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September 30, 2015

Regular, Premium, Super, and Renewable SuperDuper

Jim Lane

Move over Super, here comes SuperDuper. All the high octane and performance, and the renewability too, at a price you can afford.

Biofuels are adding options for drop-in, low-carbon, super-perfornance gasoline via isooctane and isooctene, as Gevo (GEVO) announces sales of isooctene to BCD Chemie, a subsidiary of Brenntag.

In Colorado, Gevo said that it has begun selling renewable isooctene to BCD Chemie, a subsidiary of Brenntag. Initial orders in 2015 are expected to result in revenues to Gevo of over $1 million.

And you might wonder why that matters.

The performance appeal?

One, high octane, unlike gasoline but like ethanol. Two, unlimited blending via a pure hydrocarbon and no tolerance hassle, unlike ethanol but like gasoline.

The economic appeal?

Three, the value is isooctene in Europe can range up to $7.00-$10.00 per gallon for petroleum-based isooctene and isooctane, according to Gevo.

In the US, it could be worth something like $4.35 per gallon, today.

Here’s our math on that. Adding 13% renewable isooctene or isooctane to 85-octane refinery blendstock, you get an 87-octane E0 fuel which commands a 20-cent per gallon premium over 87-octane unleaded E10, and there’s roughly 13 cents in RIN value in there also, plus you start from nickel-cheaper 85-octane blendstock in making an E0 product, instead of making 87-octane. Adding $0.38 in margin with a 13% blend gives you a $4.35 per gallon value in the additive.

Plus, use of these renewable hydrocarbons enables companies to meet regulatory requirements for renewable content in fuels while satisfying the performance requirements of their customers.

The background on renewable isooctane and isooctene

octane

We’ve been tracking the birth of this market for some time. Earlier this year, Ronan Rocle and David Gogerty of Global Bioenergies observed in June:

Isooctane is currently derived from the dimerization of isobutene followed by hydrogenation. Another method to produce isooctane would be alkylation of isobutene by isobutane. But additional [production] steps results in isooctane and alkylate products that are, on average, 25% and 15% more costly than gasoline, respectively, with the big driver in isooctane price being the requirement for isobutene as part of the production process.

This is where bio can have a large added value—bio-engineered microbes are great at producing specific products such as isobutene.

Gevo and Global Bioenergies in the lead

The isooctene in the BCD deal will be produced at Gevo’s biorefinery in Silsbee, Texas, derived from isobutanol produced at Gevo’s plant in Luverne, Minn. Gevo’s biorefinery is operated in conjunction with South Hampton Resources.

Meanwhile, direct production of isobutene by fermentation has been reported by Global Bioenergies at its pilot plant in France. Isobutene evaporates from the fermentation broth, leading to no toxicity for the microbe, and is then directly recovered as a pure product. Due to the relative simplicity of this process, renewable isobutene can be produced cost competitively compared to fossil-based pure isobutene, based on five year averages.

One could then envision the production of isobutene and the dimerization of isobutene into isooctane (via isooctene) for a 100% bio-based, renewable molecule. This could come to fruition scientifically, but the renewable industry has heard one key message loud and clear—customers only want renewable/sustainable products that are at or below fossil prices. Thus, a renewable company would find it difficult in today’s market dynamic to compete on price with gasoline when it would have to make two very pure bio-isobutene molecules and saturate the isooctene product with hydrogen to produce the isooctane.

Two routes to value

Gevo is highlighting the high price route – targeting a $7-$10 fuel molecule in the EU. But, there’s premium value in the US, too.

Conversely, Global Bioenergies has highlighted a low-cost approach. Specifically, combining a high-purity bio-isobutene monomer with the very cheap refinery product, butane, to produce an isooctane molecule that competes on cost with conventional isooctane, and 50% renewable content and RIN-qualified. thus qualifying for a pro-rated RIN price that will add additional benefits to its economic feasibility.

One more thing: The vapor pressure performance add-on

As Rocle and Gogerty noted in the Digest, customers get a second benefit beyond the high-octane molecule, they get a vapor pressure much lower than ethanol, gasoline, and even alkylate. This vapor pressure value is critical, because by adding isooctane with a vapor pressure of 1.8 psi, one can blend gasoline with cheaper butanes that have a decent octane value (92) but a difficult vapor pressure (54 psi).

For consumers at the pump

Rocle and Gogerty predict:

“We can already see some indication of what this means for consumers at the pump. They will have the opportunity to purchase a sustainable, domestically produced fuel with identical hydrocarbon qualities as gasoline and higher performance. Higher technical properties also mean that lower quantities of premium components are needed to match the same quality.”

The deal background and prospects moving forward

BCD Chemie is targeting applications in Europe with Gevo’s isooctene. This commences a relationship with BCD Chemie that may include the marketing of other hydrocarbon products, including isooctane and jet fuel, and builds on Gevo’s existing partnership with Brenntag in Canada, which is currently selling Gevo’s isobutanol as a solvent in Canada.

Reaction at BCD and Gevo

“BCD Chemie has begun purchasing continuously increasing quantities of renewable hydrocarbons from Gevo for distribution to selected customers. These customers are very excited to utilize renewable components in their products as they are green replacements for fossil hydrocarbons, which benefit the environment without any performance loss. We are looking forward to developing this market together with Gevo in Europe, as this fits our business plan of expanding sales of high performance chemicals and substances throughout Europe,” said Denis Hamann, Project Manager for BCD Chemie.

“Gevo appears to be one of the only sources of renewable isooctene and isooctane globally. As a result, the market has been very excited by these product offerings, with demand outpacing our ability to produce at our biorefinery in Silsbee. Renewable hydrocarbons are exact replacements to petroleum-derived hydrocarbons, so there is no compromise on performance. We are very pleased to be working with BCD Chemie. The European market is an ideal place to be marketing many of our specialty fuels and chemicals products,” said Gevo CEO Pat Gruber.

The Bottom Line

Here’s the renewable riddle?

Q: Why make a $2 fuel when you can make a $5 chemical?

A: When you can make a $7 fuel additive.

Which is to say, Gevo is one of those companies targeting niche fuel additive markets. Recognizing that the fuel supply is so vast that even commanding a 30% market share of a 3% fuel additive would be, globally, something like 5 billion gallons. A volume of business that would keep companies like Gevo and Global Bioenergies building capacity as fast as they could for years to come.


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.

September 28, 2015

BioNitrogen: Valuable Technology, Management Questions

by Debra Fiakas CFA

My last post outlined how  Bion Environmental Technologies, Inc. (BNET: OTC/QB) is transforming livestock waste into organic fertilizer.  Bion is not the only aspiring fertilizer producer.  BioNitrogen Holdings Corp. (BION:  OTC/PK) was recently patent protection for a process to produce urea from stranded natural gas.  Instead of burning off the unwanted gases, oil and gas operators can turn it into an economically viable by-product.

There is more than just cash flow at stake for oil and gas producers.  Burning off stranded gas increases harmful emission that can lead to penalties in the future.  Gas flares in the Eagle Ford oil and natural gas patch releases over 25,000 tons of air pollution each year.  The U.S. Environmental Protection Agency (EPA) has proposed regulations to eliminate flaring and venting during the well completion phase.  Importantly, the new rules would apply to natural gas well and not oil wells, which are more prevalent in Eagle Ford.  Nonetheless, there is movement in the U.S. gas patch toward eliminating pollution from burning off stranded gases.

Gas producers have some options to reduce the emission of methane and volatile organic compounds from their wells.  There is available leak detection equipment and a menu of fixes to keep equipment in good working order.  Bionitrogen is hoping its patented process will pique gas producer interest because it could deliver a high return on investment.

Whether investors can get a similar return on BION is another question.  The stock is priced in pennies, making it more like a lottery ticket than a stock.  Investors in BION will be frustrated in following the company’s progress by the fact that the company is not up to date in financial filings with the SEC.

BioNitrogen has had its problems, including the indictment of its chief financial officer for grand theft.  While the criminal charges were later dropped, the news left BioNitrogen reeling from the scandal.  An internal investigation into the officer’s misconduct is ongoing, but preliminarily legal counsel indeed found misconduct.  The officer subsequently resigned.  The company has since added new directors to the board and a new auditor has been appointed.

As appealing as BioNitrogen’s urea process might be in a world beset by climate change due to harmful emissions, BION has its risks.  It seems logical that there is value in the technology, in as much as the availability of stranded natural gas as feedstock is without question.  Furthermore, there are strong economic incentives for gas well owners to consider the BioNitrogen option.  Unfortunately, this is a management team that has to prove its ability to execute and re-establish its reputation.

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. 

September 26, 2015

Sharp Drops for Alternative Energy Mutual Funds and ETFs

By Harris Roen

Alternative Energy Mutual Funds Down for the Quarter, Mixed for the Year

Alternative Energy Mutual Fund Returns

Alternative energy mutual funds have turned sharply lower over the past three months. Of the 14 MFs that the Roen Financial Report tracks, all but one are down for the quarter. Five are posting double-digit declines. On average, the drop in MFs are similar to that of the S&P 500 and Down Jones Industrial Average, which fell 7.44% and 9.6% respectively. The only MF showing a gain…

ETFs are Widely Lower

Alternative Energy ETF Returns

Green ETFs are showing poor returns on both a three month and one year basis. ETFs on average are off -16.5% for the quarter, and -20.7% for the year. All ETFs are down over both time periods with the exception of one fund, iPath Global Carbon ETN (GRN). Even on a three year basis, ETFs are up only 3.7% on average, far lower than their MF counterparts…


DISCLOSURE

Individuals involved with the Roen Financial Report and Swiftwood Press LLC do not own or control shares of any companies mentioned in this article. It is also possible that individuals may own or control shares of one or more of the underlying securities contained in the Mutual Funds or Exchange Traded Funds mentioned in this article. Any advice and/or recommendations made in this article are of a general nature and are not to be considered specific investment advice. Individuals should seek advice from their investment professional before making any important financial decisions. See Terms of Use for more information.

About the author

Harris Roen is Editor of the “ROEN FINANCIAL REPORT” by Swiftwood Press LLC, 82 Church Street, Suite 303, Burlington, VT 05401. © Copyright 2010 Swiftwood Press LLC. All rights reserved; reprinting by permission only. For reprints please contact us at cservice@swiftwood.com. POSTMASTER: Send address changes to Roen Financial Report, 82 Church Street, Suite 303, Burlington, VT 05401. Application to Mail at Periodicals Postage Prices is Pending at Burlington VT and additional Mailing offices.
Remember to always consult with your investment professional before making important financial decisions.

September 25, 2015

The Economics of Biofuels: Crack, Crush and Fuse

Jim Lane
Use-the-fuse[1].jpg
In oil & gas and biofuels, we hear about crack spread and crush spread. But fuse spread is a critical factor in advanced, low-carbon fuels.

Here’s the what and why and who.

The most fundamental economic in the oil & gas business has historically been the crack spread, which is the price difference between the value of crude oil and the underlying products after refined, or “cracked”. For example, Brent crude oil costs $49 a barrel right now, or $1.17 per gallon, while front month RBOB gasoline prices at $1.42 per gallon, and the New York October contract for ULS diesel is at $1.54.

Over in the world of biofuels, a similar measure is the crush spread — the differential between the underlying feedstock and the market price of the fuel. Right now the front month price for soybean oil is 25.51 cents per pound, or around $1.94 per gallon, and the September RME biodiesel contract in Rotterdam is $882 per ton, or $3.05 per gallon. Over on the ethanol side, corn is trading at $3.83 per bushel, which translates into $1.32 per gallon, while the October ethanol contract in Chicago is trading at $1.59.

About crush and crack spreads, in general

In the case of petroleum, the crack spread we’ve quoted doesn’t take into account the value of the chemical fraction, which pushes up the overall value of the barrel quite a bit. And, the soybean oil example doesn’t take into account the value of the glycerine by-product from biodiesel production. And the ethanol example doesn’t take into account the value of corn oil, CO2 or distillers grains. Or, the value of renewable fuel credits such as RINs. So, these are rough calculations relating the fuel fraction.

But they demonstrate right away some of the pressures on biofuels right now, at a time of low petroleum prices. On the ethanol side, there’s not much margin to work with for the biofuels producer. On the biodiesel side, the traditional US feedstock produces an expensive fuel.

Accordingly, ethanol producers have worked hard on diversifying the product set, notably adding corn oil in recent years, while biodiesel producers have sought out alternative feedstocks, especially tallows and other waste fats, oils and greases. Choice white grease in the Central US, for example, is trading at 21 cents per pound, or 20% less than soybean oil.

Over on the cellulosic ethanol front, the crush spread isn’t much better for agricultural residue. The most pessimistic assessment of feedstock cost right now is around $115 per ton for cellulosic biomass, or around $1.44 per gallon (at a yield of 80 gallons per ton). Should feedstock prices drop to around $80 per ton, delivered to the refinery gate — well, that’s much better, at around $1.00 per gallon.

The good news — if you have a technology that can work with municipal solid waste. MSW comes in at zero cost, right now. We don’t know how long that scenario will hold.

So, where’s the sustainable, affordable, reliable, available supply of feedstock for the industry moving forward?

There are two schools of thought.

School One. “oil prices are going up again soon enough” school, which generally subscribes to the belief that by the time cellulosic and other technologies can scale broadly around the world, oil prices will return to a $70-$80 per barrel price range, or around $1.67-$1.90 per gallon of crude, and that wholesale gasoline prices will rise to around $2.15 per gallon. Add in a 50-cent RIN for an advanced fuel, and a producer has something like $2.65 per gallon to work with, excluding the value of any co-products.

School Two. Oil prices could be low for some time, and investors don’t like rosy future scenarios based on high oil prices, anyway. So, it’s not a case of “waiting for business as usual”, but pursuing lower-cost feedstocks.

Which brings us to the fuse spread.

What’s that? The fuse spread is the difference between the underlying feedstocks fused together to make an organic molecule and ultimately produce a biofuel. Plants use carbon dioxide and water.

Water’s cheap, averaging 1.5 cents per gallon in the US.

So, it comes down to the cost of CO2, which is why the current haggling over the status of waste CO2 is of titanic importance to the planet.

If governments decree that, to mitigate climate change, waste CO2 must be geologically sequestered by regulated parties, CO2 must be obtained from the merchant market at something like $160 per ton, as we reported here.

If regulators allow carbon capture and use, costs could fall to a penny per pound of CO2.

So, here’s the underlying raw feedstock cost, per gallon of fuel, at theoretical yield:


Merchant CO2 Waste CO2
Hydrocarbon $1.55 $0.41
Ethanol $0.68 $0.10

Generally, carbon monoxide and hydrogen combinations, such as LanzaTech uses, is expected to be available for free for some time. So they have the same “it’s free!” math as MSW.

The battle over carbon capture and use and the US Renewable Fuel Standard

A glance at the chart above and the math tells us why companies like Joule and Algenol, that have microorganisms that can produce fuels from CO2 and water, are working hard on carbon capture and use, as well as supporting efforts to expand ethanol acceptance.

The hydrocarbon route using merchant CO2 is a non-starter — the feedstock is priced at more than the target fuel in today’s market, and even if oil prices improve as expected, these are complex technologies that need to build refineries, and there isn’t much help in the fuse spread. However, the match gets much better with waste CO2, where there’s some room for capex, opex and for a yield of say 85% of theoretical.

Over in the world of ethanol, it’s likely not to be workable with merchant CO2 unless then price drops into the $50 per ton range. But the math looks pretty good with waste CO2 and ethanol — one of the reasons that these technologies suggest that they can be, long-term competitive even with low-cost petroleum.

The role for the regulator: dig up the carbon, then re-bury, or just leave petroleum in the ground in the first place

The decision facing regulators, then, is very simple. Do they want low-cost, low-carbon fuels that bypass competition with food and arable land — or not? The policy path to affordable, at-scale fuels is relatively straightforward. A rising ethanol distribution combined with a policy on carbon capture and use — and the fuse spread tells us there will be robust investor interest in deploying low-carbon fuels.

Or not.

Given that there are hard limits on the geography and availability of free feedstocks such as MSW and carbon monoxide — and given that there are practical limits on the availability of traditional biofuels feedstocks such as corn, soybeans and rapeseed, and supply chains to be worked out to tap cellulosic biomass — the choice of the regulator is quite clear.

Either bury the CO2 and dig up petroleum to fuel the transportation economy, or use the CO2 that’s available and leave the petroleum in the ground. Either path sequesters the same amount of carbon. The latter path is quite a bit less costly and complex in the long-term.

 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.

September 24, 2015

King of the Cow Pats



by Debra Fiakas CFA


Last week Bion Environmental Technologies, Inc. (BNET: OTC/QB) announced that the company has applied for patent protection of a process to recover nitrogen from livestock waste.  The process yields a crystalline, water-soluble fertilizer product that is about 12% to 15% nitrogen.  Since the nitrogen is extracted from the livestock waste without the use of chemicals and leaves behind potentially toxic salts, metals and minerals, the company is also applying for certification as an organic material.

The company believes there will be a strong demand in the agriculture sector for its products.  First, feedlot owners have to worry about federal mandates to stem contaminated run-off that can pollute streams and rivers.  Nitrogen and other nutrients in run-off can lead to reduced oxygen levels in water and otherwise harm aquatic life.  There is a strong incentive to find alternatives for livestock waste and Bion expects to find an eager reception among livestock finishers. 

Second, there is a ready market for organic fertilizer to satisfy the increasingly discerning consumer interested in eating more wholesome foods.  Its fertilizer product is easy to handle, package and distribute  -  qualities that are supporting of a high-margin fertilizer product.

The nitrogen fertilizer product could be a breakthrough for Bion, which has reported only a few thousand dollars in revenue since inception.  With so little money coming in the door, Bion is not profitable and is burning cash.  In the twelve months ending March 2015, the company used $715,960 in cash to support development work and other operations.  It does not sound like a large sum until an investor notes that at the end of March Bion only had about $500,000 in cash in the bank.

It might be a bit dicey accumulating a meaningful position in Bion Environmental.  Trading volumes are quite modest and the stock does not trade every day.  Trading near $1.00 per share, BNET trades less like a stock priced on future cash flows and more like an option on management’s ability to commercialize its technology.

Debra Fiakas is a cattle rancher's daughter and 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. 

September 23, 2015

Solar Weaklings Shudder on Tianwei Collapse

Doug Young 

Bottom line: The bankruptcy of Tianwei signals Beijing will allow a new round of failures for weaker solar panel makers, with Yingli and ReneSola the most likely to come under pressure.

News that solar panel material maker Baoding Tianwei is on the brink of collapse has sent shudders through the entire sector, as everyone guesses who might be next to fall in a looming new clean-up of China’s bloated industry. Tianwei has been in trouble for a while now, after the company became the first state-run firm to ever default on a domestic bond interest payment back in April.

That development certainly didn’t bode well for Tianwei, but it remained unclear if the local government or Beijing would ultimately step in to bail out the company and save its investors. Now we finally have the answer to that question, following media reports that Tianwei and 3 of its business units are formally filing for bankruptcy. (English article; Chinese article)

The bigger picture to this story is that Beijing now appears willing to let weaker and less efficient solar panel makers and their suppliers fail, in an effort to create a more solid foundation for the remaining stronger players. The government already allowed an earlier round of failures that included former giants Suntech and LDK, but no major closures have come since then. But that looks set to change now.

According to the latest reports, Tianwei announced its insolvency and inability to pay its debts on the website Chinamoney.com.cn, a website of the China Foreign Exchange Trade System. The company cited the slowdown in the broader global economy, as well as overcapacity in the solar panel sector for its decision.

Tianwei was traditionally a maker of electrical transformers, but more recently got into the business of making polysilicon, the main material used to makes solar panels. Such a move may sound puzzling to many westerners, but is actually quite common for big Chinese state-run companies that often rush into new business areas that Beijing sets as priority areas for development.

In this case, Tianwei and many other state-run firms piled into the solar sector, only to incur big losses when their mass action created a huge oversupply on the global market. Tianwei reported a loss of 10.14 billion yuan ($1.6 billion) last year, with total debt at 21 billion yuan, far higher than its total assets of 13 billion yuan.

Solar Sell-Off

Tianwei’s bankruptcy announcement sent shivers through stocks of US-listed solar panel makers, as investors worried over what the bankruptcy might mean for the rest of the sector. In this case it’s quite easy to tell which companies are the biggest sources of concern by looking at the magnitude of their share declines.

Leading that group was the wobbliest company, Yingli (NYSE: YGE), whose shares plunged 24 percent on the news. Yingli is one of the few major solar players that failed to return to profitability as the sector downturn eased, and previously warned that it could be in danger of going out of business. Adding to the worries, the company’s headquarters are also in the northern Chinese city of Baoding where Tianwei is based, indicating the local government may not step in to provide any relief.

The other big loser in the Friday sell-off was the loss-making ReneSola (NYSE: SOL), whose shares tumbled 14 percent to close below the symbolically significant $1 threshold. Most other solar companies also got caught up in the sell-off but to a smaller extent, with stronger names Canadian Solar (Nasdaq: CSIQ) and Trina (NYSE: TSL) both down by around 7 percent.

Shareholders are correct to be worried about weaker names like Yingli and Renesola, as these companies clearly could face growing difficulties if their financial situation continues to deteriorate. But I question the sell-off for the strong names like Canadian Solar, since these companies could be well positioned to buy up assets at bargain prices from failed companies like Tianwei and others that could soon follow into bankruptcy.

Doug Young has lived and worked in China for 15 years, much of that as a journalist for Reuters writing about Chinese companies. He currently lives in Shanghai where he teaches financial journalism at Fudan University. He writes daily on his blog, Young´s China Business Blog, commenting on the latest developments at Chinese companies listed in the US, China and Hong Kong. He is also author of a new book about the media in China, The Party Line: How The Media Dictates Public Opinion in Modern China.

September 21, 2015

EPA Says VW Running Massive Clean Air Scam

Jim Lane 

VWlogoVW is facing up to $18.07 billion in fines; recalls, mandatory vehicle emission fixes on the horizon; investigations underway at EPA and in California as “defeat devices” uncovered that evade clean air regulations.

In Washington, EPA issued a notice of violation of the Clean Air Act to Volkswagen AG, Audi AG, and Volkswagen Group of America, Inc. alleging that four-cylinder Volkswagen and Audi diesel cars from model years 2009-2015 carry a “defeat device” which circumvents EPA emissions standards for certain air pollutants.

Specifically, the EPA alleges that a sophisticated software algorithm on certain Volkswagen vehicles detects when the car is undergoing official emissions testing, and turns full emissions controls on only during the test.

The effectiveness of these vehicles’ pollution emissions control devices is greatly reduced during all normal driving situations, according to the EPA. “This results in cars that meet emissions standards in the laboratory or testing station, but during normal operation, emit nitrogen oxides, or NOx, at up to 40 times the standard. The software produced by Volkswagen is a “defeat device,” as defined by the Clean Air Act,” the EPA wrote in its Notice of Violation.

VW facing up to $18.07 billion in fines

VW is facing up to $18.07 billion in fines for an estimated 482,000 violations of the Clean Air Act, and the EPA may seek injunctive relief. This could take the form of a mandatory recall. Meanwhile, individuals associated with the violations may be subject to a further $1.8 billion in civil penalties.

For purposes of comparison, BP paid $18.7 billion in fines to settle claims stemming from the Deepwater Horizon disaster.

Is there room for some benefit of doubt for VW?

Alas, not much room for hope. According to EPA, VW admitted to installing the software earlier this year, which EPA has characterized as a “defeat device”.

In a statement released Sunday, Volkswagen CEO Prof. Dr. Martin Winterkorn said:

The U.S. Environmental Protection Agency and the California Air Resources Board (EPA and CARB) revealed their findings that while testing diesel cars of the Volkswagen Group they have detected manipulations that violate American environmental standards.

The Board of Management at Volkswagen AG takes these findings very seriously. I personally am deeply sorry that we have broken the trust of our customers and the public. We will cooperate fully with the responsible agencies, with transparency and urgency, to clearly, openly, and completely establish all of the facts of this case. Volkswagen has ordered an external investigation of this matter.

We do not and will not tolerate violations of any kind of our internal rules or of the law.

The trust of our customers and the public is and continues to be our most important asset. We at Volkswagen will do everything that must be done in order to re-establish the trust that so many people have placed in us, and we will do everything necessary in order to reverse the damage this has caused. This matter has first priority for me, personally, and for our entire Board of Management.

VW’s meteoric diesel sales boom

Volkswagen is touting its line of diesel passenger vehicles as “a whole family of front runners,” ironic in that the company has been accused by EPA of running a front.

One thing there is no doubt about in the background to this story, “Volkswagen has sold more diesel cars in the U.S. than every other brand combined,” and the company attributes its TDI Clean Diesel success to “long range without sacrifice”, describing its efforts as a “Promise kept”.

Investigations pending

California is separately issuing an In-Use Compliance letter to Volkswagen, and EPA and the California Air Resources Board have both initiated investigations based on Volkswagen’s alleged actions.

“Using a defeat device in cars to evade clean air standards is illegal and a threat to public health,” said Cynthia Giles, Assistant Administrator for the Office of Enforcement and Compliance Assurance. “Working closely with the California Air Resources Board, EPA is committed to making sure that all automakers play by the same rules. EPA will continue to investigate these very serious matters.”

“Working with US EPA we are taking this important step to protect public health thanks to the dogged investigations by our laboratory scientists and staff,” said Air Resources Board Executive Officer Richard Corey. “Our goal now is to ensure that the affected cars are brought into compliance, to dig more deeply into the extent and implications of Volkswagen’s efforts to cheat on clean air rules, and to take appropriate further action.”

Vehicles covered

The allegations cover roughly 482,000 diesel passenger cars sold in the United States since 2008. Affected diesel models include:

• Jetta (Model Years 2009 – 2015)
• Beetle (Model Years 2009 – 2015)
• Audi A3 (Model Years 2009 – 2015)
• Golf (Model Years 2009 – 2015)
• Passat (Model Years 2014-2015)

What is NOx again?

NOx pollution contributes to nitrogen dioxide, ground-level ozone, and fine particulate matter. Exposure to these pollutants has been linked with a range of serious health effects, including increased asthma attacks and other respiratory illnesses that can be serious enough to send people to the hospital. Exposure to ozone and particulate matter have also been associated with premature death due to respiratory-related or cardiovascular-related effects. Children, the elderly, and people with pre-existing respiratory disease are particularly at risk for health effects of these pollutants.

Clean Air Act background

The Clean Air Act requires vehicle manufacturers to certify to EPA that their products will meet applicable federal emission standards to control air pollution, and every vehicle sold in the U.S. must be covered by an EPA-issued certificate of conformity. Motor vehicles equipped with defeat devices, which reduce the effectiveness of the emission control system during normal driving conditions, cannot be certified. By making and selling vehicles with defeat devices that allowed for higher levels of air emissions than were certified to EPA, Volkswagen violated two important provisions of the Clean Air Act.

The investigative background

EPA and CARB uncovered the defeat device software after independent analysis by researchers at West Virginia University, working with the International Council on Clean Transportation, a non-governmental organization, raised questions about emissions levels, and the agencies began further investigations into the issue. In September, after EPA and CARB demanded an explanation for the identified emission problems, Volkswagen admitted that the cars contained defeat devices, according to EPA’s Notice of Violation.

So, you were hoping to get good performance and cleaner air from your VW or Audi – what now?

“It is incumbent upon Volkswagen to initiate the process that will fix the cars’ emissions systems,” says EPA.

But, for now, owners of cars of these models and years do not need to take any action. “Car owners should know,”‘ the EPA said in a statement, “that although these vehicles have emissions exceeding standards, these violations do not present a safety hazard and the cars remain legal to drive and resell.”

For now, switch to renewable diesel. Nexte’s (NEF.F) NEXTBTL renewable diesel, sold extensively in the EU and the US, reduces NOx emissions by 9% compared to conventional diesel fuel. More on that here.

VW and renewable diesel

In June, Amyris (AMRS) announced the successful completion of a diesel demonstration program with Volkswagen of America that was designed to test the commercial readiness of Amyris renewable diesel and its ability to enhance VW’s innovative and advanced diesel technology. The collaboration included evaluating emissions reductions and demonstrating performance of Volkswagen’s existing TDI Clean Diesel technology using advanced renewable diesel fuel.

Utilizing vehicles provided by VW in real-world driving conditions, the two-year-long program to assess the results reinforced the company’s data that greenhouse gas (GHG) emissions were reduced by more than 60 percent on a well-to-wheel basis when using Amyris’s No Compromise renewable diesel. In addition, the program demonstrated fuel economy that was similar to or improved over petroleum-based fuels, together while maintaining outstanding engine performance under a variety of conditions.

Audi, renewable diesel and advanced fuels

In April, Audi’s pilot plant in Dresden has started production of the synthetic fuel Audi e diesel. After a commissioning phase of just four months, the research facility in Dresden started producing its first batches of high‑quality diesel fuel a few days ago. To demonstrate its suitability for everyday use, Federal Minister of Education and Research Prof. Dr. Johanna Wanka put the first five liters into her official car, an Audi A8 3.0 TDI clean diesel Quattro on Tuesday.

Joule and Audi formed a partnership in 2011 to accelerate the development and commercialization of CO2-neutral fuels. These efforts include fuel testing and validation, lifecycle analysis and support for Joule’s production facility in Hobbs, New Mexico, where demonstration-scale production of ethanol is underway. Audi is also supporting Joule’s hydrocarbon product, which was previously tested and shown to meet ASTM specifications in diesel blends of up to 50%. This product will follow ethanol to market.

In May, Global Bioenergies and Audi announced that the first batch of renewable gasoline has been produced, converted into isooctane from isobutene, by the Fraunhofer Institute at the Leuna refinery near Leipzig where Global Bioenergies is now building its demo plant.

Not the first defeat device rodeo for the EPA

The Notice is the first major violation involving mass-produced defeat devices in US vehicles since a 1998 consent decree between the EPA and Caterpillar, Cummins, Detroit Diesel, Mack, Renault Vehicles Industriels, and Volvo Truck Corp. Following that NOV, the companies agreed to pay heft fines and were subjected to NTE standards for heavy truck engines.

Why risk evading regulations with defeat devices?

As Fundamentals of Motor Vehicle Technology observes, “devices used to ‘clean up’ vehicle pollutants are costly and their use often results in a lower power output and higher fuel consumption.”

What’s the connection between power, performance, fuel economy and NOx emissions?

In a nutshell, diesel engines that use high compressions and a lean air-to-fuel ratio get great mileage, but they produce high temperatures inside the engine, and at 2500 degrees the nitrogen that is coming into the car with air (Earth’s atmosphere is 78% nitrogen) begins to react with oxygen to produce NOx.

Wasn’t BlueTec technology from Daimler-Benz supposed to address NOx emissions?

Yes, and VW/Audi licensed the technology. It does indeed reduce NOx, when switched on, using a variety of techniques but notably featuring a Selective Catalytic Reduction converter that produces nitrogen and water from nitrous oxides.

When was BlueTec deployed in the Jetta?

The 2008 Model year. Leading us to suspect that in fact it is BlueTec that is at the heart of the issue here.

Why is power a problem especially for diesel vehicles?

Gasoline engines, traditionally, have more pep, or horsepower, which is what you use when you want to travel at high-speed on the highway. Diesel engines are better known for torque, which is what you need when you’re climbing a hill and carrying a heavy load. Consequently, diesel cars have had a “low power” rap for many years, fairly or unfairly, and manufacturers have been eager to maximize and tout the power and performance of diesel cars.

Why is power specifically an opportunity area for mischief when it comes to diesel and emissions control?

At the heart of SCR technology is a diesel exhaust fluid injection, and that specifically can reduce power output and increase engine temperature. Consequently, technology has been developed over the years to delay DEF injection, for example, when climbing hills.

It may well be the case — we don’t yet precisely know — that DEF injection has been postponed via this snarky algorithm that the EPA mentioned, until the vehicle next visits the shop for an EPA emissions test.

More on the story

More information on EPA’s Notice of Violation.
More information on CARB’s In-Use Compliance Letter.

 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.

September 20, 2015

Tetra Tech: Energy Engineer

by Debra Fiakas CFA

In the coming years power generators will be under pressure to meet new standards for lower carbon emissions embedded in the EPA’s Clean Power Plan.  Each state has to meet a set of standards set by the EPA based that state’s particular circumstances in electrical generation.  The carbon pollution limits begin in 2022 and ramp to full effect by 2030.

Power generators could meet standards by reducing harmful emissions from existing fossil fuel-fire plants.  Unfortunately, that may prove too costly at some of the older plants.  It is logical that power generators will look increasingly to renewable energy sources, creating a welcome boost in demand for firms that serve that sector with design, engineering and other consulting services.

Tetra Tech, Inc. (TTEK:  Nasdaq) is a leading provider of engineering, construction and technical services to the energy and infrastructure markets.  They also provide a diverse menu of product management and consulting services for resource management, water conservation and environmental improvement.  The company has completed projects around the world and appears to have a solid reputation in both developed and emerging markets.

Tetra Tech has a successful track record in all types of power generation, including conventional fuel-powered plants.  In my view, its stature is higher in the wind energy market.  Indeed, at least one engineering publication ranked Tetra Tech as number two in the world in wind energy project engineering.  The company claims to have worked with twenty of the top twenty-five wind power developers and a majority of the wind equipment manufacturers.

One of the reasons the company may have gained such a large presence in wind is its environmental expertise.  Tetra Tech personnel working on wind projects know their birds and bats, giving them the extra knowhow to help their clients resolve environmental objections. 

Tetra Tech showed other valuable qualities in its work as the prime contractor for the Fire Island Wind Project near Anchorage, Alaska.  The 17.6 megawatt project eliminates the need for burning about 500 million cubic feet of natural gas.  The location is an uninhabited island where the turbines are the least disruptive.  However, the location also posed significant logistical and safety challenges during the construction phase.  The company completed construction of the eleven 1.6 megawatt wind towers, turbines and connecting facilities ahead of schedule and with no incidents or injuries.

Interestingly, Tetra Tech itself sees other opportunities as better growth markets.  The company is targeting the coal ash problem created by fossil fuel-powered plants.  Likewise, management has identified the conventional oil and gas industry as low risk because the oil majors typically have strong spending budgets for environmental management.  Indeed, Tetra Tech really shines when it comes to cleaning up the ‘nasty by-products’ of the energy industry as we know it today.

Tetra Tech reported $1.75 billion in revenue in the twelve months ending June 2015, providing $93.4 million in net income or $1.49 per share.    The company is a consistent generator of cash, delivering $147.2 million in operating cash flow in that same twelve month period.  As a solidly profitable company, it is surprising that its stock is trading at 13.6 times the consensus estimate for the fiscal year ending September 2016.  A forward dividend yield of 1.3% and a $200 million stock buyback program make the stock even more interesting.

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.  Crystal Equity Research has issued a Buy rating on TTEK.

September 15, 2015

Demand Picture Cloudy For Trina's Solar Farm Spin-Off

Doug Young

Bottom line: Trina’s plan to separately list its solar plant-building assets is likely to meet with lukewarm to frosty demand.

A new plan by Trina (NYSE: TSL) to separately list some capital-intensive assets has overtones of desperation. The intense pressure solar panel makers continue to feel as their sector still struggles to recover from a downturn that dates back 4 years due to massive oversupply.

Panel prices have rebounded somewhat over the last 2 years and many of the best-run companies have returned to profitability during that time. Even better performers like Trina are feeling pressure as they pour massive money into construction of new solar power plants, in a bid to create more demand for their products.

The bottom line is that solar plant construction is a costly business and not many private sector companies want to get involved due to the volatile climate. The situation is particularly difficult in China, even though Beijing has committed to a massive build-up of solar energy. But like many things in China, a wide range of complicating factors exist for anyone who wants to actually try and build solar power plants in the country.

Trina is planning to spin off its unit that builds new solar farms, with an aim of eventually making a separate IPO for the company. (English article) Trina CFO Teresa Tan discussed the plan at a forum in the northeastern city of Dalian, and said her company would like to make the IPO as soon as next year.

Under normal circumstances such a plan might look attractive for investors, since such power plants provide stable returns by using cash generated from the sale of electricity to pay down debt and give a dividend to investors. But in Yingli’s case, this particular new company is likely to focus on construction of power plants in China. Such plants are far less reliable since they are more difficult to build due to local bureaucratic and technical issues. And even after construction is complete, many still often run into problems.

In Need of Cash

Trina could clearly use the cash it would get from an IPO, as the company had more than $1 billion in debt and just $600 million in cash in its last quarterly report. Much of the debt has come through a series of bond and stock offerings over the last year, a big portion of which is being used to build new solar plants that will buy their panels from Trina. I suspect investors will quickly realize the high risk associated with the company Trina now hopes to spin off, and demand for the IPO will be lukewarm at best and frosty at worst.

Doug Young has lived and worked in China for 15 years, much of that as a journalist for Reuters writing about Chinese companies. He currently lives in Shanghai where he teaches financial journalism at Fudan University. He writes daily on his blog, Young´s China Business Blog, commenting on the latest developments at Chinese companies listed in the US, China and Hong Kong. He is also author of a new book about the media in China, The Party Line: How The Media Dictates Public Opinion in Modern China.

Yingli's Downward Spiral

Doug Young

Bottom line: Yingli’s downward spiral will continue as customers abandon the company due to its financial weakness.

Shares of the stumbling Yingli (NYSE: YGE) are coming under pressure after its latest earnings report. The intense pressure solar panel makers continue to feel as their sector still struggles to recover from a downturn that dates back 4 years due to massive oversupply.  Panel prices have rebounded somewhat over the last 2 years and many of the best-run companies have returned to profitability during that time. But intense pressure still remains for less well-run companies like Yingli.

The bottom line is that solar plant construction is a costly business and not many private sector companies want to get involved due to the volatile climate. The situation is particularly difficult in China, even though Beijing has committed to a massive build-up of solar energy. But like many things in China, a wide range of complicating factors exist for anyone who wants to actually try and build solar power plants in the country.

Yingli is being spotlighted in a report that says its shares have tumbled 34 percent in the last 3 weeks over concerns about its future prospects. (English article) The company caused a panic earlier this year when it said it could be in danger of going out of business, but later back-tracked and said investors had misinterpreted its words. Its latest quarterly report looks quite gloomy, with the company saying shipments this year will come in at least 22 percent below its previous forecasts.

Yingli’s shares have traded below $1 since mid-July, and last month it said it was notified that it had until next February to bring its price back above $1 or risk being de-listed. (previous post) The shares now trade at 59 cents, and its quite possible they could fall even lower as Yingli slips closer to insolvency. I don’t see much cheer in YIngli’s future, since its customers are likely to abandon the company in growing numbers as concerns rise about its financial health, which will only further accelerate its downward spiral.

Doug Young has lived and worked in China for 15 years, much of that as a journalist for Reuters writing about Chinese companies. He currently lives in Shanghai where he teaches financial journalism at Fudan University. He writes daily on his blog, Young´s China Business Blog, commenting on the latest developments at Chinese companies listed in the US, China and Hong Kong. He is also author of a new book about the media in China, The Party Line: How The Media Dictates Public Opinion in Modern China.

September 14, 2015

Light at the End of the Tunnel for Lightbridge

by Debra Fiakas CFA

The U.S. Environmental Protection Agency is preparing to execute on the Clean Power Plan aimed at reducing carbon emissions from U.S. power generation facilities.  Each state has to meet a set of standards set by the EPA based that state’s particular circumstances in electrical generation.  The carbon pollution limits begin in 2022 and ramp to full effect by 2030.

In the meantime, the power generation industry must begin preparation in order to be ready for the initial standards.  The lower-carbon emitting power sources will clearly be in favor as a consequence of the new standards.  That means a new lease on life for the nuclear industry, which has been out of favor due to safety concerns.  Most investors might first think of the uranium mining industry as a beneficiary of a nuclear renaissance.  However, there is another contestant in the game that could be a big winner in the drive to clean up the electrical grid.

Lightbridge Corporation (LTBR:  Nasdaq) is a developer of nuclear fuel technologies.  The company has long been known for its efforts to perfect thorium-based fuels as an alternative to uranium.  However, it is an all-metal fuel that could help Lightbridge makes its bones in the evolving nuclear power industry.  The company has developed and patented a novel zirconium metal design that replaces the ceramic-type fuel rods now in use by pressurized water reactors.  Lightbridge’s fuel rods are also produced differently.  A co-extrusion technology is used to extrude a single piece of solid fuel rid from a metallic matrix composed of a uranium and zirconium alloy.

The Lightbridge fuel rod affords a number of advantages.  Most important for nuclear power plant operates is the potential for a 10% to 17% increase in power generating capacity from existing reactors.  For new reactors the “power uprate” as Lightbridge calls it, could be as high as 30%.  The Lightbridge all-metal fuel rods could also extend the operating cycle length from 18 months to 24 months.  These benefits mean a dramatic change for the better in the economics of nuclear power plants, making both existing and new plants more attractive alternatives to fossil fuel plants that spew out offending carbon pollution.

Increased efficiency and improved economics are only part of the story.  Lightbridge’s metal-allow fuel rods also improve reactor safety.  For example, in the event of a large loss-of-coolant, fuel rod temperatures rise and a ‘melt-down’ of the fuel rods can occur.  Tests of the Lightbridge zirconium-based fuel rods show that they remain 200 degrees Celsius below the 850 to 900 degrees at which the steam rising from the water around the fuel rods would begin to break down the zirconium and begin leaking radioactivity.

Some reactor system adjustments would be required to use Lightbridge’s all-metal fuel rods.  That hurdle does not seem to have intimated four of the leading power generation companies in the U.S.  In April 2015, Duke Energy (DUK:  NYSE), Southern Company (SO:  NYSE), Dominion Generation (D:  NYSE) and Exelon Generation (EXC:  NYSE) notified the Nuclear Regulatory Commission (NRC) of their interest in Lightbridge’s novel fuel rods.  The notification indicated the group of four would be submitting an application sometime in 2017 to use the Lightbridge fuel beginning in 2020.

Of course, the power generators will not be Lightbridge’s customers.  The company will license its technologies to fuel suppliers such as Westinghouse.   The licensing strategy presents an attractive, high-margin model.  Until sales from its fuel rod technology hit the top-line, management has been providing consulting services to the nuclear power industry.  Revenue in the twelve months ending June 2015, were $1.1 million.  While the company still reported a net loss of $4.3 million in that twelve-month period, operations only used $3.5 million in cash.  The company has $2.4 million in cash on its balance sheet, suggesting a runway of about nine months before the bank account is overdrawn.  The company recently announced a new financing facility through which management can ‘put’ shares of common stock for up to $10 million in value over the next two years.  The equity financing facility provides some assurance that the company can move forward with the next phase of testing and proofing required to get approval by the NRC.

Lightbridge shares trade near $1.00 per share, well below where investors might expect valuation for a company that is on the cusp of a major product introduction.  The depressed stock price might arise from the company’s long association with thorium fuel development, which seemed to languish as the years went by.  Lightbridge has also been heavily dependent upon relationships in Russia to test and proof the all-metal fuel rods.  With the imposition of sanctions against Russia related to incidents in the Ukraine, Lightbridge has had to find alternatives.  Two new laboratory deals have been set up, but the significance of those relationships does not seem to have filtered into investor sentiment.  Likewise we do not believe investors have been impressed by the group of four power generators who have gone on record with the NRC with their interest in the all-metal fuel rod.  Perhaps the breakthrough of a fuel supplier license would get investor attention.  This is the step that would pave the way for orders and revenue.

In my view, LTBR is a stock well worth putting on a watch list even if the stock appears to present more risk that it’s worth today.  For those who have a long-term time horizon, the stock price can be considered an option on the last laboratory tests and the application to the NRC in 2017.  Granted neither of lab tests or applications is on par with actual orders.  Yet both hurdles must be cleared before fuel suppliers could find it worthwhile to give Lightbridge a call.

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.  BLSP is featured in research reports published by Crystal Equity Research.  Please note the important disclosures at the end of all Crystal Equity Research reports.  Please read the important disclosures related to sponsorship and subscriptions in the final pages of all reports.

September 04, 2015

Ethanol Missed The Boat; Isobutanol May Not

Jim Lane 

CaptainE0E-Zero – ethanol-free gas, has been popular with boaters, but here comes isobutanol, with Gevo leading the pack.

Are the economics a slam-dunk? Here’s the hard data.

One of the more interesting trends in recent years has been the rise of ethanol-free gasoline.

Overall, Pure-gas.com reports 9915 stations offering ethanol-free gas in the US and Canada — although it is a crowd-sourced site and may have missed stations adding or dropping E0 fuels. The site does not include stations in Alaska because “all gasoline is ethanol-free.” 314 of those are in Canada.

gevoThat’s around three times the number of stations offering high-ethanol blends such as E85, despite the inducements that emerge under the Renewable Fuel Standard for high-ethanol blends, especially as the US reaches the E10 saturation point and RIN prices rise, as they are designed to do to provide “blend-wall busting” incentives.

In many cases, customers are looking for ethanol free gasoline for a “boat, truck, RV, plane, farm equipment, snowblower, hotrod or motorcycle”, based on concerns over corrosion, engine wear, and performance of E10 in boat engines and outdoor power equipment.

Isobutanol makes a move

In that context, along comes news this week that Harbor Marina, at Lake Pomme de Terre in Missouri, has become the first U.S. marina to sell gasoline blended with Gevo’s (GEVO) renewable isobutanol at the pump. Harbor Marina owner Todd Spencer said he made the decision to offer isobutanol-blended gasoline to his recreational boating customers once he concluded that it would be a superior renewable fuel for their boats.

Oil and Octane Shop of Springfield, Missouri enabled testing of Gevo’s isobutanol by supplying test blends to major marine engine manufacturers, such as Mercury Marine. Following the success of these tests, Oil and Octane Shop has been recommending the use of isobutanol to its marina customers, including Harbor Marina.

“My fuel supplier introduced me to the idea of blending Gevo’s renewable isobutanol with the straight, ethanol-free gasoline my marina was previously offering,” Spencer said. “At Harbor Marina, we pride ourselves on providing the best in entertainment, food and beverages – and now we can add: the best-in-marine fuel.”

The move by Gevo into boating fuels follows a decision last June by the National Marine Manufacturers Association to officially endorse isobutanol as a drop-in fuel for marine and recreational boat engines. The fuel is moisture resistant, does not cause phase separation and helps reduce engine corrosion. thereby addressing concerns that many boaters have with ethanol-blended fuels.

It’s early days, but certainly there’s a market in the “ethanol-free” world, and Gevo has certainly targeted marine, outdoor equipment and off-road vehicle markets, and we’ll see how that roll-out goes.

The Deep Dive

We take you through the data in The Digest’s 2015 8-Slide Guide
to renewable marine fuels, which is right here.

Some price background: E10 vs E0

Perhaps the most fascinating stat in this growing market is the pricing. E85prices.com reports the national E85 price average at $1.93, E10 at $2.30, and E0 averaging $2.88. Looking at E10 and E0, we don’t know yet whether that E0 price would be available for an (ethanol-free) isobutanol blend with gasoline, but it could be a substantial premium market for isobutanol.

A price case for $5.00 per gallon isobutanol

For example, a $5.00 per gallon (wholesale) isobutanol fuel blended at 12.5 percent adds 47.8 cents to the hard cost of a gallon of fuel, compared to using $1.468 ethanol (today’s CBOT September ethanol futures contract price). At the same time, there’s a 5.6 cent gain in the RIN value in the fuel (slightly higher blend, higher RIN value for advanced biofuels and more energy density). So, you net out with a $0.42 premium in this scenario — or $2.72 for B12.5. That’s less than the $2.88 average for E0.

In a nutshell, you have the answer to the age-old question in renewables: why sell a $2 fuel when you can sell a $5 chemical? Answer, sell a $5 fuel, and be happy that you don’t have to meet the exacting green chemistry performance spec.

The two-stroke market

trufuelredThere’s ample evidence elsewhere on premium pricing available for other ethanol-free alternatives. Consider, for example, the pricing on two-stroke gas/oil mix, optimized for leaf blowers and other equipment of that type.

TruFuel is selling at chainsawsdirect.com for $27.95 today, per 1.5 gallon pack, or $18.63 per gallon, and ChainSawsDirect will tell you straight out the rationale: Ethanol Free, High Octane fuel. There are other benefits in lubricity, such as the blend with synthetic oil, and there’s the 2-year shelf-life from gas in a can. But we see right away in the marketing pitch that there’s a perceived advantage for ethanol-free fuel in this sector.

How big is the addressable market?

Well, that gets tricky; there doesn’t seem to be an easy-to-find stat on how much fuel is used by powerboats, much less all outdoor uses where there’s a market for ethanol-free fuel.

But we know it’s big. The 2011 Recreational Boating Survey found 10.11 million power boats in the US. 70% of them were operated in the past year, and an average of 75 hours of operation and an average of 100 horsepower in the engine. Boating Magazine advises a rule of thumb of 0.5 pounds of fuel per HP per hour, without taking into account boat drag., sea conditions and so on. Putting all those together, we came up with a 4.4 billion gallon addressable market for powerboats. We’d be guessing at fuel sales for home-based outdoor power equipment, but there’s additional market available.

Now, addressable is one thing, sales are quite another. But, there’s some heft in this sector when mapped against Gevo’s capacity and any capacity Butamax might develop. And, ample evidence of an ethanol-free premium that isobutanol, if well-positioned, might capture some of, or even all of.

Marinas, and stations near the water, that’s probably where you’ll see your friendly Gevo rep in the upcoming months.

 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.

September 03, 2015

The Biogas Rush

Jim Lane 
8SG-Farmatic-090315-31[1].jpg

51 percent? Could renewable natural gas get that big? The rationale behind the Eureka!, and some Caveats for all you Emptors.

A few years back we lived in the era of the National Energy Solution Summed Up in One Word: it was gasoline, then diesel, then ethanol, or biodiesel. Then there was the Two-Word Era: in p[art because of an Inconvenient Truth, the craze was on for cellulosic ethanol, algae biofuels, aviation biofuels, and there was the Hydrogen Economy or the Glucose Economy, depending on who you were talking to.

We seem to have reached the Three-Word Era.

Seems like every day we hear the drums beating for Renewable natural gas and low cost methane. And there’s been a steady newsflow in new natural gas project and technology announcements, posted cellulosic RINs, a surge in investor enthusiasm, and increasing stakeholder acceptance.

In a remarkable presentation at the Infocast Methane Bioengineering Summit in San Diego this week (and earlier at the Advanced Bioeconomy Feedstocks Conference in New Orleans, in June), Farmatic CEO Michael Schuppenhauer said that the US could replace up to 51% of its fossil transportation fuel through biogas, and that from crop residues and waste streams alone, 33 states could generate more than 10 percent of their transportation fuel.

You can see an 8-Slide Guide digest of that presentation, right here.

8SG-Farmatic-090315-4

Building that low carbon fuel economy, Schuppenhauer said, would create 2.5 million jobs and create $240 billion in investment in the communities that adopted this pathway.

Heady stuff, the kind of wild west, gold rush enthusiasm not seen in this sector since the ethanol heyday of the mid 2000s.

Real reasons for enthusiasm

Part of the enthusiasm stems from low-carbon enthusiasts, who see reductions in carbon intensity of up to 85% for “Landfill gas cleaned up to pipeline quality NG; compressed in CA,” according to California’s Air Resources Board.

But the prices look good too, with Farmatics’s projected fuel costs ranging from $2.39 (per gasoline equivalent gallon) to negative $1.00 per GGE. Yes, negative cost fuel — that’s CNG made from food waste. From energy crops and residues, the costs come in around $1.52-$1.71 per GGE, Schuppenhauer said.

RNG-1

Now, even in these days of unbelievably low oil prices — hanging around in the mid $40s for West Texas Intermediate — those are incredibly attractive opportunities for investors, regardless of how they feel about the environment. Not to mention, the potential to register cellulosic fuel RINs under the Renewable Fuel Standard.

For all those reasons, we’ve reported on the substantial increase in cellulosic renewable fuels via the EPA’s registration service, almost all of it coming from renewable natural gas. In all, 61 million of the 62 million RINs issued for cellulosic fuels have come from renewable compressed or liquified natural gas — 98% in all.

So, that’s the good news.

Here are the Caveats for all you Emptors

1. Vehicle and pump infrastructure.

OK, there are roughly 150,000 natgas powered vehicles in the United States, according to the DOE’s Alternative Fuels Data Center. GE and the CNG Now group disagree, putting the number at 250,000, incouding conversions.

No matter, either way, it’s a major limiting factor. With low gas prices, that’s bound to change — but the availability of vehicles and refueling infrastructure is a major dampening factor, until more vehicles hit the road. For now, think city bus fleets, where refueling can be done in the fuel yard. Also, Utah. where there is a $3,000 state tax incentive credit for CNG vehicles.

2. Residue supply chain.

According to Farmatic, the availability of waste is a limiting factor. The Coalition for Renewable Natural Gas puts the upper limit of waste availability at around 7 billion gallons of gasoline equivalence. That’s about 3 percent of US fuel usage.

The solution, according to Farmatic, is crop waste, and they point out that the energy derived — in miles per acre — is here for CNG than ethanol. But, we run into the problem that those residue supply chains haven’t been built yet — for any type of cellulosic fuels.

Also, Birgitte Ahring, a professor at Washington State University, warns that anaerobic digester organisms need to be improved before gas conversion is made as efficient as it needs to be — they face the same barriers of recalcitrance that we see on the cellulosic ethanol side. Not insurmountable, but a barrier, nonetheless.

We also note that converting 350 million tons of crop residue biomass into CNG will leave us with 120 million tons of lignin, leftover. And that will need a market.

3. Energy crop development.

The biggest source that Farmatic sees is in energy crops — and the Billion Ton Study and Son of Billion Tons give considerable encouragement here — 385 million ton potential, 60% Miscanthus and 40% Sorghum.

The problems here? It’s a collection of Not Quite Yets. First, we don’t have that much seed, we don’t have the growers contracted, we don’t have the supply sheds set up including transport to the miniplants for conversion. We probably don’t even have enough baling equipment in the midwestern United States — or anywhere that energy crops would grow.

It’s something that the country will grow into. The good news here — you don’t need to wait for a cellulosic liquid biofuels plant to grow biomass sorghum. CNG will do just fine.

4. Beware those tipping fees.

In the Farmatic models, we see $30 tipping fees per ton of organic waste. Those are definitely available now in selected locales. However, we’ve seen tipping fees turn into feedstock fees quite rapidly in other fuel markets. rem,ember the days when you could get waste fryer oils for nothing, and pick up a $25 per week collection fee from a restaurant? Now, you pay up to 25 cents per pound for fryer oil.

5. Energy crop costs have doubled.

In the Farmatic model, we see the Billion Ton Study numbers, accurately reported, for feedstock costs. The problem is, they’ve evolved. Right now, the DOE is guiding project developers to think in terms of around $115 per ton today for biomass. Longer-term, $80 per ton. So, those models that use the old Billion Ton figures of around $50 per ton — they all have to be updated.

6. The real costs of infrastructure.

A CNG vehicle cost? You can buy a DIY converter kit for between $1000 and $1800 — but professional truck conversion will run around $9000, according to this report. Another way to go to market is to simply wait for the fleet to turn over and sell CNG one vehicle at a time — that takes decades. There are 300 million registered vehicles in the US. Converting half to CNG would probably drive the conversion cost down dramatically, but it would be something like $750 billion to convert half the fleet at $5000 a pop.

Dispensers? To get around 50 percent fuel usage, you need to add on large-station, fast-fill capacity at roughly 129,000 or more outlets in the US.

Consider that it takes around 150,000 outlets to distribute gasoline, and that has around 60 percent market share. But, do the math, based on 1750 GGE/day at a large station.

Those conversions run $1.2M- $1.8M per outlet, according to the ADFC. Let’s assume that the conversion cost could come down by half if there was a massive deployment that afforded economies of scale. Still, we’re looking at something like $97 billion.

These locations can do onsite compression — but they will need a natural gas feed. Hopefully, not with expensive pipelines. We’ve left out that delivery cost, entirely, on the assumption that it costs no more to deploy gas than any other novel fuel.

The Bottom Line on cost

There’s a short-term, high-impact conversion path — and there’s a dramatically less costly growth path for renewable natural gas, based on hoping to change over the fleet as it retires.

Short-term cost? There’s the $240 billion aforementioned to deploy the technology. There’s some $750 billion in vehicle conversion costs, the $96 billion in fueling infrastructure. And, there’s a $30 per acre capital “establishment cost” per acre for energy crops, according to this report. Needing something like 50-100 million acres: that’s another $1.5-$3 billion in prep cost.

All in? Think $1.089 trillion to convert over half of US fuel usage to CNG in a reasonable time frame, excluding any costs associated with exploration or production, or the effect on the cost of natgas itself in the face of such a demand shock, which could be modeled and could be considerable.

So, it’s a $1 trillion solution. Compare that to around $50 billion for the build-out (to date) of the current liquid renewable fuels infrastructure — and you see the problem. It’s expensive.

RNG-2At incremental deployment levels, such as the Coalition for Renewable Natural Gas looks at, where the focus is on waste, and tipping fees, and a much smaller number of (mostly fleet) vehicles, purchased on a “as we replace them anyway” basis by fleet owners, running many more gallons than the average passenger car, and fueled with overnight time-fill systems: that is a much less impactful scenario, in terms of the dollars.

So, for now, consider that renewable CNG will be focused on organic waste streams, including food waste, manure and landfill gas — and “as you replace them” fleet conversions that might take 20 years, but will not have that much bottom line impact.

50% conversion of the US anytime soon? Not a chance in the world, despite some very attractive energy densities and yields for CNG compared to other renewable fuels — and highly attractive carbon numbers (though these change with the introduction of energy crops into the mix because of land use change factors).

In the end, it comes down to infrastructure and the costs of infrastructure change.

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.

September 02, 2015

Ten Clean Energy Stocks For 2015: Buying Opportunities

Tom Konrad Ph.D., CFA

In the two months since my last "monthly" update, the stock market has been in turmoil.  At the end of June, I was pleased report that my Ten Clean Energy Stocks for 2015 model portfolio was not only up for the year, it was comfortably ahead of its benchmarks.  At the end of August, the report is of a more win-the-battle-lose-the-war variety. The portfolio is still ahead of its benchmarks, but it's now down 1% for the year to date.

The portfolio lost 4.8% in July and 5.7% in August, to end down 1.0% for the year to date.  This decline was entirely due to the strong dollar: without the relative decline of the Canadian dollar, Euro and South African Rand, the portfolio would have been up 5.5%.  In contrast, its broad market benchmark, IWM, was down 1.1% in July, down 6.3% in August, and down 3.7% year to date.  Its clean energy benchmark was down 8.4% in July, down 10.7% in August, and down 21.3% year to date. 

The clean energy benchmark is a 60/40 weighted average of the income and growth benchmarks discussed below.

I feel that the recent volatility presents a great buying opportunity for many of the stocks I follow, especially the income stocks.

On Wednesday last week (the day of the market low), I persuaded a client to add some cash to her account.  The money reached the account on Thursday, one day after the market's low, but I was still able to buy a number of stocks for her at very compelling prices on Thursday and Friday as the market began to rebound.   I also invested all available cash in the other accounts which I manage, including funds freed up by reducing positions in PFB Corporation (TSX:PFB; OTC:PFBOF), which was a stock from my 2014 model portfolio.  As I wrote at the time, I dropped the stock not because I did not like its prospects, but because I felt few readers had bought it because of the foreign listing and low liquidity.  I suggested that readers hold the stock last December when it was in the low C$4 range.  Now that the stock is up significantly (around C$9) and there are many other attractive income stocks to choose from, it's time to take some or all of our profits.

Value/Growth and Income Sub-Portfolio Performance

The six stock income sub-portfolio continues to hold up despite the turmoil and strong dollar.  It fell only 0.7% in July and 0.9% in August, for a still strong 13.6% return year to date.  This performance is even more remarkable given that Yieldcos, the best known clean energy income investments, fell 8.1% in July and 10.7% in August, as measured by the Global X YieldCo Index ETF (NASD:YLCO), which I also use as a benchmark for the income sub-portfolio.  Year to date, the benchmark (which began the year as JXI, until YLCO was launched at the end of May) is down 21.3%. 

The Green Alpha Global Equity Income Portfolio (GAGEIP) strategy which I manage with Green Alpha Advisors also fared well despite the market turbulence.  It was flat in July, and fell only 2.3% in August.  For the year to date, it is up 5.6%.

The four stock value and growth sub-portfolio continues to fare poorly.  It was down 11.0% in July and 12.8% in August, for a decline of 23.0% year to date.  Its benchmark, the Powershares Wilderhill Clean Energy ETF (NASD: PBW), also fell 8.9% in July and 10.6% in August, but these smaller declines left PBW well ahead, with a 16.7% fall year to date.

Individual Stock News and Returns

The chart below (click for larger version) gives details of individual stock performance, followed by a discussion of the month's news for each stock.

10 for 2015 performance thru 8/31/15 

The low and high targets given below are my estimates of the range within which I expected each stock to finish 2015 when I compiled the list at the end of 2014.

Income Stocks

1. Hannon Armstrong Sustainable Infrastructure (NYSE:HASI).
12/31/2014 Price: $14.23.  Annual Dividend: $1.04.  Beta: 0.81.  Low Target: $13.50.  High Target: $17. 
8/31/15 Price: $18.99. YTD Dividend: $0.52  YTD Total Return: 37.1%.

Sustainable infrastructure financier and Real Estate Investment Trust Hannon Armstrong announced second quarter earnings, with a 19% increase in core earnings per share for $0.26.   The company originated $455 million in transactions during the quarter, bringing its investment portfolio to $1.1 billion, 30% of which were energy efficiency investments and 67% of which were in renewable energy, with the balance in other sustainable infrastructure.

2. General Cable Corp. (NYSE:BGC)
12/31/2014 Price: $14.90.  Annual Dividend: $0.72.  Beta: 1.54.  Low Target: $10.  High Target: $30. 
8/31/15 Price: $14.55. YTD Dividend: $0.36  YTD Total Return: 0.01%.

International manufacturer of electrical and fiber optic cable General Cable Corp. fell, most likely because the investors are no longer chasing rumors that the company might be acquired by European competitor Prysmian (OTC:PRYMF), as well as the general market decline.  Second quarter results were strong, with adjusted earnings per share of $0.36 coming in well ahead of analysts' average estimate of $0.26 per share.  The company also completed the sale of its operations in Thailand on August 31st, which was part of the restructuring that is already improving profitability.

The company will pay its second quarter dividend of $0.18 to shareholders of record as of August 17th.  I only added small amounts of BGC to my managed portfolios, but that was more because it rebounded from its $13 low extremely quickly.

3. TransAlta Renewables Inc. (TSX:RNW, OTC:TRSWF)
12/31/2014 Price: C$11.48.  Annual Dividend: C$0.84.   Low Target: C$10.  High Target: C$15. 
8/31/15 Price: C$11.02. YTD Dividend: C$0.53  YTD Total C$ Return: 0.0%. YTD Total US$ Return: -11.6%.

Yieldco TransAlta Renewables reported its second quarter results.  On a per share basis, Funds From Operations (FFO) and earnings both increased significantly because of the drop-down of its parent's (TransAlta (NYSE:TAC)) Australian assets on May 7th.  Cash Available For Distribution (CAFD) per share increased to C$0.24 for the quarter from the same period in 2014.

Despite these strong fundamentals and a 7.6% yield, the stock fell 14% in July and August, most likely dragged down by the poor performance of other (mostly lower yield) Yieldcos and the 5% decline in the Canadian dollar.  (The Yieldco ETF YLCO was down 18% over the same period.)  I thought it was already a great value before the recent decline, and have been adding to my position in several managed portfolios.

4. Capstone Infrastructure Corp (TSX:CSE. OTC:MCQPF).
12/31/2014 Price: C$3.20. 
Annual Dividend C$0.30.  Low Target: C$3.  High Target: C$5.  
8/31/15 Price: C$3.24. YTD Dividend: C$0.15  YTD Total C$ Return: 5.9%.  YTD Total US$ Return: -6.4%.

Canadian power producer and developer (Yieldco) Capstone Infrastructure bucked the Yieldco and Canadian currency declines with a 3% gain in July and August. The gain was most likely due to provisional findings in the UK Competition and Markets Authority's (CMA) evaluation of Capstone's UK water subsidiary's appeal in a regulatory matter against its regulator, OfWat.  While Capstone seems likely to only get part of what it wants in the case, investors seemed to have been assuming that Capstone would get nothing at all.  The market took the provisional findings as good news.  This may have been because the CMA later stated that its evaluation would be extended by up to two months.  If the CMA did not think that Capstone had strong grounds for appeal, it seems likely that it would not have felt the need for more time to evaluate the case.

Capstone also received an excellent in-depth write up by Spy Hill Research on Seeking Alpha.  I recommend it highly to anyone who wants to become familiar with Capstone's business.

I have not been adding significantly to my positions in Capstone in the last two months, but only because they are already quite large.

New Flyer Industries (TSX:NFI, OTC:NFYEF)
.

12/31/2014 Price: C$13.48.  Annual Dividend: C$0.62.  Low Target: C$10.  High Target: C$20. 
8/31/15 Price: C$19.11.  YTD Dividend: C$0.40  YTD Total C$ Return: 44.4%.  YTD Total US$ Return: 27.6%.

Leading North American bus manufacturer New Flyer reported excellent results for the second quarter, well ahead of most analysts' expectations.  The company is reaping the benefits of consolidating its lead and streamlining its operations during the industry downturn over the last 5-7 years.  CIBC, Cannacord Genuity, and National Bank Financial all increased their price targets or ratings in the days following the earnings announcement.

6. Accell Group (XAMS:ACCEL, OTC:ACGPF).
12/31/2014 Price: €13.60. 
Annual Dividend: €0.61.  Low Target: 12.  High Target: €20.
8/31/15 Price: €19.14. YTD Dividend: 0.61  YTD Total Return: 45.2%.  YTD Total US$ Return: 34.6%.

European bicycle manufacturer Accell Group reported that its first half net profit was up 21% compared to the first half of 2014 in July, and the stock took off, rising 20% in Euro terms and 18% in dollar terms for the month. The entire bike sector has been enjoying a strong tail-wind, outperforming other transportation industries (carmakers, automotive suppliers, truck manufacturers, and aerospace) for the first half of 2015.

SNS Securities increased its price target for Accell from Accumulate to Buy on September 1st, citing its relative undervaluation compared to other bicycle stocks. 

Value Stocks

7. Future Fuel Corp. (NYSE:FF)
12/31/2014 Price: $13.02.  Annual Dividend: $0.24.   Beta 0.36.  Low Target: $10.  High Target: $20.
8/31/15 Price: $10.08 YTD Dividend: $0.12.  YTD Total Return: -21.7%.

Biodiesel and specialty chemicals producer FutureFuel reported strong revenues but weaker profits in the second quarter.  The decline in profitability was driven mostly by low oil prices (which determine the price of biodiesel.) Falling profits caused shares to fall as well, but insiders remain bullish, with two directors making substantial stock purchases in August and no insider selling.

8. Power REIT (NYSE:PW).
12/31/2014 Price: $8.35
Annual Dividend: $0.  Beta: 0.52.  Low Target: $5.  High Target: $20.
8/31/15 Price: $4.60. YTD Total Return: -44.9%.

Solar and rail Real Estate Investment Trust Power REIT's continued to decline slowly in July and August.  I expect that investors are frustrated that the judge in the REIT's civil case with its rail tenants Norfolk Southern Corp and Wheeling and Lake Erie will not make his ruling until the fourth quarter of this year.

Power REIT's preferred shares, PW-PA have also been trading down.  As I've said before, the 7.75% coupon is not in my opinion at risk and should be treated as return of capital due to the lawsuit.  Because of this, I've been adding to my positions.

9. Ameresco, Inc. (NASD:AMRC).
12/31/2014 Price: $7.00
Annual Dividend: $0.  Beta: 1.36.  Low Target: $6.  High Target: $16.
8/31/15 Price: $5.67. YTD Total Return: -19.0%.

The EPA's Clean Power Plan should provide a good boost to energy service contractors like Ameresco, but investors seemed unimpressed. The stock also fell despite strong second quarter results, which exceeded analysts' expectations for the fourth quarter in a row.  My best guess as to why the stock remains in the doldrums is that it has been down for so long that investors have given up and stopped paying attention.  If they were paying attention, the stock would almost certainly be advancing instead.

Two people who are paying attention are Director Francis Wiseski and President and CEO George Sakellaris.  Both have been making large and regular purchases of AMRC stock (and no insiders have sold) in the last year.

Growth Stock

10. MiX Telematics Limited (NASD:MIXT).
12/31/2014 Price: $
6.50Annual Dividend: ZAR 0.08 or $0.15  Beta:  0.78.  Low Target: $5.  High Target: $20.
8/31/15 Price: $6.08. YTD Dividend: $0.  YTD Total South African Rand Return: 7.6%.  YTD Total US$ Return: -6.5%.

Vehicle and fleet management software-as-a-service provider MiX Telematics announced earnings for the quarter ended June 30th, meeting analyst expectations and continuing the company's trend of 15% annual subscription growth.  However, the stock fell substantially over the two last months in part because of the general market decline, but also because it concluded its strategic review process without the sale of the company that many speculators had been betting on.  The company stated that there had been "significant interest from prospective buyers," so we can only assume that the offers were not at a price that management found attractive.

I believe MIXT is worth at least two or three times its current price, based on its rivals' valuations.  The lack of sale came as a bit of a relief to me: I had been worried that the company might agree to a sale below what I think it is worth.  Instead, it resumed its dividend  of 8 South African cents per year, and will pay dividends for the preceding 5 quarters (ZAR 0.10 or $0.19 per share) on September 18th.  This resulting 2.5% annual dividend from a company that is growing earnings at over 15% per year underscores MIXT as a compelling value proposition.

Buying Opportunities

Two months ago, I called TransAlta Renewables and Capstone Infrastructure the best buys in the list.  Capstone was a good call, but TransAlta Renewables disappointed again, albeit not as much as most Yieldcos.  I suppose I should not complain about getting one winner out of two in the market turmoil of the last two months.  On average, my two picks were flat in Canadian dollar terms, but down 5.5% in US currency.

Right now, I see many excellent buying opportunities, and I don't want to limit them to this list.  On this list, I've currently very enthusiastic about TransAlta Renewables, Ameresco, and MiX Telematics.  Elsewhere, I have been aggressively buying Enviva Partners, LP (NYSE: EVA), Innergex Renewable Energy (TSX:INE, OTC:INGXF), Pattern Energy Group (NASD:PEGI), and Abengoa Yield (NYSE:ABY).

It's no coincidence that almost all of these picks have high yields.  The market correction has been mostly due to overvaluation combined with worries of a worldwide economic slowdown.  If that slowdown materializes, it will put downward pressure on interest rates, which in turn helps income stocks.  The market turmoil itself is also reducing the pressure for the Federal Reserve to raise rates soon or quickly, and this also increases the value of long term income streams.

Conclusion

Although it's been a tough couple of months in the stock market, a correction has been long overdue.  The reminder that stocks can go down as well as up is likely to make investors pay more attention to the risks of the stocks that they buy.  Portfolios like this one, which have a bias towards low risk stocks, should be relative beneficiaries over time.

That said, there is no guarantee that the correction is over, and so while there are currently a large number of very compelling investment opportunities, investors should also be looking at potential ways to free up capital if the opportunities become even more compelling in the near future.

Disclosure: Long HASI, CSE/MCQPF, ACCEL/ACGPF, NFI/NFYEF, AMRC, MIXT, PW, PW-PA, FF, BGC, RNW/TRSWF, REGI.  I am the co-manager of the GAGEIP strategy.

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.

September 01, 2015

Blue Sphere's Eyes On The Horizon

by Debra Fiakas CFA

Renewable energy companies have to worry about flagging commodity prices that make it even more difficult to prove the competitive potential of alternative fuels, as well as possible disruption in the capital markets and valuation multiples which are concerns of all public companies.

Shlomi Palas, the CEO of  Blue Sphere, Inc. (BLSP:  OTC/QB), a microcap in the Crystal Equity Research coverage group, is not dissuaded.  He continues to push forward with the company’s strategy to own and operate biofuel-powered, grid-connected generation facilities.  Blue Sphere has two food-waste-to-energy plants under construction in the U.S. in North Carolina and Rhode Island.  The company is also pushing forward with two additional ‘greenstart’ biogas plants.  Management is working to secure a power purchase agreement for a 5.2 megawatt plant planned near Middleboro, MA, where local governments are keen on keeping food waste out of landfills.  Another waste-to-energy biogas plant is planned near Ramat Chovav, Israel.  The project would for the first time give Blue Sphere an operating presence in its home country. 

It is never easy for developmental-stage companies like Blue Sphere to bring the vision into focus for investors.  With first electricity sales from its North American projects still months away, Blue Sphere is buying four operating biogas plants in Italy, each with a capacity of one megawatt of power and each with a strong power purchase agreement in place.  With closing the Italy plants could deliver Blue Sphere’s first sales to its top-line.  In the company’s quarterly financial report management reveals the continued, but quite protracted odyssey to closing.
Blue Sphere has arranged financing for the Italy power plants acquisitions, putting it in 100% ownership of the plants.  However, to move forward with the two North American food-waste-to-energy projects, the company entered into a joint venture with a U.S. investment fund.  In the end Blue Sphere will lay claim to 25% and 22.5% of the North Carolina and Rhode Island joint ventures, respectively.  The arrangement might have been disappointing to some shareholders who had expected Blue Sphere to retain equity control over the projects.  However, the reality of U.S. capital markets in general and renewable energy financing in particular, has been challenging. 

In 2014, there had been a 17% increase in world renewable energy investment, bringing total new capital to $270 billion for the year.  This was just short of the peak in global investment of $279 billion reached in 2011.  The rebound was due in part to the achievement of an inflection point of sorts.  In 2013, the world added 143 gigawatts of renewable electricity capacity compared to the addition of 141 gigawatts of new plants that burn fossil fuels.  It was the first time that renewable fuel additions outpaced fossil fuel additions.  Bloomberg Energy Finance group estimates renewable energy additions could grow by more than four times by the year 2030, leaving new fossil fuel power plants far behind.  The trend is driven in part by the dramatic decline in the price of wind and solar power sources.
However, in the near-term the falling price of oil has given some investors pause in considering biofuel alternatives for power generation.  It is clouding the investment pitches made by executives like Palas who head up smaller, unproven companies.  It is vital to keep perspective.  In the long term oil, at least oil that is paying its way in environmental cost, cannot compete with renewable fuel sources for power generation.

Oil may be at a low in its cycle and that may be impacting world business.  The specter of oil barrels being sold off for $40 may have rattle some enough to divest of U.S. equities.  However, the entrepreneurial spirit keeps the eyes of Palas and his fellow biofuel development colleagues glued to the horizon, where the price of oil has no relevance in a world powered by renewables.

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.  BLSP is featured in research reports published by Crystal Equity Research.  Please note the important disclosures at the end of all Crystal Equity Research reports.  Please read the important disclosures related to sponsorship and subscriptions in the final pages of all reports.

« August 2015 | Main | October 2015 »




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