tomorrow’s booming market. 

It is difficult to hedge bets and develop a diversified portfolio of markets to serve in an incentive driven industry.  The learned behavior of solar participants is to serve (or over serve) the available market while assuming that another market will take its place when it finally slows.  Historically the industry has been rewarded for this belief.  No matter what, another incentivized or supported market seems to come along to replace a waning market. 

Figure 2 presents an assessment of 2014 global supply (shipment) and demand shares for the PV industry.

Figure 2: Supply/Demand Expectations for 2014  

Solar and the Don Quixote Principle

Figure 3 offers a picture of PV industry metrics from its demand/supply inventory at the end of 2013, through 2014 and into 2015. These metrics include demand/supply inventory, capacity, production, shipments, installations and defective modules.

Figure 3: Global PV Industry Metrics 2014 into 2015 

In an industry surrounded by obstacles, well-funded competitors, ill-thought-out government intervention (including poorly designed incentive programs) and often irrational market behavior, it takes a profound and steadfast hopefulness and belief structure to continue developing and deploying solar technologies.  The need to celebrate decades of often significant growth in a vacuum, that is, ignoring solar’s share in the overall energy mix is understandable given the bone shaking disappointment  experienced by many participants.  Amazing progress has been achieved by ignoring daunting realities. 

Don Quixote tilted at windmills, performed brave acts, fought imagined and real enemies and saw his comrades as heroes — acts of a demented mind or the courage of a man unwilling to be ordinary and saw a world filled with potential.  The solar industry combines courage, willfulness, imagination and a determination to ignore or remain ignorant of market and sometimes technological realities. 

The Don Quixote Principle is the willingness to persevere despite real or imagined obstacles and villains with the goal of heroic action and a more perfect world.  Into this definition, the solar industry and all of its participants falls quite neatly.

Paula Mints is founder of SPV Market Research, a classic solar market research practice focused on gathering data through primary research and providing analyses of the global solar industry.  You can find her on Twitter @PaulaMints1 and read her blog here.

This article was originally published on RenewableEnergyWorld.com, and is republished with permission.

August 13, 2014

GMOs and Hain Celestial

50 Shades of Green

Garvin Jabusch

As I've written before, "human economies are still so far from real sustainability that even a highly idealized portfolio of our most sustainable enterprises necessarily falls short. Ultimately, the best any portfolio can do is mirror the reality of the world, and today, still, even the best representatives of sustainability can be found wanting compared to what will be required if we would like to keep society thriving indefinitely."

There's no better example of the various conundrums swirling around sustainable economics than GMOs. As one institutional client, Timothy Yee of Green Retirement Plans, recently emailed to me, an "Issue that I am having is with Hain Celestial (ticker: HAIN) and its stand on GMO not labeling/mislabeling. Given this issue, I am in a bit of a quandary. What are your thoughts on the GMO front?"

This is a complex one, and it points out that there really are "50 shades of green," especially in portfolio management, and that no shade is perfect -- far from it.

And yet, we think that our follow-the-science, empirical, evidence-based methodology keeps us as close to a pure realization of a sustainable-economy model as you can find, given the world as it is today, and particularly given the state and entrenchment of the investment management field today, where most clients and advisors remain stubbornly invested in the primary causes, fossil fuels in particular, of the key systemic risks with the power to cause turmoil in economies and societies.

So, where do we believe the empirical approach to observing the world leads with respect to GMOs? First, we know there are questions about where the science will lead us, but we don't believe that GMOs are universally bad. We do not, as a firm, screen GMOs out, per se, although we do not currently own any GMO inventors or development labs, and our Sierra Club Green Alpha portfolio (SCGA) does screen out GMOs explicitly. We do believe that,  as with any technology (AI comes to mind), misuses can be and are deleterious. For example, we object strongly to GMOs such as "Round-Up Resistant Corn," which has been gene hacked to tolerate a huge quantity of toxins that then in turn of course end up in everything -- our food, water, oceans, and bodies. This type of application is not the path to indefinite sustainability and has to stop. Our portfolio construction theory of avoiding systemic risks and investing in solutions to those threats would never allow us to invest in GMOs of this type.

And yet, there are advantageous gene hacks that do give us a shot at mitigating some large systemic risks. Higher-yielding crops can alleviate hunger, drought-resistant crops can conserve water and keep agriculture going in the many places in the world that are drying out (California seems to be emerging as ground zero recently), and in other cases, plants have been modified to improve nutritional content. On the point of drought-resistant crops, Stanford's Dr. Henry I. Miller has posted a particularly informative piece on GMOs and public policy in which he concludes, "As water scarcity increases, drought-stricken crops wither, and food prices rise, the need for resilient agriculture will become more obvious -- and more urgent. With more rational public policy, we can meet that need now. How much more preventable misery and death must occur before our policymakers see reason?"

Indiscriminate rejection of GMOs, in my opinion, only serves to obscure variation among applications. Therefore, as a position, it lacks depth.

We don't think Hain Celestial (HAIN) is likely to be distributing many of the worst kinds of GMOs, since its focus on organics means it's not getting a lot of raw materials (and resulting SKUs) from pesticide-using farms that  might use pesticide-resistant seeds. That said, we do of course believe folks deserve to know what they consume, so transparent labeling -- whatever you think of GMOs -- should be required, and this is the kind of thing where we'd consider some shareholder activism to nudge HAIN to reconsider on this front. Activism, but (as long as we like the fundamentals!) not divestment. HAIN is the most diversified natural and organic product producer, and offers a ton of sustainable alternatives in food and personal care in numerous channels. Therefore, to us it represents a strong next-economy analogue to a legacy-economy rival such as, say, Unilever (ticker: UN).

Finally, in a larger sense, we can't help but agree with astrophysicist Neil Tyson's take on the issue: that "We have systematically genetically modified all the foods, the vegetables and animals that we have eaten ever since we cultivated them. It's called 'artificial selection.' That's how we genetically modify them." Tyson's no-hysteria approach gives us some context, and further, as Ezra Klein points out in the same article, one key cultural difference in addressing ideas that are at odds with the underlying science in conservative and progressive circles "is that conservatism's mistrust of climate science has taken over the Republican Party -- even politicians like Mitt Romney and John McCain have gone wobbly on climate science -- while liberalism's allergy to messing with nature hasn't had much effect on the Democratic Party. And part of the reason is that the validators liberals look to on scientifically contested issues have refused to tell them what they want to hear." On warming, validators like Ann Coulter will tell her base what they want to hear all day long. On GMOs, Tyson, as befits a scientist, defaults to the evidence and tells it like it is. 

Disambiguation of the many and varying underlying issues is what this -- and many other issues within sustainability -- is really about. As Tyson later explained on Facebook:

"If your objection to GMOs is the morality of selling nonprerennial [sic] seed stocks, then focus on that. If your objection to GMOs is the monopolistic conduct of agribusiness, then focus on that. But to paint the entire concept of GMO with these particular issues is to blind yourself to the underlying truth of what humans have been doing—and will continue to do—to nature so that it best serves our survival. That's what all organisms do when they can, or would do, if they could. Those that didn't, have gone extinct."

Recognizing blind spots that can lead to misinformation and, in the case of our field of investment management, therefore to inefficient markets, is a big part of what I try to do.

Is there today such a thing as an indefinitely sustainable economy? No. But we can see a way there, and that way is paved with innovations and increasing efficiencies, and we don't think we can afford to avoid the most promising representatives. Folks like antivaccinators and blanket GMO opponents ignore scientific consensus to their (and our!) peril. 

Disclosure: Green Alpha Advisors is long HAIN, and holds no positions in UN.

[Note: this is part of Green Alpha's ongoing "50 Shades of Green" series, wherein we endeavor to disambiguate the sustainable and less sustainable aspects of sectors, industries, trends and companies. – GJ]

Garvin Jabusch is cofounder and chief investment officer of Green Alpha ® Advisors, and is co-manager of the Green Alpha ® Next Economy Index, or GANEX and the Sierra Club Green Alpha Portfolio. He also authors the blog "Green Alpha's Next Economy."

August 10, 2014

Convertible Solar Bonds: Trina, SunPower Stoke Fire; Ascent Descends

by Sean Kidney

Trina’s $150m 3.5% 5yr convertible solar bond

In June Chinese solar manufacturer Trina announced the private placement of $150m of 5 year, 3.5% convertible bonds to “institutional investors” (no details provided). Trina weren’t clear how they would use the proceeds, but they are planning to build 400-500MW of solar plants over the rest of this year. Book-runners were Deutsche Bank, Barclays, J.P. Morgan and Goldman Sachs (Asia), with co-manager HSBC.

SunPower issues $400m 7yr 0.875% (!) convertible solar bond

That same month SunPower announced a private placement of $400 million, 7 year, 0.875% senior convertible bonds. What a great interest rate! Being 60% owned by Total may have helped; and then Total bought $250m of the bonds. Proceeds were for debt paydown, working capital and projects.

Then $32m Ascent 8% convertible solar runs into problems

Two weeks ago US thin-film solar developer Ascent Solar Technologies [ASTI] announced it was issuing $32 million of 8% convertible loan notes via private placement with institutional and other investors. Ascent is also owned by a Chinese company, TFG Radiant; it used to be controlled by Norsk Hydro.

A week later they announced it wasn’t happening after all – they’d been unable to get the permissions of one of their lenders and had to instead go for a much smaller ($4m) stock placement deal. Bummer!

Solar Power Inc issues a small convertible bond, but it’s converted 3 wks later. Hmmm.

In mid-July US PV developer SPI Solar (Solar Power Inc), a subsidiary of China’s troubled LDK Solar [LDKSY], one of the world’s largest solar PV companies, announced it had made a private placement of “common stock and convertible bond” for an aggregate $21.75 million to four investors. Proceeds to be used as working capital and to pay down debt.

We noted this as we generally count convertible bonds in our broader “Bonds and Climate Change” universe. At the time SPI didn’t specify the breakdown of stock and bond; but today it announced one of the investors had already converted their bond - a mysterious Hong Kong shelf company Robust Elite Limited. Geez, that was quick. Perhaps it’s something to do with LDK Solar’s re-structuring with the help of a company part-owned by China’s Xinyu City Government – where LDK is based in fact.

------------------------

Environmental-Finance’s Peter Cripps reports that more convertibles look likely.

(He amusingly quotes a banker: “The markets are very like sheep – if one sees a rival doing something they immediately look at it and think should we do the same.” That BTW is one of the rationales for promoting a green bonds market.)

——— Sean Kidney is Chair of the Climate Bonds Initiative, an "investor-focused" not-for-profit promoting long-term debt models to fund a rapid, global transition to a low-carbon economy. 

August 06, 2014

No Longer Just Growth: Investing in Renewable Energies for Yield

by Robert Muir

Given the determined investor quest for yield as the Federal Reserve maintains the benchmark Federal Funds rate at zero, and the resurgence of attention being paid to alternative energy generation, mainly solar, and to a lesser extent wind and hydro, it’s no wonder Yield Co’s have gained so much investor interest lately. In the near to mid-term, the enthusiasm may be justified. Supported by Power Purchase Agreements, energy infrastructure financing and leasing contracts, and electricity transmission and distribution concessions, all with credit-worthy counter-parties, Yield Co’s are designed specifically to pay out a large portion of their EBITDA to shareholders in the form of dividends. By virtue of their steady cash flow and above market yields, these companies are often viewed by investors as relatively safe and stable, similar to high yielding traditional utilities, and their shares tend to trade with low volatility and beta.

Structured as they are to generate and pay out cash flow to investors these firms are to a large extent valued on both current yields and their anticipated ability to maintain and increase future dividends. Therefore vigorous deal flow and a robust acquisition pipeline are key. I'm most in favor of Yield Co’s that are direct spin offs and by contract have Right of First Offer (ROFO) on any projects developed by the parent. The other very important factor I consider is financing. I like to see structured debt financing at attractive rates that is properly engineered into the financial metrics of the acquisition. I tend to avoid Yield Co’s that finance development projects and acquisitions with the issuance of new equity.

Green Alpha Advisors holds Yield Co’s in some of our portfolios. One I particularly like is Pattern Energy Group (PEGI). PEGI has the ability to expand it MW production capacity, and therefore grow its revenues and cash available for distribution, through a solid pipeline for identified projects from Pattern Development on which it has ROFO, while also being able to consider beneficial third party project acquisitions. It will benefit through 2016 from the Federal Renewable Electricity Production Tax Credit. PEGI currently holds only wind capacity generation in its portfolio but management is open to adding solar as well. The company has a stated goal of increasing its cash available for distribution by 10-12% annually and increasing its dividend by 12% annually over next 3 years. With a current yield of 4.10%, and an annual dividend of $1.31, PEGI is currently fairly priced at around $32.00. Its forward performance estimates are trending nicely, with estimated full year revenue growth of 25.5% in 2014 and 35% in 2015 and estimated full year EPS growth of 32.8% in 2014 and a whopping 133% for 2015. Both its Price to Book and Price to Cash Flow are estimated to trend lower in 2014 and 2015. Its EV/EBITDA valuation ratio is high, but not relative to its superior EBITDA, and its EV/EBITDA vs. EBITDA ratio is markedly more attractive than many of its competitors. PEGI seeks to pay out 80% of EBITDA, and if the company performs as estimated it should be able to meet both that benchmark and its dividend growth targets. If the company does meet those growth targets its annual dividend in 2017 will be $1.67. All things being equal, if the yield were to remain at 4.1% that would potentially make for a 2017 price of $40 a share. Inversely, if the price were to stay close to $32.00, the 2017 yield will have ballooned to 5.2%.

     While acknowledging many positives, I do see some risk in owning shares in these firms. Firstly, Yield Co’s stock valuations, like traditional dividend paying utilities, often considered bond proxy’s, or any high yield investment instrument for that matter, have negative exposure to a rising interest rate environment. A seven, six, or even five percent yield might seem extremely attractive when the Ten Year U.S. Treasury Note is yielding just 2.52%, but if or when benchmark interest rates return to more historical norms income investors may not be willing to pay today’s prices for shares with those same yields. To offer some context, in 1995 the Fed Funds rate was 5.5%. In the minutes from the most recent Federal Reserve meeting, released on July 9th, FOMC members anticipated the fund rate will be at 1% in 2015, 2.5% in 2016, and 3.75% in the longer term. To preserve share prices in a rising interest rate environment Yield Co’s will need to be able to increase their dividends commensurately.

Also, as the number of publicly listed renewable energy Yield Co’s has risen, the demand from these firms to secure renewable electricity generation projects has also spiked, leading to less attractive pricing and revenue metrics on third party, competitive bid acquisitions.

Another potential risk that Yield Co’s face, albeit in the longer term, is the threat to the traditional “Hub and Spoke” electricity generation and distribution model. This is far and away the model of the majority of the holdings in Yield Co portfolios. As the generation and storage technologies that will bring about distributed and eventually autonomous energy production advance this utility model will become increasingly less economically viable. I know of only a handful of Yield Co’s at this time, NRG Yield Inc. (NYLD), Hannon Armstrong Sustainable Infrastructure Capital, Inc. (HASI), and TerraForm Power, Inc. (TERP), that have distributed solar assets in their current portfolio of holdings. This is clearly a longer term concern and doesn’t affect my near term analysis of the space or any individual companies. However, it is something I will continue to monitor.

In my view Yield Co’s clearly have a role to play in any diversified equity investment model, particularly one designed to generate dividend income.
                                                                                                                      
Disclosure and Sources:

Green Alpha Advisors is long PEGI and HASI, and has no position in NYLD or TERP.  Data on PEGI is sourced from Thomson Reuters as of 08/05/2014.  This information is for information purposes only and should not be construed as legal, tax, investment or other advice.  This information does not constitute an offer to sell or the solicitation of any offer to buy any security.  Some of the information contained herein constitutes “forward-looking information” which is based on numerous assumptions and is speculative in nature and may vary significantly from actual results.  Green Alpha is a registered trademark of Green Alpha Advisors, LLC.

About The Author

Robert Muir is a Partner and Senior Vice President at Green Alpha Advisors, LLC. He is a member of the Shelton Green Alpha Fund (NEXTX) Investment Committee.  An earlier version of this article was first published on Green Alpha's Next Economy blog.

August 05, 2014

Ten Clean Energy Stocks For 2014: August Update

Tom Konrad CFA

July was a hard month for the stock market and clean energy stocks in particular.  My broad market benchmark of small cap stocks, IWM,  fell 7% and is down 2.7% for the year, while my clean energy benchmark PBW fell 9% and has slid into the red for the first time.  It is down 0.1% for the year to date.  The mostly defensive stocks in my 10 Clean Energy Stocks for 2014 model portfolio fared relatively well, but they were still down 2% for the month.  For the year to date, the model portfolio has held up well, with a total return of 4.8%.

(Note that the monthly numbers are for July 3rd to August 5th, and the YTD numbers are from December 26th to August 5th.  I use numbers as of when I have time to write, rather than strict month-end in order to make these updates as timely as possible.)

10 for 14 - Aug.png

Individual Stock Notes

(Current prices as of August 5th, 2014.  The "High Target" and "Low Target" represent my December predictions of the ranges within which  these stocks would end the year, barring extraordinary events.)

1. Hannon Armstrong Sustainable Infrastructure (NYSE:HASI).
12/26/2013 Price: $13.85.     Low Target: $13.  High Target: $16.  Annualized Dividend: $0.88.
Current Price: $13.57.  YTD Total US$ Return: 1.2

Sustainable Infrastructure REIT Hannon Armstrong has fallen fairly sharply in recent weeks, on minimal news.  The company announced a deal to finance home solar projects for Sunpower (NASD:SPWR) which I would expect to have a small positive effect on the stock price.  I find the decline puzzling, but consider it a buying opportunity.  Although Hannon Armstrong is already my largest holding, I recently sold some $12.50 March 2015 puts.

If there is trouble that the market knows about but I don't, you can find out when HASI reports second quarter earnings on August 11th.  I'll find out when I come back from a week long backpacking trip on the 16th, but I'm not worried.

For readers wanting a detailed overview of HASI all in one place, an excellent one just came out on Seeking Alpha.

2. PFB Corporation (TSX:PFB, OTC:PFBOF).
12/26/2013 Price: C$4.85.   Low Target: C$4.  High Target: C$6. 
Annualized Dividend: C$0.24.
Current Price: C$4.36. YTD Total C$ Return: -7.6%.  YTD Total US$ Return: -9.7%

Green building company PFB has been declining as well, also for unknown reasons.  Second quarter results were better than the previous year, with higher earnings and profit margin.

3. Capstone Infrastructure Corp (TSX:CSE. OTC:MCQPF)
.

12/26/2013 Price: C$4.44.   Low Target: C$3.  High Target: C$5.  
Annualized Dividend: C$0.30.
Current Price: C$4.46.  YTD Total C$ Return: 33.5% .  YTD Total US$ Return: 30.5%

Independent power producer Capstone Infrastructure held steady throughout the month, without significant news.  The gain for the month arose from the payment of its regular C$0.075 quarterly dividend.

4. Primary Energy Recycling Corp (TSX:PRI, OTC:PENGF).
12/26/2013 Price: C$4.93.   Low Target: C$4.  High Target: C$7. 
Annualized Dividend: US$0.28. 
Current Price: C$6.00.  YTD Total C$ Return: 24.4% .  YTD Total US$ Return: 22.3%

Waste heat recovery firm Primary Energy announced a regular quarterly dividend of 7¢ US to holders of record on August 15th. but there was no other significant news.  The gain shown here was mostly a big jump at the close today (Aug 5th.) It might just be a blip (the stock is thinly traded), or there may be trading based on rumors of some real news about to be announced.

Update: The jump seems to be due to the immanent acquisition of Primary Energy by Fortistar.  The Wall Street Journal reported that a deal was "near" shortly after the close.

5. Accell Group (Amsterdam:ACC [formerly ACCEL], OTC:ACGPF).
 
12/26/2013 Price: €13.59.  Annual Dividend €0.55 Low Target: 11.5.  High Target: €18.
Current Price: €13.90. YTD Total  Return: 6.3% .  YTD Total US$ Return: 3.5% 

Bicycle manufacturer and distributor Accell Group reported strong results for the first half of the year, and said it expects the strength to continue in the second half.  Since the company resets its dividend annually based on profits, we can expect next year's dividend to be significantly higher than this year's €0.55. The company has been streamlining its operations discontinuing its relatively unprofitable mass market bicycles, and focusing on its higher end models.  The company also sold its small fitness unit.  Both of these moves mean that Accell will be better able to capitalize on its leadership in e-bikes as the market for assisted pedaling continues to grow rapidly.

6. New Flyer Industries (TSX:NFI, OTC:NFYEF).
12/26/2013 Price: C$10.57.  Low Target: C$8.  High Target: C$16. 
Annualized Dividend: C$0.585.
Current Price: C$12.89.  YTD Total C$ Return: 25.2% .  YTD Total US$ Return: 22.3%.

Leading transit bus manufacturer New Flyer will announce second quarter results about the same time this will be published on August 5th.  The market expects good news, if price action is any indication.

7. Ameresco, Inc. (NASD:AMRC).
12/26/2013 Price: $9.64Low Target: $8.  High Target: $16.  No Dividend.
Current Price: $7.58  YTD Total US$ Return: -21.4%.

The stock of energy performance contracting firm Ameresco jumped in response to its second quarter results on July 31st.  Although the company did not raise its guidance for the year, management's tone regarding the market for its services was very positive.  This was a big change after two years of mostly negative surprises caused by customers delaying and scaling back projects. 

Management also noted that they may be able to upgrade some of their existing landfill gas plants to take advantage of new rules allowing higher quality landfill gas to qualify for the incentives designed to encourage cellulosic biofuels.

8. Power REIT (NYSE:PW).
12/26/2013 Price: $8.42Low Target: $7.  High Target: $20.  Dividend currently suspended.
Current Price: $8.95 YTD Total US$ Return: 6.3%

There was no significant news for solar and rail real estate investment trust Power REIT.

9. MiX Telematics Limited (NASD:MIXT).
12/26/2013 Price: $12.17Low Target: $8.  High Target: $25.
No Dividend.
Current Price: $9.86. YTD Total ZAR Return: -12.3%. YTD Total US$ Return: -15.8%

Global provider of software as a service fleet and mobile asset management, MiX Telematics did not report any significant news.

10. Alterra Power Corp. (TSX:AXY, OTC:MGMXF).
12/26/2013 Price: C$0.28. Low Target: C$0.20.  High Target: C$0.60. No Dividend.
Current Price: C$0.315   YTD Total C$ Return: 12.5% .  YTD Total US$ Return: 9.9%.

Renewable energy developer and operator Alterra Power gave updates on its uninterrupted progress on its Jimmie Creek run-of-river hydro and Shannon Wind projects, as well as a loan it is negotiating to finances those investments.  It expects to close on the loan in the third quarter.

Two Speculative Clean Energy Penny Stocks for 2014

Ram Power Corp (TSX:RPG, OTC:RAMPF)
12/26/2013 Price: C$0.08.  Low Target: C$0.00.  High Target: C$0.22. No Dividend.
Current Price: C$0.02   YTD Total C$ Return: -75% .  YTD Total US$ Return: -75.5%
Terminal US$ Return -57% (when I said to sell on June 3rd.)

Geothermal power developer Ram Power's stock continued to slide since the company has not announced any progress in negotiation with its creditors. 

Finavera Wind Energy (TSX-V:FVR, OTC:FNVRF). 
12/26/2013 Price: C$0.075.  Low Target: C$0.00.  High Target: C$0.22. No Dividend.
Current Price: C$0.11   YTD Total C$ Return: 46.7% .  YTD Total US$ Return: 43.3%.

Wind project developer Finavera received the final payment from Pattern Energy Group (NASD:PEGI) for its Miekle Wind project.  This follows the announcement of the sale of its 10% stake in Cloosh Wind project in Ireland.  Comparing the announced payments to my March estimates, the Cloosh payment was at the low end of my expected range, but the Miekle payment was towards the high end.  All together, I estimate Finavera's net cash per share is at least twice the current stock price of C$0.11.

The company now has cash to more than settle all its outstanding liabilities, and will provide details of its long-awaited strategic plan in advance of the Company's annual general meeting on September 12th.  The company's CEO, Jason Bak, says that the reason it has taken so long to present this plan to shareholders was courtesy to its potential partners, who did not want to publicly commit to the plan until the money was available to implement it.

If shareholders do not like the plan when they find out what it is, Bak has previously said that we will have the option of voting for the strategic plan or for returning the cash to shareholders.

Conclusion

Although the market pulled back in July, earnings announcements for these picks have generally been positive.  This is especially for Ameresco, where two years of disappointments seem to be ending, and Accell Group which is showing the benefits of a couple years of reorganization into a leaner, more focused operation.

In addition to the good news in the main portfolio, speculative pick Finavera seems to be on the cusp of paying off more than enough to compensate for the losses realized in June on the other speculative pick, Ram Power.

Disclosure: Long HASI, PFB, CSE, ACC, NFI, PRI, AMRC, MIXT, PW, AXY, FVR, PEGI.  

DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results.  This article contains the current opinions of the author and such opinions are subject to change without notice.  This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

August 01, 2014

Solazyme: Return On Dream (and ROI Next Year)

Jim Lane solazyme logo 

Signature AkzoNobel deal expansion highlights Solazyme’s Q2 results.

But there’s something more to this company than the cash that sustains it, though sustain it cash does, and necessarily so.

In California, Solazyme (SZYM) and AkzoNobel announced that they have expanded their multi-year agreement with supply terms targeting 10,000 MT annually of algal oils for a new proprietary surfactant and with funding for the joint-development. The parties said that they expect Solazyme’s algal oil to replace both petroleum- and palm oil-derived chemicals. Product development is expected to commence immediately, and the parties anticipate entering into a definitive supply agreement as they near completion of product development.

At the same time, Solazyme announced a net loss for the quarter of $42.9M on Q2 revenues of $15.9M. For Q2 2013, the company lost $25.8M on revenues of $11.2M.

The 43% revenue jump

In May, Solazyme’s joint venture with Bunge (BG) started producing commercially saleable products at the Solazyme Bunge Renewable Oils plant in Brazil and has subsequently begun shipping. Both oil and encapsulated lubricant, Encapso, products have been manufactured using full-scale production lines that include the 625,000L fermentation tanks. In addition, Solazyme expanded its customer base and increased total output by >40% from Q1 2014 to Q2 2014 at its Clinton/Galva processing facility in Iowa.

Reviewing the commercial highlights

Highlights include:

  • AlgaVia brand launched at the International Food Technology (IFT) Food Expo, Solazyme’s High Stability High Oleic oil won a prestigious 2014 IFT Innovation Award, and Solazyme added key food ingredient customer, and distribution agreements. Solazyme secured an important new AlgaVia Whole Algal Flour customer, and also signed agreements with two of the top North American food ingredient distributors to meet demand in the US and Mexico.
  • Signed agreement with a leading North American oleochemicals company to commercialize microalgae-derived oleic acids. The agreement is to commercialize kosher certified high oleic algal oils for the oleic fatty acid market. The Soleum base oils, the company says, offer “performance, safety and sustainability.”

Solazyme’s progress

The Solazyme view

“Solazyme made important progress in the second quarter on its commercialization path,” said Jonathan Wolfson, CEO of Solazyme. “We are now manufacturing product in three facilities on two continents. We are shipping multiple oils and have increased production volumes out of our Clinton/Galva, Iowa operations, and we have begun production and shipment from the Solazyme Bunge Renewable Oils plant in Brazil. We are also building commercial momentum, including an expanded multi-year agreement with AkzoNobel involving funded joint development and targeting up to 10,000 MT of oil per year.

“In food ingredients, we launched our AlgaVia brand and won the highly prestigious IFT Food Expo innovation award. We have more work ahead as we progress on our production ramps and continue to build our commercial pipeline, but I believe we have the products, the plants, the capital and the team to execute moving forward.”

“We are continuing to drive fiscal discipline and balance sheet management as we ramp our capacity and focus on delivering products to our customers,” said Tyler Painter, CFO and COO of Solazyme. “We achieved a number of milestones this quarter and continue to strengthen our sales and market application efforts across our targeted markets.”

View from The Street: Bear side, Mike Ritzenthaler, Piper Jaffray

Initial commercial volumes at Moema prove anticlimactic on limited commentary. The framework (non-binding) collaboration expansion with AkzoNobel announced on the call is for up to 10 kMT/yr, and even if converted to a binding sale agreement, still leaves the majority of the 100 kMT capacity unsold. We believe that, ultimately, low sales volumes and high fixed costs will beget poorer than expected economics in an effort to secure volumes. We remain concerned about the alarming cash burn rate, the very limited visibility/obfuscation into tangible production metrics (in order to gauge the underlying health of the ramp), and lack of firm off-take agreements in place, in addition to the standard start-up risks that we have outlined previously. Maintain Underweight rating and $4 target.

View from The Street: Bull side Rob Stone, Cowen & Company

Q2 financial results missed the St., impacted by plant startup and 1x expenses. However, revenue grew 29% Q/Q, shipping customers increased 50%, the AkzoNobel partnership was extended, Encapso is expanding outside N. America, an important food ingredient customer was signed, and Algenist added customers and countries. Revenue grew Q/Q in every segment: Algenist $6MM (+21% Y/Y, 22% Q/Q), funded R&D $6.9MM (+10% Y/Y, +37% Q/Q), chemicals, fuels and nutrition $3MM (vs. $0 last year, +26% Q/Q). At Clinton there are 15 Customers (vs. 10) and 75 Qualifying; Algenist +40% Store Count. Maintain Outperform rating and $18 price target.

View from The Street: Bull side Pavel Molchanov, Raymond James

“The key inflection point for scale-up is materializing in 2014. The balance sheet is also in great shape, with by far the largest cash balance in the peer group, implying optionality of yet-to-be-disclosed growth initiatives. The adjusted loss per share of $(0.43) was below our estimate of $(0.37) and consensus of $(0.36), the delta coming from higher operating expenses, same as in 1Q. Total revenue of $15.9 million was exactly in line, with upside in R&D revenue offsetting slightly slower-than-expected growth in product sales. The latter, while not increasing quite as rapidly as we had modeled, rose 84% y/y (and 23% q/q) to a new record. This was the second quarter with sales from the Clinton plant, where output jumped 40% q/q.

Clinton customer count rises to 15. January marked the first of Solazyme’s major scale-up milestones, as production began at the Clinton, Iowa plant, built with Archer Daniels Midland. Production will ramp over 12 to 18 months until reaching nameplate capacity of 20,000 metric tons per year. Product from Clinton has been shipped to 15 customers to date, up from 10 in 1Q, and another 75 industrial customers (an impressively long list) are prequalifying product. Positive cash flow on deck for 2015. Outperform 2 – Target price = $12.50;

The Digest view

You get a lot of insight from Solazyme’s progress as to the general direction of the industry. Consider this cool chart from Cowen & Co’s Rob Stone:

Screen Shot 2014-07-31 at 6.18.02 AM

The key takeaways, in our view:

1. Ramping capacity and utilization are the story for 2014-17. The company has gone from less than 20,000 metric tons last year (and less than 1 million tons less than four years ago) to a projected 401,000 metric tons by 2017. Utilization is modeled to grow to 85% by 2017.

2. Multiple product lines and application sectors. Algenist skin care products started the company on its road to revenue and profit. It remains a dominant product along with R&D revenue even by 2014. Despite strong YoY growth rates, it is expected to be swamped by fuels and chemicals by 2017, which by then would represent 65% of the revenues.

3. Higher margins in personal care and skin creams.

4. It will have taken 14 years from start-up to $1B in revenues.

The Bottom line

Look at that AkzoNobel announce — tailored algal oils will be replacing not only dread petroleum but (for some) dread palm oil. Up until now, the alternatives have been to pay one heck of a lot more to use an alternative, or simply stop consuming a given product in order to show support. Look how the equation has changed. And that’s not exactly Ed Begley Jr. embracing a new world order – that’s AkzoNobel.

Consider where they are making this product. Anywhere you can grow sugars in reasonable quantities. It happened to be Iowa and Brazil. It could have been sugarbeets in Idaho or Russia, or sugarcane in India or Pakistan or Angola, or ultimately synthetic sugars made by companies like Proterro wherever you can find water and CO2 in concentrated quantities. Any country could have capacity — everyone has access to the riches of the new world.

Because the new world doesn’t consist any more of somewhere you sail to. It’s found within. You don’t have to grab some advantaged geography rich in mineral wealth, to be pumped or dug out of the ground until the country’s wealth is exhausted. It’s not renewable oil, it’s renewable wealth, and distributed opportunity.

A number of years ago, Solazyme put this graphic out. It remains a Digest favorite — just a simple graphic that shows all the places where renewable products touch and change everyday lives.

Solazyme-infographic-jpg

Now, investors will see things through a slightly different lens — not just a case of making a difference, but making one with an attractive yield at an attractive rate of return. Rate matters. They would, for example, measure Van Gogh’s Starry Starry Night by the metric of a financial return. There is more to life than the cash that sustains it, though sustain it cash does, and necessarily so.

Solazyme just changed the world. It happened in your lifetime, you got to see it. Lucky you.

Jim Lane is editor and publisher  of Biofuels Digest where this article was originally published. Biofuels Digest is the most widely read  Biofuels daily read by 14,000+ organizations. Subscribe here.


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