Three Renewables Companies: No Pain, No Gain
In California and Canada this week, BioAmber (BIOA), Pacific Ethanol (PEIX) and the former Solazyme (SZYM) reported their Q4 and year-end results, providing between them a fascinating look at the evolution in the fuels, renewable chemicals, specialty products and nutrition that make up the advanced bioeconomy.
In advanced nutrition
The most spectacular news of the week belonged to TerraVia (formerly SolaZyme), which landed a 5-year, $200 million “baseload” offtake deal with Unilever, which provides a huge lift for investors and validates the economics and performance of the company’s first commercial plant, which it operates in a Bunge JV in Moema, Brazil. “Importantly, this agreement was structured at variable cost-plus pricing,” noted Cowen & Company equity analyst Jeffrey Osborne, “enabling this deal to be cash flow positive at the plant level. We expect more deals such as this to be signed in the coming quarters, potentially offering greater visibility for TerraVia’s future vol. production.
The company stunned the market also last week with news of new investors and a re-branding of the company as TerraVia, to emphasize its decision to focus on nutrition and personal care, leaving “industrials” to be spun off at a later date. The Unilever deal, which has been five years or so in the making, which provide wind in the sails for the company, which hasn’t yet announced a fate for its Algenist health & beauty products business but otherwise has clarified its focus going forward around products such as AlgaVia whole flour and its pure food oils opportunities.
As we tipped in our coverage earlier this week of the name change, the company’s progress in industrials had stalled the face of low oil prices, and Q4 revenue was $10.4M compared with $14.5M in Q4 2014. The company has narrowed its net loss to $26.1M in Q4 vs $35.5M in Q4 2014, but the company had expected to be further along in industrial by now, and investors had wearied, with stock prices dropping below $2.
Cowen & Company’s Jeffrey Osborne wrote: “Algae is the next wave in protein ingredients and Solazyme, through is new TerraVia branding, is positioning itself to take advantage of higher margin and more stable applications. The company will predominantly focus on four main areas; food ingredients through its AlgaVia and AlgaWises brands, consumer foods through Thrive, specialty through personal care products with brands like AlgaPur, and through a yet unannounced animal nutrition product. Consequently, Solazyme will be de-emphasizing Encapso, fuels, and lubricants, which comprise the industrial segment of the business.
“We are very constructive on Solazyme’s strategic focus on high value applications of algae strains. However, given the de-emphasis on industrials and concentration on food, nutrients, and specialty ingredients we still see 2016 as a transitional year. The agreement with Unilever provides a meaningful volume baseload for its Moema JV facility with Bunge. As capacity and yields at this facility improve, it could accelerate milestones and allow for JV revenue to be recognized earlier than anticipated. While the exact timing of this event is inherently difficult to time we believe it could serve as a very material catalyst for shares of Solazyme.”
Over in renewable chemicals
For some time, investors and industry experts have pointed to succinic acid as a new intermediate for chemicals and an area where green renewable chemicals can shine. Succinic, say chemical experts, offers new options to make novel, high-performing chemicals that are not as easy or as affordable to maker from the traditional platform chemicals of the petrochemical refinery: Ethylene, Propylene, Butadiene, Benzene, Xylene, Toluene, Methanol.
The biobased advantage in this case? Organics acids like succinic acid contain oxygen, which biomass also contains but petroleum does not. It’s an extra processing step to oxygenate a petroleum-based molecule. So, though biomass starts at a disadvantage in making hydrocarbons, it has an advantage in organic acids — where biology can give us one-step methods of making a target molecule from sugar or plant oils.
Leading the succinic charge has been BioAmber, which concluded a successful IPO and is making and shipping succinic acid out of Sarnia, Ontario. To date, sales have been at the “emerging company level”, reaching $1.1M for Q4 , including initial shipments to PTTMCC Biochem, an important off-taker requiring high purity succinic acid to make bioplastic. However, more than 100 companies tested and qualified the bio-succinic acid produced in Sarnia, and in recent weeks Mitsui & Co. invested $CDN25 million in the Sarnia joint venture, increasing its equity stake from 30% to 40% and committing to play a bigger role in commercialization.
Investors have been encouraged by an average selling price for Q4 2015 above the $2,000 / MT guidance, despite low oil prices. Overall, 2015 revenues were up to $2.2M from $1.5M in 2014, and net loss for the year narrowed to $37.2M from $48.5M in 2014. R&D costs have increased to $20.3 million from $15.2 million in 2015, driven primarily by an increase in expenses related to the commissioning and start-up of the Sarnia plant.
The company’s first commercial plant opened in August at a cost of $141.5M, and volumes specified in signed take-or-pay and sales agreements exceed annual production capacity. Should the company be able to maintain a $2,000 per ton price and reach nameplate capacity of 30,000 tons at Sarnia — well, it’s not hard to get out a calculator and reach $60M in annual revenues. 2016 could well be a mighty year as the company begins to ramp up production.
In conventional biofuels, Pacific Ethanol
In Oregon, Pacific Ethanol reported Q4 revenues of $376.8 million for the fourth quarter of 2015, an increase of 47% when compared to $256.2 million for Q4 2014, and operating income for the Q4 2015 of $0.5 million, compared to $13.6 million for Q4 2014. Net loss for Q4 was $1.1 million compared to $11.9 million for Q4 2014. Cash and cash equivalents were $52.7 million at December 31, 2015, compared to $62.1 million at December 31, 2014. For 2015 as a whole, the company reported a net loss of $20.1M compared to $19.4M for 2014.
Neil Koehler, president and CEO, stated: “In 2015, we made significant progress in positioning the company for long-term growth. We completed our acquisition of Aventine in July, more than doubling our production capacity. Our expanded footprint is demonstrating operating benefits. The diversification of geography, technology, feedstocks and products strengthens our performance across margin cycles and provides a strong platform for growth.
Look for less production in Q1 2016.
Koehler notes, “we are moderating production levels to match supply and demand. While the demand for ethanol continues to grow, current industry ethanol inventories remain high. We are confident that the fundamentals of ethanol as a valuable source of octane and carbon reductions will support continued growth in demand and improved production margins.”
Cowen & Co’s Jeffrey Osborne wrote: Pacific Ethanol reported revenue below estimates but beat on earnings. The oversupply theme of 2015 continues to remain the biggest concern going forward. While management is hopeful that the end is near due to growing demand, they are planning for the trend to continue in the near to mid term by reducing capacity..our implied equity value reflects a price target of $10.00 per share.”
What do these three companies share, and where do they differ?
The search for volume is a connecting point.
In the case of Pacific Ethanol, they’re producing at scale but moderating production — as we expect other first-gen producers may do — to shore up the fuel price. Demand has grown for ethanol with rising vehicle miles and small upticks in Renewable Fuel Standard volumes and growing exports, but not as fast as supply has grown. Bottom line, lots of established customers, and more of a case of right-sizing the production for the margins.
In the case of BioAmber, it’s a matter up ramp-up on production without sacrificing price — as the $2000 per metric ton price is a good sign but the volumes have been scanty to date and the company is now at commercial-scale and poised to grow, fast. So, lots of potential customers — a matter of scaling up production at effective yields.
In the case of TerraVia, a more complex task. There’s a focusing going on in the customer base at the same time as the company is ramping production.
One of the more interesting points of comparison, though — is the contrast between the search for focus and the search for diversity. BioAmber finds itself keeping a focus on its single molecule and process, and diversifying the customer and investor base. Making its molecule multi-functional, that’s a key — new things you can do with succinic acid, in short. TerraVia, is also diversifying investors and customers, but continues to aim at diversifying its range of molecules. In short, new applications through new oils. Yet, a single technology, in this case algae fermentation.
Pacific Ethanol, that’s the outlier here.
It’s diversifying in all directions, as are all conventional, or “first generation” companies. They’re acquired Aventine to achieve economies of scale; they’re diversifying the customer base through exports. They’re diversifying the product line — adding corn oil extraction which has opened up new customers for them. In partnership with Edeniq, they’ve added cellulosic production which they get out of the cellulosic material in the corn kernel. And, they remain heavily invested in the nutrition space, through the animal protein business of the dried distillers grains (DDGs).
Some of their peers have also explored adding CO2 liquefaction to turn that CO2 gas into an asset. Call it a gasset. And, others in the first gen space have experimented with renewable natural gas and sorghum as a feedstock to qualify for advanced biofuels RINs.
Diversification vs focus
Bottom line — all pursuing growth but PEIX is approaching through diversification of feedstocks and technology, as opposed to focusing the technology and diversifying the customer base through new applications.
Experts differ on the merits of focus vs diversification almost as much as they differ on whether companies should be organized around customer sets, product lines, or regions. It’s the age-old debate, and it’s now invading the renewables space.
Diversification means risk-spreading, and that’s a good thing. Focus means putting resources onto the most important opportunities, and that’s a good thing.
Here in Digestville, we see diversification as a stronger strategy — though resources are hard to come by and the investors who provide them are known to have epic issues with attention-deficit disorder when the results come in more slowly than expected, and costs rise.
The reason is this. Aside from a handful of experts, some profiled recently in The Big Short, who correctly called the timing on the Great Recession of 2008-10. Who foresaw the problems with weapons of mass destruction repiuted to be in Iraq? Who called the timing well on the rise of fracking, or the 2014-16 crash in commodity prices?
We live in a world of global macro — macroeconomic events that shift the microeconomic landscape that renewables compete in, like seismic waves rolling through the San Andreas Fault. The world of $80 oil was expected to begat cellulosic ethanol — instead, we saw driving miles drop, fracking take off, and interest in electrics soaring. Meanwhile, fuels producers began to chase chemicals, which welcomed new sources in a world of high commodity prices. But now, chemicals find challenges and though fuels protected by the Renewable Fuel Standard are doing fine so long as there is not over-production — many technology developers are targeting protein, and nutrition as a whole.
The Summer of Fish Meal
It’ll be the summer of Fish Meal, perhaps. But where will the next set of trends take us? Hard to say, because we live in a macro world — to some extent influenced by global interest rate policy, or social factors that influence cartels such as OPEC.
How do renewables companies find strength through diversification when the resources that diversity demands can drain a treasury. The secret lies in partnership based on the search for an alternative to economic, social or climate pain.
No pain, no gain
Renewables, they’re a therapeutic for what ails us, and the natural first customer for an experimental therapeutic is the patient at the greatest risk, feeling the greatest pain. It’s pain that drives companies to complete tasks — groups driven by perceived opportunity have been known to be fickle — dirfiting to the next glowing target like moths to a flame.
Pain focuses, clarifies, and makes change inevitable and drives us to the finish line. If there’s pain the sector, there’s no gain without it.