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May 30, 2017

Smarting Up Electrical Grids

by Debra Fiakas CFA

My recent post “Bull Case in Rick Perry’s Grid Study” highlighted efforts by U.S. Energy Secretary Rick Perry to help the coal industry with a study of the U.S. electrical grid.  Coal has long claimed advantage as a ‘dispatchable’ power source, i.e. a consistently available power source suitable to supply power for the base load.  Technology is making base load less important.  Indeed, modernized or ‘smart’ electrical grids are making it possible to take advantage of low-cost renewable power sources even though they produce power intermittently and are therefore considered ‘not dispatchable’.

The preference of market-based electric grids for the lowest-cost producer is what has got the coal industry in a knot as power generated from cheap natural gas wins out the daily bidding process.  Even intermittent power sources such as wind and solar can beat out coal-fired power plants.      When wind and power sources are in operation at some scale their marginal cost is low (and getting lower according to the National Renewable Energy Laboratory) and therefore the asking price to the electrical grid is low.  As electricity demand escalates the grid operator casts about for additional power from the next lowest priced power source.  At some time during normal operating conditions, as more power is needed, wind and solar sources will rank as the next lowest-cost power source and beat out a coal-fired power source.

Investors can take a cue from the Perry grid study by going long companies with technologies and know-how that make it possible to deliver power at the lowest possible cost.  Following are few companies that are helping to ‘smart up’ the U.S. electricity grid.

An electric grid is smart when its can optimize electricity utilization and interact with consumers and markets.  EnerNOC, Inc. (ENOC:  Nasdaq) describes itself as a world leader in energy intelligence.  Among other energy management products for industry and business, the company provides demand response solutions and energy management software to customers in the U.S. and around the world.
Demand response is a communications link between the power grid operator and large electricity users, making it possible for grid operators to cue these large customers that electricity demand is on the rise.  Participating electricity users can then temporarily reduce their energy use during these periods of peak demand and get rewarded with special low rates.  Even with offering lower rates the utilities and grid operator benefit from the smoothing effect the demand response system has on electricity demand.  The grid operator does not as frequently have to reach out to higher-cost power providers and can more frequently tap power from intermittent power generators.

EnerNOC reported a net loss of $41.9 million on total revenue of $398.7 million in total sales during the twelve months ending March 2017.  As worrisome as that large loss might seem, it is not as troubling as the fact that the company burned up $39 million in cash resources to support operations during that period.  To keep things going as EnerNOC struggles to right the ship, the company has tapped credit markets.  The total debt to equity ratio is 141.88.  The company has $74 million in cash on its balance sheet suggesting that it still has some staying power to see its strategic growth plan back to breakeven.   

MasTec, Inc. (MTZ:  NYSE) is an engineering, procurement and construction company focused on the energy and utility infrastructure sector.  An electric grid is considered smart when its can self-monitor its equipment and components.  Among a long list of infrastructures, MasTec delivers on smart grid projects for utilities, including smart-metering, energy controls and monitors, and other technology solutions designed to regulate power flows.

The company is also experienced in wind, solar and geothermal power construction, but has made wind power a specialty.  For example, MasTec constructed 32 miles of 34 kilovolt electric power lines to collected power from a new wind farm for Transcanada.  In White Lake, South Dakota, MasTec erected 108 wind towers with 1.5 megawatt turbines for the Crow Lake Wind Farm owned by the Basin Electric Power Cooperative.  MasTec uses its extensive knowledge of electric generation and transmission to connect and deliver high voltage power in the most efficient network.

In the twelve months ending March 2017, MasTec earned $174.9 million in net income or $2.13 per share on $5.3 billion in total revenue.  Operating cash flow generated during the period totaled $343.9 million, representing a sales-to-cash conversion rate of 6.5%.  If that achievement is not impressive enough, note that return on equity is 17%.

Analysts expect the good times to continue rolling for MasTec. The consensus estimate is for $2.46 per share in the year 2017.  This represents a growth rate of 15.5%.  We note that MTZ shares are trading at 15.1 times forward earnings, suggesting that the stock is just at fair value. 
 
Quanta Services (PWR:  NYSE) is another engineering, procurement and construction company based in the U.S. and claims to be the largest electric transmission and distribution specialty contractor in North America.  The company has an engineering design and planning team focused exclusively on smart grid technologies.  The company puts particular emphasis on information technology systems as needed for achieving a truly ‘smart’ grid.  Two-way communications systems, automated feeder switches and phasor measurement units to monitor grid stability are part of a sophisticated network solution.  With a robust IT solution the grid is able to integrate renewable energy sources by nimbly switching among sources as they generate power.  This process levels out power availability, thereby reducing dependence upon high-cost ‘dispatchable’ sources.

Quanta is significantly larger than MasTec as an EPC services provider, but is not quite as profitable.  Quanta reported net income of $226.5 million or $1.45 per share on $8.1 billion in total sales in the twelve months ending March 2017.  Sales-to-cash conversion was only 2.1% in the year.  Furthermore, Quanta is only earned 6.9% on equity.

Shares of Quanta are priced at 13.4 times forward earnings and therefore present a bit of a bargain compared to MTZ.  Perhaps more importantly, PWR shares are a less volatile with a beta of 0.74 compared to a beta of 1.88 for MTZ.

Silver Springs Network, Inc
. (SSNI:  Nasdaq) offers a solutions to enable communications between devices and the power grid.  The SilverLink system provides utilities with data to improve and even automate power management decisions.  The company is particularly focused on integrating distributed energy resources to the electrical grid, and touts its communications and intelligent control solutions for utilities.  Silver Springs also uses a novel concept of ‘virtual power plants’ to created greater reliability in distributed energy resources.
Silver Springs reported a loss of $26.3 million or $0.51 per share on $312.7 million in total sales in the twelve months ending March 2017.  However, cash flow from operations was a healthy $18.6 million or 5.9% of sales.  The benefits of internal cash generation can be seen on the balance sheet with $116.6 million in cash at the end of March 2017 and no debt.

Analysts anticipate even better times ahead the consensus estimate is for net profits $0.30 per share in 2018.  The stock is currently trading at 32.8 times that consensus estimate.

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.

May 24, 2017

Amyris: 90 Days To Build The Future

Jim Lane
BD-TS-052217-Amyris-cover[1].png

In California, Amyris (AMRS) reported Q1 revenues of $13.0M compared with $8.8M for Q1 2016, and touted the “significant increase in product sales, primarily in the personal care and health and nutrition markets, offset by a slight decline in collaboration revenue.” Collaboration revenues contributed $4.7M and product sales added $8.3M for the quarter.

Big Q1 miss vs analyst expectations

As Jeff Osborne at Cowen & Co noted, “Amyris reported revenue of $13.0mn, well below our estimate of $37.1mn due to much lower collaboration payments than we had anticipated. Management has highlighted that these payments can be very lumpy in nature, and attributed the miss to a failed milestone payment from Ginkgo Bioworks. Gross Margin of 2% was well below our estimate of 40% due to the lower collaboration payments.”

A turning point of interest

We liked one item more than anything.

In Q1 2016, product sales were $5.2M and the cost of product sales were $11.2M, and a number of informed observers became alarmed that the company was losing money on every product produced, and that growth would be unsustainable. The company noted the concerns but said that future sales would arrive with stronger gross margins.

So, let’s look at Q1 2017.

And indeed, the company has staged a turnaround in that critical metric. In Q1 2017, product sales were $13.2M and the cost of product sales were $12.8M. IIt’s a rretunr to the kind of gross margins that company had achieved by Q3 2016 — but with a 50% jump in revenues. Long ways to go before the company is out the financial woods, but we may see here a turning point.

The big hit is Biossance

The company recorded record quarterly Biossance sales following successful launch into Sephora with the brand delivering high growth and expected to drive much better than expected 2017 results — growing from approximately $500,000 in 2016 total retail sales to over $10 million expected for 2017

The big miss is Ginkgo

There wasn’t much insight offered regarding the Ginkgo situaiton, excepting that a mysterious milestone payment was missed — apparently, a huge one, because the miss on revenues compared to analyst expectations was almost $24M.

Indeed, the scale-up news from the Ginkgo universe this past week went in a completely different direction. Ginkgo Bioworks and Robertet USA completed the commercial-scale fermentation of “a key flavor and fragrance ingredient” – which one, we don’t yet know. The specific scale was 50,000 liters.

But think along the lines of rose oil ingredients and lactone ingredients — that’s the Robertet sector. Overall, Ginkgo has a portfolio of over 40 products under contract with 20 customers.

The Q1 developments that will impact 2017 and 2018

The company highlighted three major developments that will positvely impact the company this year and next:

  • Growing Farnesene for Vitamin E oil from around $6 million in 2016 to around $20 million in 2017
  • Significant progress in healthy sweeteners with expected commercial production in 2018 of low cost, best performing healthy sweetener to focus on sugar replacement market
  • Announced up to $95 million in anticipated equity financing led by Royal DSM along with institutional investors over two tranches and announced in-process reduction of the company’s debt by approximately $75 million, significantly strengthening the company’s balance sheet

Happy Campers at Camp Amyris

“We are pleased with our continued execution delivering increased product sales and very healthy revenue growth for Amyris,” said John Melo, Amyris President & CEO. “We are very excited to join with Royal DSM to accelerate product sales in health and nutrition markets, deliver better performing products and accelerate market access. With their support and that of our investors we have significantly strengthened our balance sheet and the company’s foundation as a leading company in its sector.”

Continued Melo, “Our product portfolio is growing at a faster rate than we expected within nutraceuticals, skin care and fragrance ingredients. We have evolved our business to predictable quarter on quarter product sales and continue to deliver on our strategic milestones for delivery of our collaboration revenue. While our competitors struggle to deliver material revenue and predictable growth we expect to deliver around $60 million of product revenue for 2017, or more than double from 2016, and we expect total revenue to be better than our 2017 plan.

The Bottom Line

It’s the 5th consecutive quater of year on year product revemue growth, and the company is targeting $115-120M in revenue in 2017 and of that $60M is expected to come from product sales.

In 2018, guidance is at $160M for product sales.

All that’s the good news. Here’s the bad news, Amyris has been pushing back it’s time to $100M in revenue for some time. Back in May 2016 we heard from AMyris that it was “On track to execute 2016 business plan with expected non-GAAP revenue of $90-$105 million for the year.” The company ended up with $67M for the year — and with a $13M result in Q1, the company will need to average out at $33M per quarter to reach its $115M target in 2017.

Needless to say, the next 90 days are perhaps the most important in the company’s lifespan. There’s a time for building the long-term future and there’s a time for delivering on stated goals. Wall Street may well be able to put the past in the past with all forgive if Amyris can break out and hit that $100M revenue threshold, and even with a strong second half, the company will need to reach something like $30M in Q2 revenue to maintain belief, given the 2016 miss.


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.

May 21, 2017

Ethanol and Biodiesel: Production Cost and Profitability

For a number of years, this (now old and outdated, but) very useful chart has been in circulation in energy circles, mapping the supply of energy to the world by looking not at prices, but at production costs.

For one thing, it goes a long way to explaining why the price of oil can tumble so quickly when there is a fall off in demand, and explains why OPEC is troubled by unconventional oil in a way it is not so bothered by other energy sources such as renewable fuels.

Renewables not only have been traditionally at the expensive end of the curve, the supply has been generally quite limited when we look at total global demand. OPEC makes so much money off $100 oil that they don’t mind sacrificing a few market share points to other fuels, when demand spikes and prices reach those levels.

The shale oil revolution and its impact

Conversely, shale oils uncovered through US fracking operations — to use another example — are able to supply lots of oil to meet world demand at prices well below the OPEC target, and they can also be competitive with some of the more expensive conventional oils. So, they bite into market share and also price.

Updating the charts: Where does ethanol fit now in the cost curve?

Back then, ethanol fitted in the $90-$120 per barrel slot. But today, the cost of production has changed, dramatically. You can see it in this wonderful data set that Bruce Babcock and the Center for Agricultural and Rural Development at Iowa State have maintained for many years.

As you can see from the hard data, the production cost for ethanol today is $1.22 per gallon, which translates to $51.24 per barrel. Now, on an energy basis — given that ethanol has 67% of the energy content of a barrel of oil, that translates to $76.86 on a barrel-of-oil-equivalent basis.

To make a fair comparison, we have to take into account the refining cost of making gasoline — we need to compare finished ethanol and finished gasoline, not compare corn to gasoline or ethanol to crude oil. Estimates of the variable cost of refining are not easy to obtain and vary based on the product mix, cost of utility power and so on, but tacking on at least $4 per barrel is fair (this older estimate from PSU puts it at $20). The EIA has this data from 2012, here.

$76 is well above today’s oil price, even if you tack on $4 for refining costs to make gasoline. But it’s not well above the price that oil is expected to reach by next year, according to the wizards at Raymond James (whose energy desk correctly forecast the collapse in oil prices, so we approach their forecasts with great respect, although timing is always an issue with any projection). They expect oil to reach around $70 per barrel by the end of 2017. Of course, we’ll wait to see what impact that might have on corn prices, the price for DDGs and for corn oil — but it would be a remarkable step in ethanol’s journey.

We’ve put the latest data from the IMF, and the new numbers for renewables, into the chart you see below.

As Aemetis CEO Eric McAfee notes:

“The general perception is that biofuels are more expensive to produce than petroleum fuel products. That perception is not accurate for the net cost of production of ethanol in the US after considering the value of animal feed byproducts (DGrain and corn oil) and CO2 production for the human food market.”

The impact of carbon on profitability

Let’s look at the impact of carbon.

Under the Renewable Fuel Standard, there’s an implied carbon credit for ethanol, and that’s in the value of the D6 RIN.

And that tells you that there’s a significant inflection point in ethanol and gasoline prices, and it’s this. If, one day, the production cost + the RIN cost of corn ethanol falls below any given source of conventional oils, it just makes economic sense for an obligated party to switch towards increased renewables production (as opposed to, say, investing in tight oil operations) — not because of obligations to government, but because of obligations to shareholders. That’s a step-change.

And it’s getting close. Thanks to the pricing data from our friends at PFL, we see that the D6 RIN is trading at 41 cents per gallon.

That adds $17.22 in carbon value to a barrel of ethanol. Putting the ethanol production price together with the RIN price, it makes sense to buy or make as much ethanol as you can stuff into the system — mandated or not — starting at $55 per barrel.

That’s not far at all from the world oil price.

Over to the biodiesel side

All the same math applies in the world of biodiesel, but there are different data points. So let’s look at those.

Starting again with CARD’s data on operating costs, the production cost of biodiesel right now is at $2.76 per gallon, or $115 per barrel.

It happens that CARD data is based on the soybean oil price of $0.31 cents per pound. Technologies that can use recycled oils that are sold as low as $0.22 per pound will have a production cost of roughly $2.61 per gallon. Now, biodiesel is much closer to petroleum on energy density — it’s between gasoline and diesel. So, depending on whether you want to compare biodiesel back to gasoline that comes out of a barrel of oil or to diesel, you’ll come up with a production cost range (on a barrel of oil equivalent basis) of $105-$115, after we’ve adjusted for energy density.

So, biodiesel is well above the $52 Brent crude oil price, right now. But biodiesel RINs are more valuable, and close the gap a little. According to PFL, D4 biomass-based diesel RINs are trading at $1.03 per gallon, and are adding $43.26 to the value of the barrel.

Putting the production price together with the RIN price, it makes sense to buy or make as much biodiesel as you can stuff into the system — mandated or not — starting at $62-$72 per barrel. That’s high compared to today’s price, but inside the predicted crude oil price of $70 that we referenced above.

So, we live in interesting times — and we’ve charted the costs and supply figures, taking carbon into account, in the chart below.

Considering California

When we look at the California market and its Low Carbon Fuel Standard (and Oregon, too, which also has an LCFS) we are looking at a different animal, since the carbon value is added on top of RIN credit values.

Right now, our friend at PFL advise that the LCFS credit price is at $74 per ton of carbon avoided. For locally-produced ethanol, that means around an additional $6.21 per barrel for ethanol delivered into the California market.

For biodiesel, the credit bites harder because biodiesel really, really reduces carbon. The LCFS credit translates into around $26.64 in added value for biodiesel.

Putting the ethanol production price together with the RIN price, it makes sense to buy or make as much ethanol as you can stuff into the California system — mandated or not — starting at $49 per barrel.

Putting the production price together with the RIN price, it makes sense to buy or make as much biodiesel as you can stuff into the system — mandated or not — starting at $36-$46 per barrel.

We’ve charted all that in this California-only chart below.

Two Takeaways

The current barrel of oil costs $49.38 (WTI) and $52.52 (Brent) right now. Which tells you two things:

1. The renewable fuel credit markets work with remarkable efficiency, after just a few years in operation. The credits reach almost exactly where they should, because a credit should in some ways make a mandate obsolete, it should incentivize a market player exactly to the point where they have a financial gain from deploying a renewable fuel. In the real world, incumbents don’t act with perfect economic rational actors, but you get the idea.

2. In California at least, a remarkable threshold has in fact been reached. In the actual markets that exist – carbon and fuel markets — ethanol and biodiesel have achieved market parity. Now, you can argue all night that carbon markets are not free markets — they are created by government fiat. And, you can argue all night that fuel markets are not free markets — they are created by cartel fiat. And you’ll find supporters and detractors by the zillions, and the shouting will drive you crazy.

But they are markets, and they are the markets we have. And don’t get me started on how free and transparent financial markets really are, Mr. Madoff. But they are the markets we have, and in the markets we really have, we can say that markets in California are telling us this:

You can make more money producing ethanol than producing gasoline from petroleum, according to our math. And investors might take note — because making money is generally what investors are trying to accomplish in the petroleum markets.

So, a step change worth noting.

[A brief explanatory note. As a sharp-eyed Digest reader noted, the CARD model tracks what may be considered “operating costs” and excludes amortization, depreciation and so forth — if all those were added in, the “production cost” would be higher — as high as $1.46 per gallon, vs $1.22 per gallon. So, why exclude those? As it happens, the EIA model for oil refinery costs (that we noted above) also excludes amortization, depreciation and so forth, which is why the refining add-on is $4 per barrel instead of $20-$30. Since we don’t have a good source of overall oil refinery costs, these capex related costs were excluded for both, to esnure that we are comparing apples to apples. If you like, you can add $10-$15 per barrel to both sides of the equation to account for these charges, and it doesn’t change the comparison, but you may feel that although it would be an approximation, it may be closer to a fully-loaded “production cost” as opposed to an “operating cost”.]

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.

May 18, 2017

US Geothermal Fizzles

by Debra Fiakas CFA

Geothermal power generator US Geothermal (HTM:  NYSE) came up short in reporting financial results for the first quarter ending 2017  -  at least from the perspective of the four analysts with published sales and earnings expectations for the company.  Operating revenue of $8.4 million slipped slightly from the same period a year ago, but produced slightly lower net income of $1.1 million.  The company’s share was $260,000 or a penny per share.  Not good enough say the analyst’s who were collectively looking for two pennies per share in earnings!

Missing earnings expectations has become a bad habit for US Geothermal, having failed to clear the consensus hurdle three quarters in a row.  The previous missed had resulted in modest trimming of expectations.  Investors should be prepared for another round of nipping and tucking in revenue, profit margin and earnings predictions.  The steady drumbeat of lower numbers, and the muted commentary that comes along with it, is usually a drag on share price.

Investors have to question whether a period of price weakness is a good time to pick up shares of a quality company at bargain prices…or a time to run for the hills.  It is May after all, when it is ‘time to sell’.

From a revenue standpoint, US Geothermal benefited from increased output at its Raft River facility after installation of a new production pump at one of the Raft River wells.  That installation was completed in late March 2017, suggesting that the real impact will not be observed until report of the June 2017 financial results.  Unfortunately, the company also faced a setback in the quarter.  The Neal Hot Springs Unit 1 was out of production for five weeks in late January and early February 2017, after vaporizer tubes froze.  The company reported a negative impact on power generation valued at $830,000 due to the equipment failure at Neal Hot Springs.

Total generation was 89,613 megawatt hours in the quarter compared to 93,787 megawatt hours in the same quarter last year.  With Raft River up 100% during the quarter and San Emidio follow up in second place with 98.6% availability for the quarter, it was really Neal Hot Springs with just 82.5% availability that was the cause of the slippage in power production in the quarter. Fortunately, business interruption insurance will cover about 38% of the lost revenue. Property insurance will provide another $2.0 million to repair and replace the damaged equipment.

Management seemed unfazed by turn of events at Neal Hot Springs, reiterating previous guidance for revenue and earnings in 2017.  Revenue is expected in a range of $30 million to $34 million, providing net income in a range of $4 million to $8 million.  US Geothermal’s cut of net income would be $1 million to $4 million.  Thus it would seem that Neal Hot Springs is fully back to normal and with the increased production at Raft River, management is apparently expecting another decent year.  The increased output from Raft River in the first quarter was valued at $200,000 for about one week of power generation.  Simple math provides an incremental addition of $1.2 million for a full quarter, more than enough to make up for the shortfall from Neal Hot Springs in the first quarter.

Importantly, management’s guidance is based on existing production facilities.  There are expansion projects in the works, but potential power from these projects is not included.  Altogether the development pipeline encompasses 115 megawatts of incremental power production capacity.
  • Progress has been made at the Geysers in California where the company is at the point of sourcing turbine generators and is negotiating a power purchase agreement with a single buyer.  The company is targeting end of 2018 for bringing the project on-line.
  •  The company has received permits to deepen three wells in its San Emidio II reservoir in Nevada that could elevate power production at that location from the current 10 megawatts to over 40 megawatts.    Drilling will commence this year when spring weather conditions allow.
  • Additionally, at San Emidio an application for new development of three power plants, twenty wells and a power transmission line has already been submitted to the U.S. Bureau of Land Management.  The company has targeted 25 megawatts to 45 megawatts as the ultimate resource size for this latter expansion project.
  • A geothermal power production project in El Ceibillo in Guatemala is awaiting a request for proposals from the government, to which US Geothermal is planning a competitive bid.  The process is expected to unfold yet in 2017.
Successful commissioning of all these projects would more than triple the size of US Geothermal’s power production capacity, which is around 45 megawatts today.  It will not be accomplished at the hand of current chief executive officer Dennis Gilles.  In late April 2017, the board of directors issued a cryptic press release indicated they would not be extending the employment agreement with Gilles.  A search committee will be looking for a successor to take over after Gilles’ current contract expires in July 2017.  Gilles may still have an influence over operations through an advisory agreement.  If the board could not accept an extension to his employment agreement, what foundation could be built into an advisory role that would be more palatable?

The market has had an opportunity to fully digest the news of Gilles department as CEO.  However, slippage in the first quarter production reminds investors of the many moving parts and sources of business risk inherent in geothermal power production.  Knowledgeable leadership is a key hedge against those risks.  The specter of a shuffle in the boardroom is likely to resurface as a source of worry in the coming weeks.  Thus the price weakness that might ensue following a 'quarter earnings miss' might be deeper and more protracted than usual because of leadership change.

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.

May 15, 2017

Ocean Power’s Stock Offering

by Debra Fiakas CFA

The first two lines of the prospectus for the April 2017 public stock offering by Ocean Power Technologies (OPTT:  Nasdaq) say all investors need to know about the market opportunity for the company’s wave power generation products.  First, the earth’s surface is covered 70% by water.  Second, over 40% of the world’s population lives within 150 miles of a coastline.  If the earth is dominated by water and a good share of our energy-hungry population lives near that water, doesn’t it make sense to turn the ocean into a renewable energy source?
If market opportunity based on common sense was all required for a stock offering, Ocean Power might have been able to sell new shares nearer its 52-week high price of $15.65 rather than a penny below the 52-week low of $1.31.  In the final trading days leading up the pricing on April 27th traders paid as much as $3.67 for the shares.  However, underwriters were frightened off, setting the offer price at a NEW 52-week low.

Perhaps there is more to prove than market opportunity…or market opportunity is not what it seems.

One question mark could be the company’s flagship technology.  Ocean Power Technology is on the cusp of commercializing a line of ocean wave conversion systems branded PowerBouy.  The PB3 PowerBuoy is intended for use in remote locations off-shore and can generate up to three kilowatts of peak power.  It comes with an energy storage system that has a 150 kilowatt hour capacity.  As we have noted an earlier article in September 2016, “Navy Buoys Up Ocean Power Tech”, the U.S. Navy has been an early and loyal follower.  The Navy’s product development grant was on top of a deal discussed in an earlier article “Ocean Power Nets A Discerning Buyer” in June 2016, which described a lease of the PB3 by Mitsui Engineering and Shipbuilding.

Thus it seems PB3 PowerBuoy is likely a strong product, built on sound technology and delivering the performance its engineers have promised.  Testing by two high-profile customers provides strong endorsement.  However, the intended applications for the PB3 in remote locations are a long way from “the 40% of the world population that lives 150 miles from the coast.” If the intended market is only in remote locations, market opportunity might not be as suggested by the opening lines of Ocean Power’s prospectus.

Ocean Power has identified four different types of customers:  oil and gas, defense and security, ocean observing and communications.  The ocean is a busy place and there are numerous installations in each of the four categories.  On the plus side, potential customers would be easy to identify and target with marketing and sales campaigns.  Ocean Power is even narrowing its target markets to certain of plum geographies to make the most of its new capital resources.  Then again, demand, especially in the oil and gas sector, might be subject to periodic peaks and lows as each customer group contends with own business cycles.  Perhaps most important, the remote location market will be rife with competing energy solutions, such as solar power, fuel cells or systems using conventional fuel.  Management contends its solutions will be viewed as a cost-competitive solution, and this may be necessary to gain a place at the table.

Investors might now be getting a hint as to why the OPTT offer price was set at a record low level rather than at a high.  Even if market opportunity is not as significant as is implied by the ‘40% of the population’ opening line of the prospectus, Ocean Power may still have a place in the hydrokinetic energy industry.  The company will be among few bringing ocean power solutions to remote installations in those very waters.  That should provide some upside to the $1.30 follow-on offering price.

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.

May 11, 2017

Icahn’s Pig in a Poke

By Brent Erickson, Biotechnology Innovation Organization

Members of the U.S. Senate are questioning whether Carl Icahn’s lobbying to change the Renewable Fuel Standard creates an ethics conflict with his role as advisor in the Trump administration. In addition to the ethics question, Members of Congress and some in the biofuels industry should examine whether Icahn could even deliver on the purported quid-pro-quo even if he wanted to.

In late February 2017, Icahn and a biofuel trade association reportedly discussed a presidential executive order to make Icahn’s desired change to the RFS Point of Obligation (the so-called POO) in exchange for modifications to unconnected policy priorities for biofuel producers. The proposed “deal” essentially was a non-starter, since altering federal policies is a far more challenging task than Icahn or his partners care to admit publicly. In short, the reported “deal” cannot be accomplished simply by waving a magic wand or through a presidential executive order.

Icahn claims the RFS exacts a disproportionate toll on his business interests, and he therefore wants to move the POO as far from CVR as possible. Icahn Enterprises owns 82 percent of CVR Energy, which includes two oil refineries – one in Kansas and a small one in Oklahoma – and a rack marketing terminal for selling finished fuel. Despite owning the rack terminal, CVR protests it cannot blend enough biofuel to meet the obligation and must therefore buy Renewable Identification Numbers (RINs) on the market. However, Reuters has reported that CVR sold RINs on several occasions in the past year, creating a short position in the market and apparently gambling that it can escape the obligation or buy the RINs back at a deflated price. Based on Reuters’ reporting, Icahn has made a $50 million windfall on the deal, and Senators are now asking whether he influenced RIN prices through his connections to the administration and campaign while making the trades.

When Icahn was named a special advisor to the President on regulatory reform in December 2016, many different stakeholders erroneously believed he would quickly push through changes to the RFS and exempt his refineries from having to purchase RINs. Indeed, the “deal” presented to the White House by Icahn this past February was purported to be “non-negotiable.” But federal laws are made of sturdier stuff than that and several prior attempts to move the POO are now stumbling blocks to Icahn’s goal.

In November 2016, EPA proposed to deny petitions filed by the American Fuel and Petrochemical Manufacturers and several independent refiners asking the agency to change the point of obligation. Notably, not all petitioners agreed on who should be obligated, and some of the various petitions may not have exempted CVR. EPA made a strong economic case that moving the POO would not increase production and use of biofuels, as petitioners claimed; in fact it would likely disrupt RFS stakeholders’ investments and thereby decrease biofuel use. By law, if EPA now decided to reverse itself and move the POO, it would have to present a rational argument for doing so – one that countered its own previous evidence. An executive order to change the POO would likely face a Court challenge. EPA would have to undertake a new rulemaking and respond to comments from numerous groups opposed to moving the POO, including most biofuel producers and several oil producers.

The other part of the February “deal” floated by Icahn offered a few tidbits for the ethanol industry. Chief among them was a waiver of gasoline volatility standards for blends of 15 percent ethanol (E15) to allow E15 to be sold in summer months. Gasoline evaporation contributes to ozone formation. Ethanol burns cleanly, decreasing engine tailpipe emissions, and therefore the standard 10 percent ethanol gasoline blend (E10) earns a small waiver of evaporative emissions limits. E15 blends reduce both evaporative and tailpipe emissions compared to E10 but don’t qualify for the waiver because Congress’s 1990 amendments to the federal Clean Air Act specify E10. A White House executive order on E15 does nothing to change EPA’s well-documented position on the matter or alter the legal or procedural landscape around the issue. Even worse, EO’s are not legally binding. So the biofuels industry would have no recourse to force regulators to follow through on the E15 waiver.

Icahn’s “deal” was rumored to offer the ethanol industry changes to EPA’s Motor Vehicle Emission Simulator (MOVES) model, which is used by the agency and states to develop policies to meet National Ambient Air Quality Standards (NAAQS). The MOVES model is indeed flawed because it uses input parameters from an April 2013 fuel study that was basically designed to attribute tailpipe emissions to the ethanol content in the gasoline. So, to correct the flaws in the model, EPA must redo the study. But in April, the Trump administration proposed to eliminate funding for the EPA office that conducts fuel and engine tests, creating a new potential hurdle that – at a minimum – would conflict with any potential executive order to change the MOVES model.

The most absurd part of the Icahn “deal” was a proposal for the extension of the $1 per gallon biodiesel tax credit, which expired at the end of 2016. The White House does not have the authority to grant this or any other tax policy via executive order. Tax policy is set by Congress and Presidential recommendations mean little on Capitol Hill.

The biofuels industry has opposed moving the POO primarily because it would require lengthy rulemaking and disrupt an RFS program that only recently got back on track. Further delays and uncertainty on something as fundamental as who’s obligated will hurt advanced biofuels producers more than most. Even the American Petroleum Institute (API) opposes changes to the POO.

But the real problem here is even if you like the alleged carrots Icahn dangled in front of ethanol producers to justify moving the point of obligation, an executive order does nothing to change the federal Administrative Procedures Act or the other bodies of law that will prevent the industry from collecting on the “deal” after we’ve given Carl Icahn what he wants.

Brent Erickson is executive vice president in charge of the Industrial and Environmental Section at the Biotechnology Innovation Organization (BIO). BIO represents more than 1,200 biotechnology companies, academic institutions, and state biotechnology centers across the United States and in more than 30 other nations.

This article was originally published on Biofuels Digest is the most widely read  Biofuels daily read by 14,000+ organizations. Subscribe here.

May 04, 2017

Amyris Boards The Sweet Fleet

Jim Lane

Back in September 2015, we reported that Amyris inked a multi-year agreement with the US Defense Advance Research Projects Agency, the famed DARPA that gave us everything from kevlar to the Global Positioning System and the Internet — the goal in this $35M agreement with the Biological Technologies Office was to create new research and development tools and technologies — compressing the time to market for any new molecule by at least 10-fold in both time and cost.

The story expanded this week when we heard from Amyris (AMRS) that it had completed strain engineering and optimization to 26 key metabolic precursors across multiple organisms – including many different pathways beyond terpenoids allows Amyris to develop an industrial-scale fermentation process for virtually any biological molecule.

In addition to the expansion of the range of metabolic precursors, Amyris has revealed that it has now expanded its high-throughput yeast strain construction and testing pipeline to several other industrially-relevant organisms.

Living Foundries

The DARPA was called Living Foundries.

The molecules were anticipated to include chemical building blocks for accessing radical new materials that are impossible to create with traditional petroleum-based feedstocks.

These advancements have the cumulative effect of drastically reducing the R&D costs and timelines for developing a commercial process for any biological target, irrespective of the final application of the molecule. This is empowering Amyris with additional resources to develop next-generation capabilities to further advance its competitive position and accelerate its capabilities to produce go-to-market sustainable supply solutions at industrial scale for its partners.

“The DARPA-funded TIA has allowed us to continue our pioneering efforts at applying automation, next-generation analytics, and machine learning algorithms to find biological solutions to the bio-manufacturing sector,” said John Melo, Amyris President and CEO. “Amyris has always been at the forefront of utilizing big-data analytics and cutting-edge tools in the biotechnology sector, and our recent R&D results continue to pave the way toward expanding our footprint in multiple markets where fermentation-derived products offer our partners and consumers a sustainable, scalable source of supply.”

The new sweetener

Not completely unrelated to Amyris’ new-found chops in strain construction is the news that Amyris has “made significant progress” in the development of its healthy sweetener product technology and expects industrial production to occur in 2018. We reported on this earlier this week in our sister publication, Nuu.

Amyris is making a No Compromise sweetener and says it is “on track to be the low cost leader at industrial scale production” with a natural-like sweetener with very low calories that is sustainably sourced. Amyris’s target is to sell the world’s leading sweetener at a lower cost than sugar without any negative taste. Consumers love soda but hate sugar — Amyris wants to make soda taste the same and be healthy. The company expects this product opportunity in partnership with its partner to deliver over $100 million in annual revenue by 2020.

Beyond conventional sugar as a starting point

One of the things that the announcement portends is a step beyond conventional sugars as a feedstock in a conventional way. Note that Amyris will be selling at a lower cost than sugar.— and that rules out starting from conventional sugars in a conventional way.

One possibility? The company could be targeting something like xylitol — which is a C5 sugar and used as sweetener. Or, sorbitol — which is a C6 sugar alcohol that the human body metabolizes more slowly than conventional sugars. A patent search has not yet revealed any particular targets coming out of Fortress Amyris.

Polyalcohols are often used in foods like gum or even toothpaste because they offer the sweet taste without the cavities. However, they aren’t cheap as they can’t be found easily in nature and when produced industrially, they need very specific and controlled environments making it a pain for wide scale production.

We reported in Nuu last December that the Institute of Chemical Research of Catalonia and the Swiss Federal Institute of Technology researchers found a way to get polyalcohol sweeteners like mannitol or ribitol from cheap renewable sources like glucose. By being able to reorganize sugar atoms, researchers found a way to get the valuable polyalcohols from regular sugar easily and more affordably, bringing a smile to candy, gum and toothpaste manufacturers around the world.

Or, the company is proceeding from a novel sugar precursor where it can generate a higher yield. such as starting from unprocessed cane juice, which has the molasses still in the mix (in conventional white sugar refining, all the molasses is removed).

So, there are questions to be answered and we are standing by on that.

“Our focus on supplying the lowest cost, best performing products into Health & Nutrition and Personal Care markets by partnering with the leading brands has very strong momentum,” said John Melo Amyris President & CEO. “Our efforts to give the consumer sustainably sourced, best performing products without dangerous ingredients is really starting to payoff. We believe we have the leading market position for sustainable, healthy sweeteners and we are very excited about helping the world transition away from unhealthy sugars and accelerate the use of healthy sweeteners by providing the consumer a better taste experience and our partners better economics.”

The Race for a Next-Gen Sweetener

The race for the next big sweet-tooth satisfier has been heating up significantly.

We reported in April that Cargill and Evolva inked a major collaboration pact for the production and commercialization of EverSweet, the next-generation stevia sweetener. This product is on track for a 2018 launch, securing its first-mover advantage.

Over the next three years, principally in 2018 and 2019, Evolva expects to invest an estimated USD 60 million in the combined fermentation and bioprocessing facilities for EverSweet and its other products. The recent CHF 30 million equity commitment from Yorkville serves as a foundation for this investment and Evolva expects to secure an additional project financing package of around CHF 30 million by end 2017, which will enable full execution of the plans.

We reported in Nuu in February that MIT spin-out Manus Bio is using multivariate modular metabolic engineering to design microbial pathways that produce larger volumes of commercially interesting compounds.

Using MMME, the company has developed a fermentation-based process to produce Rebaudioside M with greater than 95% product purity. Currently, the alternative sweetener is derived in low yields from the stevia plant.

“Slapping genes together to make a product is fine, but this doesn’t give you a platform for producing something economically,” Stephanopoulos says. “There’s a big jump between making a few milligrams of a compound and a few grams, which is what you need to make it commercially viable.”

MMME involves using enzymes to “cut the linear pathway into a network of separate, distinct modules that can be more easily controlled and modified.”

Manus is also working on developing a route to nootkatone, a grapefruit extract that is a natural insect repellent. Traditional nootkatone production methods cost several thousand dollars per kilogram.

We also reported last October that S2G BioChem had entered into a license and collaboration agreement with Mondelēz International — a leader in biscuits, chocolate, gum, candy and powdered beverages — to help commercialize a sustainably-sourced supply of the food ingredient xylitol using a proprietary co-production technology.

Commercial-scale production of the sustainably-sourced food ingredient xylitol is expected to begin in 2018. Mondelēz owns billion-dollar brands such as Cadbury, Nabisco, Oreo, Trident and Dentyne.

We also reported last November that DSM asked Europe’s food safety regulators to approve the use of stevia produced using fermentation. The popular sweetener has already been okayed for consumption in Europe, although the regulation stipulates it be produced via water extraction of the Stevia rebaudiana plant followed purification and recrystallization. DSM’s process uses fermentation with a genetically engineered yeast to steviol glycoside.

The Bottom Line

New targets at new speeds — that’s what DARPA is trying to change. Clearly they’re looking not only for next-generation materials that have advanced properties with potential military applications — they’re looking to endow friendlies with the capability to make them faster. That not only changes the economics; it changes the potential that science can respond more effectively to the shortages, disruptions, and theater-level strategic opportunities that conflict brings.

The connection between DARPA and sugar might not be obvious. Of course, not everyone saw the point of demonstrating an internet, either, back in the days of ARPA.

The connection here is that a commercially-relevant challenge like a sugar alternative — and the race to get to market at the lowest cost — presents an opportunity to develop tools that DARPA will need for a host of molecules that no one knows how to make affordably and commercially — if we know how to make them at all.

Stronger materials, more flexible materials, materials that think, materials that respond to conditions — whether it is lightweighting military vehicles or providing better protection to military personnel, or just finding things that explode better — DARPA has a real stake in developing manufacturing and, for military applications, speed has an incredible premium.

DARPA shares a passion for pace with every company chasing a new sweetener — and also with every investor who would like industrial molecules to come out at scale, faster, from the new industrialists like Amyris. The collaborations are getting mighty interesting.

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.

« April 2017 | Main | June 2017 »




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