Biodiesel Archives


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For a number of years, this (now old and outdated, but) very useful chart has been in circulation in energy circles, mapping the supply of energy to the world by looking not at prices, but at production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

January 30, 2017

Insider View on REGI

by Debra Fiakas CFA

Insider buying is not one of my regular screening criteria in selecting long plays in the small cap sector.  However, to learn a chief executive officer has taken out his/her check book to buy shares in their company is influential.  In November 2016, the CEO of biofuel producer Renewable Energy Group (REGI:  Nasdaq) reported an increase in his stake in the company in recent months.

With REGI shares just above the prices paid by the CEO just three months ago, it is timely to look more closely from the outside.

In the most recently reported twelve months, Renewable Energy Group produced $1.87 billion in total sales of renewable diesel and chemicals, resulting in a net loss of $71.9 million or $1.70 per share.  Those two metrics are only part of the story as the company also reported generating $52.2 million in operating cash flow in the same period.   Using its typically low-cost feedstock such as inedible corn oil and used cooking oil, the company lays claim to being a low cost biofuel producer.  Nonetheless, the company has come through a particularly tough period in 2015, when thin margins failed to deliver enough profit to cover fixed costs.  Yet even during this difficult period, operating cash flows remained positive.

Free cash flow, that is operating cash flows net of investment requirements, may be a more helpful metric to evaluate a renewable energy producer.  REG operates a dozen biorefineries in North America with total nameplate capacity just over 450 million gallons per year.  The company is moving aggressively to expand its footprint.  In November 2016, management trooped out to Iowa to stage a showy groundbreaking ceremony with Iowa’s high profile governor, Terry Branstad.  The group turned over first shovels on a project to expand its Ralston biorefinery capacity from 12 million to 30 million gallons.

The price tag for the Ralston expansion is estimated at $24 million.  This is easily fit into the company’s regular budget.  Renewable Energy invested $42.8 million into its plants in the first nine months of 2016.  Indeed, capital investment has averaged $54.6 million per year over the last three years.  Operating cash flows have been more than ample to cover capital investments into existing plant and equipment, leaving $29.5 million in average annual free cash flow.

REG management has had no difficulty in finding places to use that extra cash.  Approximately $84.4 million in cash has been used to acquire new operations since the beginning of 2013.  The most recent deal in March 2016, was the acquisition of a biodiesel refinery in Wisconsin owned by Sanimax Energy.  REG paid a total of $21.1 million for 20-million gallons in nameplate capacity in a combination of cash and stock.
A more significant deal was struck in August 2015, for a facility in Grays Harbor, Washington that added 100 million gallons to the company’s total capacity.  A total of $36.7 million in cash and stock valued at $15.3 million were paid up front.  An additional $5.0 million was promised contingent upon achievement of milestones in renewable diesel production in 2016 and 2017.

A growing, profitable operation should be of interest for most investors.  The one reservation that investors should have regarding REGI, is the possible fall out of favor for renewable energy producers.  REG management has come out in support of a recent proposal for the 2017 standard set by the Environmental Protection Agency for Advanced Biofuel Renewable Volume Obligation from 4.0 billion gallons to 4.28 billion gallons.  Biomass-based diesel is a direct beneficiary of the standard.  Given the antipathy expressed by the incoming occupant of the Oval Office toward the environment and climate, renewable energy may not be a particular priority.  Indeed, petroleum-based energy is most often the lips of Trump and his surrogates.  Hopefully, REG management made a good impression on Branstad while they were in Iowa to put a good word in for renewable diesel.

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.

June 13, 2016

DAR the Rins Blow!

by Debra Fiakas CFA

Last week the management of  Darling Ingredients (DAR:  NYSE) staged a webinar on its opportunities in biofuels.  Darling produces biodiesel in Kentucky and Canada and is in a renewable diesel joint venture with Valero Energy (VLO:  NYSE) in Louisiana.  As a recycler of wastes and excess from the food production processes, the production of energy with organic feedstock is a logical extension of Darling’s collection and aggregation infrastructure.

The event did not do much for Darling’s share price, but the presentation triggered a few questions about RINs  -  shorthand for Renewable Identification Numbers.  These are a creation of the U.S. Environmental Protection Agency (EPA) to track renewable transportation fuels.  They come in handy for the EPA to monitor how well oil refiners and blenders are doing in meeting the Renewable Fuel Standard (RFS).  Those standards were set up by Congress through the Energy Policy Act of 2005, to promote the use of renewable transportation fuels.  On the simplest level, the standards require the use of a minimum amount of renewable fuel usage based on the amount of petroleum product sales.
Here is where the RINs really become important.  Of course, refiners and blenders can meet the RFS standards by buying ‘wet gallons’ of actual renewable fuels.  They can also buy RINs from other parties who have exceeded the requirements.  There is a market for RINs.  As with any other asset, the value of a RIN is dependent upon the number of RINs sloshing around and whether refiners and blenders can get enough ‘wet gallons’ to meet the standards.

Progressive Fuels Ltd. publishes weekly RINs trading data. For example, in the week ending June 2, 2015, D3 RINs for cellulosic biofuel produced in 2016 ranged from $1.77 to $1.79.   Generally, RINs prices for cellulosic biofuel produced in both 2015 and 2016 have traded down from prices in late 2015.    Corn ethanol (D6), biomass-based diesel (D4), cellulosic diesel (D7) and advanced biofuels (D5) each have their own RIN code.

It is a well-intentioned arrangement  -  support development of renewable fuels with a clever economic support system.  Indeed, the D6 RIN for corn ethanol increased in value during times of higher RFS target announcements or near the compliance deadlines.  However, more recently the D6 RIN price has been influenced by the decline in gasoline prices.

What might be as important for renewable fuel producers like Darling is the amount of gasoline demand in the country.  With prices at the pump at record lows (at least since 2009), gasoline consumption is expected to rise.  The U.S. Energy Information Administration (EIA) estimates that gasoline consumption could reach 9,530 million barrels per day in 2016.  This is 1.5% higher than consumption in 2015.  However, ethanol blended into gasoline is expected to reach 950 million barrels per day, an increase of 1.1% compared to last year.

Darling is looking at RINs also, but in terms of market opportunity.  Looking at the EPA’s new 2016 advanced biofuels mandate in terms of RINs, the company sees an opportunity to sell fuel worth 440 million RINs.  Put into ‘wet gallons’ it would be 288 million in 2016.  With a capacity to produce 18 million gallons of biodiesel and 160 million of renewable diesel per year, that is an attractive prospect.  

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. Darling Ingredients is included in the Biofuel Group of the Beach Boys Index of alternative energy developers and producers.

May 20, 2016

FutureFuel: Still Future, Less Fuel

by Debra Fiakas CFA

The last post “From Fuel to Fudge” discussed how the old Solazyme developer of algal-based renewable fuel has been transformed into a new company called TerraVia, (TVIA) which is pursing algal-based food and personal care products.  Solazyme is not the only renewable fuel company to make an about face.  Granted FutureFuel Corporation (FF:  NYSE) has not changed its name or stock symbol like Solazyme.  However, its ability to produce specialty chemicals has given FutureFuel an alternative to biofuels and its early plans to build a plant that could eventually produce 160 million gallons of biodiesel each year.

It took very little time from the company’s inception for FutureFuel strategists to pull back the biodiesel plant to a 40 million gallon name plate capacity.  Even as the company was getting started in the 2006 and 2007 time frame, margins on biodiesel began to shrink.  Management was worried.  The plant finally ended up with a capacity to produce 58 million gallons of biofuels per year.

FutureFuel was already keeping the lights on by selling performance chemicals.  As much as two-thirds of revenue in the early years was generated by the sale of specialty chemicals, including a bleach activator that was sold to a detergent manufacturer and a proprietary herbicide for a life sciences company.  Biofuels accounted for only about a quarter of revenue.  Fast forward to the year 2015, biofuels are providing the majority of sales and specialty chemicals have taken a back seat.  

Fact of the matter is sales of BOTH specialty chemicals and biofuels have declined.  Biofuel sales peaked in the year 2013, but have since declined on lower selling prices and volumes.  Specialty chemicals sales peaked that year as well.  The herbicide producer has stopped buying the herbicide additive and FutureFuel has had to accept a lower selling price for its bleach activator in order to keep its detergent manufacturer customer through the year 2018.

Rebuilding the specialty chemicals segment is a largely a matter of finding new customers.  It is a situation over which the company has some control.  It is a matter of marketing, branding and messaging.  Then again it could be just a matter of salesmanship and good old fashion shoe leather.  

Unfortunately, in its biofuel segment FutureFuel is experiencing plenty of difficulties  -  none of which are so easily resolved.  Protecting profit margins from costly feedstock is just one of them.  FutureFuel appears to have little latitude on feedstock even as other biodiesel and renewable diesel products have found success. 

There are numerous biodiesel producers, some also using the transesterification process that FutureFuel uses.  An increasing number are using less expensive feedstock, such as waste oils.  For example, Diamond Green Diesel, the joint venture of Darling Ingredients (DAR:  NYSE) and Valero Energy (VLO:  NYSE) uses the waste oils that Darling collects from meat processing plants and restaurants around the country.  Diamond Green just announced plans to expand production capacity.  Another 125 million gallon capacity will be added by the end of 2017, bringing to total capacity to 275 million gallons per year.

Renewable Energy Group (REGI:  Nasdaq) is also expanding storage capacity for both its waste oil feedstocks as well as finished biodiesel at its Danville, Illinois facility.  The storage capacity is pivotal in allowing REG the flexibility of timing its sales at peak or at least better pricing.  The ability to delay sales to wait for better prices is one of the keys to building profits in the fuel production industry.  REG now has 45 million in annual biodiesel production and 12 million gallons in biodiesel storage capacity in Danville.  This facility is only one of a dozen active biorefineries REG has in operation around the country.

In the most recently reported twelve months FutureFuel delivered $48.6 million in net income or $1.11 in earnings per share on $292.2 million in total sales.  The company remains profitable, but comparisons to the previous twelve months are not favorable. Even in the most recently reported quarter ending March 2016, the company reported sales 10% lower than the previous year period.  Earnings we well above expectations, but only because the company benefited from reinstatement of the blenders tax credit.

FutureFuel has tried to break free from its biofuel origins, finding new products and new customers.  It seems investors might be doing the same.  After a brief recovery, the stock has sold off, leaving FF priced at ten times expected earnings for the year 2016.  We note that the stock was nearly at the same value about two years ago.

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 a buy rating on Darling Ingredients and a Hold rating on FutureFuel.

April 06, 2016

REG: A Little ADM With Better Growth Prospects

Jim Lane

At 8:30am, there’s a standing daily meeting of the key traders in Gary Haer’s sales group at Renewable Eenergy Group's (NASD:REGI aka REG) headquarters in Ames, Iowa.

And they’re not kidding. Everyone stands. For 15 minutes there’s the rat-a-tat-tat of rumor, fact, competitors, pricing, spreads, the who’s selling what and where, the buying and selling of diesel, renewable diesel and biodiesel across North America.

On most minds this Friday morning, what’s going to happen with corn prices?

The USDA late on Thursday released its annual spring plantings report and it was a shocker. Corn acres up 5 million, wheat down 5 million. Despite high corn ending stocks from last year. Prices are sure to go low. But how low? By day’s end the price would drop 15 cents a bushel, almost 5 percent. That’s good news for REG — they’re the major buyer of inedible corn oil from ethanol producers, which they have figured out how to convert into biodiesel. But how much good news, that will only become clearer through the day.

Meanwhile, the dozens of Bloomberg TV screens and the overhead pricing screens on B100 biodiesel, fossil prices and key REG inputs such as virgin vegetable oils — they are spitting out the numbers, updating nearly every second.

The rat-a-tat-tat continues as the team talks about dealmaking in the market.

“I was up in North Dakota drumming up some business with [omitted], and they had [omitted] come in at -15.” In the parlance of the meeting, that’s15 cents below quoted market price. In a market where wholesale diesel futures are selling at $1.13 per gallon, that’s a gigantic discount. Someone is moving inventory aggressively. The team pauses, takes it in, then the rat-a-tat-tat resumes. Minnesota, California, a terminal here, a customer there.

It’s been a couple of years since we visited REG and the difference is palpable. The company has become a little ADM, rather than a big Amyris or TerraVia. You see the trading desks at the bigger ethanol operations like Green Plains — relatively massive and certainly lively trading ops. But it’s not something we’ve seen in companies like REG. It used to be a company you could safely describe as a biodiesel company, just as you could safely think about biodiesel as a market for the soybean oil byproduct of a soymeal crush.

But no more.

The old biodiesel paradigm gone by

The problem with biodiesel companies, for a long time, has been the volatility of raw material prices and energy prices.

Biodiesel has long been America’s favorite advanced biofuel, but they don’t call the spread between soybean prices and biodiesel prices “the crush spread” for nothing. You can get crushed. Favorable economic winds can turn on you lickety-split, leaving you with upside down economics (high input, low output prices) and working capital that burns faster than firecrackers on the 4th of July.

More than a decade ago, biodiesel was an answer to a problem for soybean growers. Their soymeal had been approved and successfully trialed as livestock feed, and orders were up, up, up. But after the soy was crushed to make meal, the oil piled up, and after a while there’s no place to store it, and dumping is neither eco-friendly nor economically viable. Now, you can run a diesel engine on straight veggie oil, but it’s gummy. But throw in some methanol and a sodium-based catalyst under heat and pressure, and you break the oil molecule into pure B100 biodiesel and a glycerine by-product. The technology is complex enough, but costs less than a dollar a gallon for the capex.

Then, soybean oil was trading at something like 10-11 cents a pound, or around dollar a gallon for the raw materials in a gallon of biodiesel, and energy prices were far higher. And an industry was born.

Back then, there were a lot of companies that wanted to become what REG has become today. A multi-plant, multi-feedstock, multi-product producer with operations across the US and now reaching into Europe.

Fast-forward to 2008/09, when soybean oil prices skyrocketed as high as 70 cents a pound, and the easy good times were over. Plenty of producers went idle.

REG, however, found the answer in a technology so critical that even today, on a public plant tour, they don’t like to talk about it. It’s a FFA stripper. This takes free fatty acids, which are difficult to process, out of alternative feedstocks like fish oil, choice white grease, yellow grease, brown grease, and inedible corn oil. The technology allowed REG to manage its input costs through supply diversification — and with a superior price structure, came a series of mergers and acquisitions that brough the company to 11 plants today, worldwide.

It’s not a license to print money, biodiesel. The company made $50 million last year and without the December 2015 renewable of a $1 per gallon biobased diesel tax credit, might have slid into the red with the collapse of oil prices which began in Q4 2014.

Three legs to the REG stool

1. Diversification. The company is diversifying everywhere you look. The afore-mentioned raw materials. Through the recent acquisition of LS9 (now REG Life Sciences) and Dynamic Fuels (now REG Geismar), the company has diversified on the product side.

We expect to see a first commercial product from Life Sciences in 2016/17 — a fragrance product that can be manufactured at commercial-scale at the company’s plant in Okeechobee, Florida. Perhaps as importantly, LIfe Science’s feedstock is sugar — for now, think corn sugars (dextrose), although any source of sugar is technically acceptable; it comes down to price.

We also note that Minnesota and Iowa, where REG operates, are the first states to put in renewable chemical producer’s tax incentives. Iowa’s legislation expected to be signed this week by Governor Terry Branstad.

Meanwhile, Dynamic Fuels is a going concern, although two fires since acquisition have set back the commercial schedule.

2. Flat management structure. With 600 employees, the expectation is the kind of hierarchy that begins to stifle innovation. But REG keeps it flat — 30-40 person teams at individual plants, divided into 4 shifts of 7-10 people. Around 130 at HQ, most of whom are in trading or financial operations. There are just a handful at the VP level, and decision-making is quick.

3. Good outlook for biobased. Who’s said there’s no green premium? REG’s average selling price was $2.69 in 2015 — compare that to the afore-mentioned $1.13 futures price for diesel. CEO Dan Oh told investors, “The regulatory clarity and growth trajectory EPA provided last year with a multi-year RVO will grow biomass-based diesel beyond two billion gallons by next year, and effectively already has when you consider carryover RINs.”

The rap on REG

1. Biofuels companies are not Wall Street darlings on the equity side. From our POV, we wonder at that. Her’s a company that debuted at $10 after its 2012 IPO, and is trading as of last week at $9.48 despite awful energy prices. And is making money in a down market, and building market share.

Yet, we see an astonishingly low PEG (price/earnings to growth ratio), at 0.29, that led Zacks to highlight REG last week as an undervalued stock.

2. Size matters. The company isn’t big enough yet, or diversified yet, to have convinced investors to pay attention. That’s the sub-$1 billion market cap problem, combined with REG Life Sciences and REG Geismar offering limited revenues to date — so, there’s an awful lot of dependence on biodiesel in the stock price.

So, the question for the investor is to pick a date when those concerns have been addressed, but the rest of the market hasn’t woken up yet. The first announce of a significant offtake and product development deal on the chemicals side, that’s your target. Could be something in the Q1 earnings call.

3 big news items

1. Expansion in life sciences. Last week, REG started expansion and upgrade of the laboratory at the company’s Ames, Iowa headquarters to further enhance renewable chemical related biotechnology research, development and commercialization. The lab expansion will include the installation of fermentation equipment and significant analytical capabilities. Upon completion, full-time positions will be added to focus on commercialization and integration of products to be developed by REG in South San Francisco into production and delivery platforms.

“This expansion is simply one of many examples of REG’s commitment to innovation and economic development in Iowa and in particular Ames which is a cornerstone of Iowa’s Cultivation Corridor,” said CEO Dan Oh.

2. Acquisition in biodiesel. Two weeks ago, the company completed its acquisition of Sanimax Energy’s 20 million gallon nameplate capacity biodiesel refinery located in DeForest, Wisconsin. REG paid Sanimax $11 million in cash and issued 500,000 shares of REG common stock in exchange for the biorefinery and related assets. REG may also pay Sanimax up to an additional $5 million in cash over a period of up to seven years after closing based on the volume of biodiesel produced at the plant, which is now called REG Madison. Using the same REG patented and proven high free fatty acid processing technology as REG’s Seneca, Illinois plant, REG Madison produces biodiesel from lower cost, lower carbon intensity feedstocks.

3. Building the capital stack. REG Energy Services secured a $30 million line of credit from Iowa-based Bankers Trust, the company last month, The line is a one-year credit facility, with an accordion option to expand to $40 million, subject to customary conditions. “This credit line gives REG Energy Services additional capital to expand our blended fuel offerings and add to our already expansive distribution network,” said Chad Stone, REG Chief Financial Officer. “It also frees up capital allocated to the business from other sources. We are very grateful to Bankers Trust Company for seeing the strength of this part of our business and committing these funds to allow us to further grow.”

The Digest’s Take

Over in the world of materials and products, we see a rush to divest. Consider, for example, DowDupont, which will emerge as three companies in distinct segments, out of two diversified companies. But in the agricultural space, they’re generally sellers, not buying raw materials from growers.

So, companies like REG are going the other way, diversifying. Back then, one product, heading for many. One input, oils — now oils and sugars, plus a diversified set of waste oils. Back then, one technology, transesterification. Now, a suite of them ranging from hydrotreating to fermentation.

So, we see it as a little ADM, with bigger margins and growth prospects for some time to come, well positioned. Inherently more diversified than a TerraVia (SZYM) or Amyris (AMRS) on the technology and raw materials side.

Meanwhile, we note that ADM is trading at almost exactly the same price-to-EBITDA ratio as REG, and on a price-to-revenues basis. That’s the “we’re so big and been around so long” premium that benefits diversified plays in uplifting raw materials into finished products.

So, how big is big enough where REG will get a bump based on a superior growth outlook? $1 billion market cap might just do it. Keep an eye on expansion into Europe — and, with the expansion into corn sugars, given that they’re into corn oil in a big way, keep an eye on opportunities with corn protein.

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.

March 10, 2016

FutureFuel Profits Preview

by Debra Fiakas CFA

Biodiesel and biochemical producer FutureFuel Corporation (FF:  NYSE) will report fourth quarter 2015 financial results after the market close today.  No conference call will be held due to low attendance on recent calls.  The single published estimate for FutureFuel is for $0.28 in earnings per share on $122.5 million in total sales.  Despite an increase in this estimate in the last week, the number still represents a significant decrease in earnings compared to the prior-year period.  The Company has missed the consensus estimate in both of the last two quarters and we do not have particular confidence that this quarter will be a ‘beat.’ 

FutureFuel makes its living producing biodiesel and biochemicals, which represent the Company’s two reporting segments.  Many of the FutureFuel products are intermediate goods used in finishing consumer and industrial end goods.  FutureFuel chemicals end up in coatings, solvents, herbicides and nutrition products. The Company is known for its bleach activator, nonanoyloxybenzene-sulfate, which is used in household detergents.

FutureFuel shares took a tumble a few months ago after one of its primary customers for the bleach activator, Proctor & Gamble, announced it would cut back orders.  Ultimately, the agreement with Proctor & Gamble was extended to 2018 with reductions in price and volumes.  The company has had to scramble to keep investors content that the near-term quarters can still deliver growth and profits.

Historically, the Company has experienced erratic sales growth in part due to volatile commodity prices.  While sales and net income have varied year-to-year, FutureFuel is consistently profitable.  Operations generate cash every year, providing financial resources for future investments.  It is an attractive achievement for a participant in the renewable energy industry where most companies remain at developmental stage or have not yet reach sufficient scale to generate profits.

The pull back in price provided an entry point into FutureFuel’s shares.  Crystal Equity Research has a Technical Buy rating on FutureFuel.  The shares have been on a steady climb over the past three weeks, much as we expected in our initiation argument issued in late January 2016.  We observe a strong line of price resistance at the $14.00 price level that appears to have been established during historic trading as higher volumes at these prices suggest it is a trigger point for trader decisions. The stock stopped short of this level in trading last week.  The stock could drive up through this price if the quarter report shows strength.

A laundry list of technical indicators was used to select FF as a good stock for a long or bull case position.  Many of the same indicators are monitored daily or weekly to decide when to close out the position.  The stock appears overbought according to two of the favorites, the Relative Strength Index and the Commodity Channel Index.  However, we do not believe that all demand for FF has been satisfied.  The Moving Average Convergence Divergence (MACD) Line is still headed higher.  More importantly, the MACD histogram is continuing to increase.  The MACD histogram established a ‘higher’ high in trading last week, a circumstance that underscores the strength of the price movement higher. 

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. 

February 04, 2016

Will Renewable Energy Group's Buying Spree Ever Stop?

Jim Lane

REG Monopoly

REG Sanimax









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.

January 28, 2016

Renewable Energy Group Teams Up With ExxonMobil For Cellulosic Biodiesel

Jim Lane

Two giants hook up to bring cellulosic biodiesel to scale. A new source of biodiesel feedstock, and a new source of renewable fuels.

In Iowa, ExxonMobil (XOM) and Renewable Energy Group (REGI) have agreed to jointly study the production of biodiesel by fermenting renewable cellulosic sugars from sources such as agricultural waste.

REG has developed a patented technology that uses microbes to convert sugars to biodiesel in a one-step fermentation process similar to ethanol manufacturing. The ExxonMobil and REG Life Sciences research will focus on using sugars from non-food sources. Terms were not disclosed.

Readers will remember the technology unit, branded as LS9 before the REG acquisition in 2014. LS9 focused on biodiesel from its earliest days in 2006 — in fact, that was the sole product in development until a detergent alcohol was put into development in 2008.

“The core technology is advanced”

Through the research, the two companies said they will address the challenge of how to ferment real-world renewable cellulosic sugars, which contain multiple types of sugars, including glucose and xylose, but also impurities that can inhibit fermentation.

“The core biodiesel technology is advanced,” REG Vice Presdient Eric Bowen told The Digest. “That’s one of the reasons ExxonMobil reached out, they know there’s a quicker timelines than other projects they’ve looked at, because there’s 7 years of work already done to ferment sugars into FAME biodiesel. The work now is to port that technology to cellulosic sugars, something which there has been DOE-sponsored work on in the past, some of which was announced publicly.”

“The bulk of cellulosic sugars development has been for cellulosic ethanol, which is primarily though not exclusively a yeast-based fermentation. It’s much more dilute, too. In our work, we do very concentrated fermentations and we like a very concentrated sugar source. So, optimizing those sugar streams, and understanding the impurities is an important part f the work going on now. The impurities depend on the source. They could include acids from the hydrolysis, or ash content. We’ll be looking at how concentrated those impurities are.”

“If there were large volumes of sugars available today, I have no doubt we could manufacture almost right away.”

ExxonMobil’s interest?

Exxon has been quiet of late in renewables, though they ran some algae TV ads around the time of COP 21. Maybe, in the context of showing that they are “doing something”. Lately, they’ve been more active in partnering and talking up their algae research. Consider this $1 million partnership with Michigan State University, here , or this recent ExxonMobil perspectives posting, here.

Back in the days before REG acquired LS9 and before the cellulosic sugar path was discovered, Chevron became an investor in 2009. Back then, the aim was to show that it could produce renewable diesel at $45-50 per barrel, by 2011, with a goal of commercial-scale production as soon as 2013. The basic science, said LS9 at the time, was completed — it was a matter of yield and scale.


“The timing is really about the availability of cellulosic sugars,” Bowen added. “If there were large volumes of sugars available today, I have no doubt we could manufacture almost right away. The technology has been significantly de-risked.

“Clearly, our interest and ExxonMobil’s is on commercial-scale production,” Bowen said. “There’s a stage-gate process in place.

The pivot to cellulosic feedstocks

On LS9’s fuel aspirations we wrote some time back:

Given that there are seven pounds of oil to a gallon, the cost of US sugar makes fuel production completely out of the question for now, and will push bioprocessors towards the higher-end chemical and bio-based products for the near term. In the company’s early days, the magic bug lived on corn or cane syrups – and for that reason the company was initially expected to build its first commercial facility in Brazil, the Saudi Arabia of cane syrup.

But, no longer.

That’s where Jay Keasling’s lab at UC Berkeley/JBEI comes into the picture. In early 2010, working with REG Life Sciences, they came up with a way to utilize cellulosic sugars. At the time, they said that the team of researchers engineered a microbe that “consolidates advanced biofuels production and cellulosic bioprocessing for the first time. This breakthrough enables the production of advanced hydrocarbon fuels and chemicals in a single fermentation process that does not require additional chemical transformations.” The research results appeared in the January 28, 2010 edition of Nature.

The cellulosic option broadened the geography considerably — conceptually, into REG’s base of operations in the Midwestern US. Or, possibly in its new operating sphere of Eastern Europe.

Advanced fuels, good, advantaged fuels, better

Biodiesel is America’s favorite advanced biofuel, but it also is one of the most advantaged by policy considerations. Specifically, biodiesel qualifies under the Renewable Fuel Standard as a biomass-based diesel fuel; it qualifies for the biodiesel tax credit, if that is extended beyond 2016; it conceivably qualifies under RFS relating to the sale of cellulosic waiver credits, as a cellulosic fuel. If produced in California, it would qualify under the California Low Carbon Fuel Standard.

Bowen agrees. “Cellulosic RINs? There’s that nested category, cellulosic diesel, that was established for some players that aren’t around any more, but it’s there, and although we have not completed the lifecycle analysis and not yet formally approached EPA, we’re expecting that the fuels would not only qualify as an advanced biofuels but as a cellulosic diesel. California would welcome this fuel, I would expect, and we expect it to fit the Low Carbon Fuel Standard very well, though again, the lifecycle analysis has yet to be completed.

What about cellulosic drop-in fuels?

Well, REG Life Sciences has IP in that area too. In the article “Microbial Biosynthesis of Alkanes” published in Science magazine in July 2010, a team of REG LS scientists announced the discovery of novel genes that, when expressed in E.coli, produce alkanes, the primary hydrocarbon components of gasoline, diesel and jet fuel. This discovery is the first description of the genes responsible for alkane biosynthesis and the first example of a single step conversion of sugar to fuel‐grade alkanes by an engineered microorganism.

Yield, and scale-up

Scale? That’s something for later in the partnership, as the partners have indicated. So, we are left with the chase for yield. It’s the task that consumes Amyris (AMRS) every day, Yield, yield, yield.

No more so than with cellulosics, where the sugars are only a fraction of the biomass and the transportation and logistics penalties for low yields add up quickly.

“Right now, as with all our process development, we’re focused on the 5 liter stage now,” REG’s Bowen told The Digest, “and then it moves to the 650-liter stage, and then as with all our work it would move to Okeechobee for testing in large scale fermenters.”

ExxonMobil’s reaction

“This research is just one way ExxonMobil is working to identify potential breakthrough technologies to reduce greenhouse gas emissions, increase energy supplies and realize other environmental benefits,” said Vijay Swarup, vice president of research and development at ExxonMobil Research and Engineering Company. “The science is extremely complex, but we hope to identify new affordable and reliable supplies of energy for the world that do not have a major impact on food supplies.”

“As we research renewable energy supplies, we are exploring future energy options with a reduced environmental impact,” Swarup said. “Our first challenge is to determine technical feasibility and potential environmental benefits during the initial research. If the results are positive, we can then take the next step and explore the potential to expand our efforts and explore scalability.”

The REG Life Sciences demonstration plant

REG Life Sciences’s demonstration plant is in Okeechobee, Florida, and was initially designed, and has been used, to scale-up LS9’s fermentation technology and generate large commercial samples for testing and product qualification by key partners and prospective customers. Since the company’s initial run at 135,000 liter scale in Q3 2012, LS9 has made numerous additional fatty alcohol runs, production runs of fatty acid methyl esters (biodiesel), and some co-operative work with Cobalt Technologies.

In 2012, we wrote of LS9’s demonstration plant opening day.

In the glades north of Lake Okeechobee, in rural Florida, a 135,000 liter fermenter column stands out against the landscape like Salisbury Cathedral rising over the plains of Thomas Hardy’s Wessex, and you half expect a tropically-attired Tess of the D’Urbervilles to come around the corner at any moment.

But the VIP-filled sedans, kicking up dust as they head northwest from the lake, are greeted primarily by dumbfounded cows and bulls that are still wondering, to the extent that they wonder, how yellow dragon disease took the citrus trees away, and where all the workers went in Okeechobee County, why so many Family Dollar thrift shops have popped up, and why so many people are using boards in place of window glass.

After all, the cows see all the Mercedes sweeping from the rich coastal enclaves like Jupiter and Palm Beach, en route to one of the several appealing hunting clubs that dot the region, or the golf courses of the west side.

Do they wonder how the rich got so rich, and the poor so poor, in such a hurry, down in Florida? To the extent that bulls consider macroeconomics, in between meals in the pasture as the cars go by.

The opening of that fermenter column is what the VIPs are coming to celebrate, because LS9’s demonstration facility opened for business in Okeechobee yesterday. A wonder of science it is – a technology that takes in sugars, and through microbial fermentation directly converts the material into a programmable array of products, including biodiesel, jet fuel, diesel, or surfactant alcohols, just for starters.

The Bottom Line

Well, ExxonMobil. REG. Biodiesel and its established market, and legion of fans. The “we could manufacture almost right away” perspective from REG. What’s not to like about this one? It’s a pick-me up of the first magnitude, and coming on the heels of the US Navy, Tesoro, and Suntory in recent days — it’s a tidal wave of dive-ins by major partners, for sure.

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.

December 02, 2015

EPA increases US Renewable Fuel Standard Volumes, But Only Slightly

Jim Lane

EPA-RFS-120115-cover-smIn Washington, the U.S. Environmental Protection Agency announced final volume requirements under the Renewable Fuel Standard program today for the years 2014, 2015 and 2016, and final volume requirements for biomass-based diesel for 2014 to 2017. This rule finalizes higher volumes of renewable fuel than the levels EPA proposed in June, boosting renewable production and providing support for robust, achievable growth of the biofuels industry.


“The biofuel industry is an incredible American success story, and the RFS program has been an important driver of that success—cutting carbon pollution, reducing our dependence on foreign oil, and sparking rural economic development,” said Janet McCabe, the acting assistant administrator for EPA’s Office of Air and Radiation. “With today’s final rule, and as Congress intended, EPA is establishing volumes that go beyond historic levels and grow the amount of biofuel in the market over time. Our standards provide for ambitious, achievable growth.”

The final 2016 standard for cellulosic biofuel — the fuel with the lowest carbon emissions — is nearly 200 million gallons, or 7 times more, than the market produced in 2014. The final 2016 standard for advanced biofuel is nearly 1 billion gallons, or 35 percent, higher than the actual 2014 volumes; the total renewable standard requires growth from 2014 to 2016 of more than 1.8 billion gallons of biofuel, which is 11 percent higher than 2014 actual volumes. Biodiesel standards grow steadily over the next several years, increasing every year to reach 2 billion gallons by 2017.

The RFS, established by Congress, requires EPA to set annual volume requirements for four categories of biofuels. The final rule considered more than 670,000 public comments, and relied on the latest, most accurate data available. EPA finalized 2014 and 2015 standards at levels that reflect the actual amount of domestic biofuel used in those years, and standards for 2016 (and 2017 for biodiesel) that represent significant growth over historical levels.

EPA-120115-3 EPA-120115-2 EPA-120115-1


Well, you might think to yourself, why is the EPA finalizing a mandate for 2014 and 2015 n November 2015. Well, they were two years late on the 2014 mandate and a year late for 2015. But they are on time for 2016. Let’s celebrate.

What’s next?

Likely, someone is going to sue the EPA. Possibly a coalition of biofuels trade groups, who will focus on getting court rulling that the EPA does not have the authority to create a distribution waiver by redefining a waiver authority basded on shortfalls in the “supply of renewable fuels” to mean “supply of renewable fuels OR gas pumps to deliver fuels to consumers.”

What the numbers mean

First of all, the EPA increased the volumes from the spring 2015 proposal, after receivging 670,000 comments. However, much of that stems from correcting an accounting error in the original proposal, and because rising gasoline consumptino increases the available pool for E10 ethanol blends.

Bottom line, the EPA has embraced an implied “distribiution waiver”, something that was proposed in the House version of the original EISA Act, not included by the Senate, and eliminated in the final bill. Congress feared at the time that the oil & gas industry would use its effective monopoly of infrastructure to strangle growth of biofuels past an E10 saturation point, which essentially happened. Critics say the EPA and Obama Administration have caved in to Big Oil on this one.

Reaction from Stakeholders

Chip Bowling, president, National Corn Growers Association

“America’s corn farmers are proud to grow a cleaner burning, renewable fuel source for America and the world. In July, we asked the Environmental Protection Agency to restore the 2014-16 corn ethanol renewable volume obligation to comply with the Renewable Fuel Standard as passed by Congress and signed into law.

“While we are pleased to see the EPA take a step forward and revise its original proposal, the fact remains that any reduction in the statutory amount will have a negative impact on our economy, our energy security, and the environment. It is unfortunate that Big Oil’s campaign of misinformation continues to carry weight in the court of public opinion, and in this decision. The Renewable Fuel Standard has been one of America’s most successful energy policies ever. Because of it, our economy is stronger, we are more energy independent, and our air is cleaner. We should be strengthening our commitment to renewable fuels, not backing down.

“In light of the EPA’s decision, we are evaluating our options. We will fight to protect the rights of farmers and consumers and hold the EPA accountable.”

Joe Jobe, CEO, National Biodiesel Board

“This decision means we will displace billions of gallons of petroleum diesel in the coming years with clean-burning biodiesel. That means less pollution, more American jobs, and more competition that is sorely lacking in the fuels market,” said NBB CEO Joe Jobe. “It is a good rule. It may not be all we had hoped for but it will go a long way toward getting the U.S. biodiesel industry growing again and reducing our dangerous dependence on fossil fuels.”

“I want to thank President Obama, Administrator McCarthy and Secretary Vilsack for supporting growth in the program and for their commitment to biodiesel,” Jobe added. “We have seen three years of damaging delays, but the Administration took a strong step forward today that should put biodiesel and the RFS on a more stable course in the years to come.”

“We will continue working with the Administration toward stronger standards moving forward that drive innovation and productivity. We certainly think the biodiesel and overall Advanced Biofuel standards could and should have been higher. The production capacity is there, and we have surplus fats and oils that can be put to good use.”

Brent Erickson, Executive Vice President of BIO’s Industrial & Environmental Section

“Today’s rule is a severe blow to American consumers and the biofuels industry. To date, BIO member companies have invested billions of dollars to develop first-of-a-kind advanced and cellulosic biofuel production facilities. EPA’s two-year delay in finalizing the rule created untenable uncertainty and shook investor confidence in the RFS program. BIO estimates that investment in the advanced biofuel sector has experienced a $13.7 billion shortfall due to EPA’s delays and proposed changes. Unfortunately, this final rule exacerbates the problem.

“As EPA has acknowledged, its delay allowed obligated parties to act as though the law did not exist. The delay increased U.S. carbon emissions by millions of tons over the past two years, compared to what could have been achieved with required use of biofuels. As the United States enters negotiations with the rest of the world to limit greenhouse gas emissions, EPA is putting in place an RFS rule that will sacrifice achievable reductions of emissions in the transportation sector.

“Moreover, EPA has violated the law. As BIO explained in its formal comments on the proposed rule, EPA has misconstrued Congressional intent, and its attempt to change the plain meaning of the RFS law regarding waivers is a needless and impermissible departure from EPA’s successful implementation of the RFS program through 2013. EPA’s action will undoubtedly trigger Court challenges that prolong and aggravate uncertainty about this program. BIO, its members and allied groups are now considering their available legal options to remedy EPA’s violation of the Clean Air Act.

“EPA’s decision increases carbon emissions from the transportation sector above achievable levels. This backsliding on transportation emissions – which account for 30 percent of all U.S. carbon emissions – unnecessarily and regrettably undermines America’s credibility at the Paris Climate Change Conference, which starts next week.”

Tom Buis, chairman, Growth Energy

“Growth Energy and its members are pleased to see that the President and the Environmental Protection Agency have recognized the need to move the renewable fuel industry past the so-called blend wall for the sake of America’s climate, energy security and rural economy. While this rule still relies on a flawed methodology that sets renewable fuel volumes below the statutory levels enacted by Congress, it is an important improvement from the proposed rule, and moves us closer to getting America’s most effective climate policy back on track and providing certainty for biofuels in the marketplace.

“Specifically, we are pleased that the RVOs have been finalized after such a long delay and that the levels have increased from the original proposal. This final rule makes it possible to drive the growth of higher ethanol blends through the so-called blend wall, giving consumers choices at the pump, such as low-cost E15. Additionally, the numbers for 2016 represent a final rule closer to the statutory levels established by Congress, avoid the “reset” and indicate a more certain future for renewable fuels.

“However, we remain concerned that the final rule continues to rely on the “distribution waiver” that redefines supply as demand and was rejected by Congress when the RFS was enacted into law. Of particular concern is that by using such a waiver, the oil industry is being rewarded for its unwillingness to follow the law and invest in infrastructure to move toward cleaner, renewable fuel, which sets a dangerous precedent for the future of the program. The uncertainty this waiver will create risks sending investment in the next generation of renewable fuel overseas just as this new, homegrown industry is taking off.

“We appreciate Administrator McCarthy’s stated commitment to return to statutory levels, and our industry is committed to working with her to ensure the final rule announced today is the first step toward fulfilling that commitment.”

RFA President and CEO Bob Dinneen

“EPA’s decision today turns our nation’s most successful energy policy on its head. When EPA released its proposed RFS rule in May, the agency claimed it was attempting to get the program back on track. Today’s decision, however, fails to do that. It will deepen uncertainty in the marketplace and thus chill investment in second-generation biofuels. Unlike Big Oil, the ethanol industry does not receive billions in tax subsidies and the RFS is our only means of accessing a marketplace that is overwhelmingly and unfairly dominated by the petroleum industry. Today’s decision will severely cripple the program’s ability to incentivize infrastructure investments that are crucial to break through the so-called blend wall and create a larger market for all biofuels.

“There is simply no reason for EPA to adopt API’s blend wall narrative. Data shows that EPA, in its initial RFS proposal, understated the likely market for E85 and non-ethanol conventional biofuels in 2016 by at least 440 million gallons. The data suggests there will be at least 14.7 billion gallons of undifferentiated renewable fuel blended next year. With approximately 2 billion surplus RIN credits already available for refiners to use for compliance in 2016, and with another 900 million RINs potentially becoming available from 2015 over-compliance, the EPA’s decision to lower the 2016 RVO below the statutorily imposed level of 15 billion gallons is simply unnecessary.

“What makes today’s decision even more perplexing is that it continues to reflect the administration’s conflicting views regarding ethanol. The Department of Agriculture continues to fight for ethanol, working hard to secure necessary infrastructure, promoting exports, correcting food versus fuel myths, investing in new technologies and new feedstocks and advocating for ethanol’s positive climate change benefits. The Department of Energy, too, works hard to complete biofuel research on higher ethanol blends and infrastructure that is moving this industry forward. Why is EPA so out of step?

“Today’s decision by EPA furthers that conflict and, sadly, significantly undercuts President Obama’s credibility as he prepares to take the world stage to address climate change at the COP21 talks in Paris. RFA recently commissioned a study which concluded that biofuels consumed under the RFS have reduced U.S. greenhouse gas (GHG) emissions by 354 million metric tons of carbon dioxide-equivalent since 2008. For context, that is the equivalent of avoiding carbon dioxide emissions from 74 million passenger cars. How can the president speak credibly about the need to address climate change on a global stage when his EPA is failing to fully implement the most potent and proven weapon to combat climate change in his own backyard?”

“This final rule directly contravenes the statute and places the potential growth for biofuels like ethanol in the hands of the oil companies. It will have the unfortunate consequence of increasing Big Oil’s ability to thwart consumer choice at the pump without even a scintilla of fear that EPA will enforce the statute. With no consequences for Big Oil’s bad behavior, consumers will be denied greater access to the lowest cost liquid transportation fuel and number one source of octane on the planet.”

POET CEO Jeff Broin

“The EPA volumes announced today are a move in the right direction, and they correctly call the oil industry’s bluff about our ability to surpass 10 percent ethanol use in the U.S.

“However, these numbers fall well short of our capability to provide clean, domestic ethanol to America’s drivers. Additionally, the EPA’s method for arriving at these numbers is contrary to the intent of the Renewable Fuel Standard.

“I look forward to breaking the so-called ‘blend wall’ next year and proving this country’s ability to replace more imported oil with biofuels produced within our borders. In the future, we need to see a stronger and more consistent commitment to renewable fuel from Washington if we are ever going to realize the true potential of renewable fuels, including the development of cellulosic ethanol.”

Brooke Coleman, Executive Director, Advanced Biofuels Business Council

“What we’re seeing in the RFS final rule, volumetrically at least, is continued growth in renewable fuel blending. That counts for something, predominantly in markets already inclined to offer consumers more renewable fuels. But it is frustrating that the Administration missed this opportunity to fix two waiver issues that are undercutting U.S. investment in low carbon, advanced biofuels. Waivers are absolutely critical to U.S. investment, because they define for investors when the field of play can be altered. It is confounding that the Obama Administration would side with the oil industry against Democratic members of Congress and the advanced biofuels industry in reinterpreting its waiver authority to allow for “distribution waivers,” which would permit EPA to waive the RFS if the oil industry refuses to make arrangements to distribute renewable fuel and comply with the law.

“The entire purpose of the RFS is to prohibit oil companies from using their market power to block the distribution of renewable fuels. We do not expect this reinterpretation to stand up in court; but regardless, it is the exact type of policy bait and switch that chills investor confidence in the United States. And while initial discussions with EPA have been productive, we must also move quickly to address waiver issues in the cellulosic pool, which currently allow the oil industry to buy year-end waivers to avoid buying cellulosic gallons. The Obama Administration has supported advanced biofuel development, and certainly the programs administered by the U.S. Department of Agriculture are an important part of that picture, but letting the oil industry off the hook with industry-friendly waivers is not consistent with the Administration’s position on innovation, clean energy development and climate change – especially against the backdrop of the President’s message in Paris. What’s at stake when it comes to the RFS is not whether the advanced and cellulosic biofuels industry will succeed commercially; but rather, whether it happens here in the United States. The Council will continue to work with the Administration and stakeholders to get the RFS back on track. We are not there yet with this rule, but we are confident that we can continue to improve the program in 2016.”

Mike McAdams, President, Advanced Biofuels Associstion

“The Advanced Biofuels Association applauds EPA’s support of next-generation biofuels. Today’s final rule is a step in the right direction that recognizes the importance of growing supplies of advanced and cellulosic biofuels to help provide more sustainable fuels for our future to combat climate issues. Only advanced biofuels reduce greenhouse gas emissions by more than 50% compared to today’s gasolines and diesels.

While we appreciate EPA’s efforts, we continue to believe that legislative reform is required to address ongoing hurdles facing next-generation biofuels. Congress needs to strengthen the RFS to help focus and expedite the production of advanced biofuels. Outdated definitions, cellulosic waivers, as well as overall program uncertainty have created significant barriers to entry for the advanced and cellulosic industry. That’s why ABFA will continue to work with Congress and the Administration to reform and strengthen the RFS so it can deliver on the promise of next-generation renewable fuels.”

Brian Jennings, Executive Vice President of the American Coalition for Ethanol

“When Congress enacted the Renewable Fuel Standard it voted to side with those of us who said ‘yes we can’ reduce greenhouse gas emissions from motor fuel, ‘yes we can’ allow consumer access to E15 and flex fuels, and ‘yes we can’ spark innovative ways to produce cleaner fuels,” said Jennings. “While we appreciate that the Administration made incremental improvements compared to the proposed RFS rule, unfortunately, today they are choosing to side with those who say ‘no, we can’t’. Regrettably, EPA’s final RFS rule protects the old way of doing business by obstructing consumer access to cleaner fuels, stifling competition in the marketplace, and undermining innovation. Given all the President hopes to accomplish at the international climate talks which begin in Paris today, it is inconsistent for the Administration to unravel the most effective policy at their disposal to support low carbon fuels.”

Despite the fact that the Clean Air Act calls for ethanol use to exceed ten percent of gasoline consumption, EPA’s final rule sets blending targets for 2015 and 2016 which fall short of statutory requirements and instead draw on the legally questionable E10 “blend wall” methodology put forward by oil companies who don’t want ethanol to comprise more than ten percent of fuel use in the U.S. Congress did not authorize EPA to adjust volumes based on the E10 blend wall.

“Thanks to the RFS, ACE members have made significant biofuel production advancements and we know that further innovation is just around the corner. ACE is strongly committed to ensuring consumers have access to higher blends of ethanol and we will explore all options at our disposal to achieve that goal with this Administration and the next.”

American Energy Alliance President Thomas Pyle

“EPA bureaucrats continue to prove they are incapable of managing the RFS. The agency consistently misses deadlines and sets unrealistic levels for cellulosic ethanol, which is expensive and not commercially viable. This gross mismanagement is just one more reason to scrap the entire mandate, and why anything short of full repeal would just make the RFS worse.

“The RFS was ill-conceived from the get-go. The mandate distorts markets, raises gasoline prices, and benefits a limited few at the expense of all Americans. Partial repeal would only make the mandate worse by moving it closer to a California-style Low Carbon Fuel Standard, causing Americans to pay more at the pump. Full repeal is the only option for those concerned about the interests of all Americans, and not just the self-interests of the biofuel industry and its lobbyists.”

The Urban Air Initiative President Dave VanderGriend

“EPA has made it clear it has no intention of opening the market for ethanol and other biofuels. We have been challenging EPA for years to take actions that would protect public health, lessen our dependence on petroleum, and reduce CO2 and other harmful emissions. The EPA has rejected us at every turn.”

“This is simply one program. We can move well beyond that and we will not let EPA and its faulty, inaccurate models define our value and limit our growth. EPAs action should be a message to the ethanol industry that it needs to secure its own future and recognize that ethanol’s highest value is as a clean fuel that can provide high octane to reduce the toxic compounds in gasoline while reducing a range of harmful emissions.

UAI has identified a number of steps to provide access to the market, all of which will improve fuel quality and protect public health. Specifically, UAI has called for EPA to:

  • Lift the Vapor Pressure Restriction on Higher Blends since RVP actually goes down as ethanol volumes go up above E10;
  • Enforce Section 202 (l) of the Clean Air Act to limit aromatics and open the market for ethanol as a source of clean octane;
  • Reinstate fuel economy credits (CAFE) and prorate them for mid-level blends;
  • Make 87 AKI gasoline the minimum octane for all states;
  • Revise modeling for both the life cycle analysis of biofuels and the emissions profile, notably the MOVES Model.

“The RFS has done its job up to this point in building a bridge but from here on we need to seize our future and look forward, not backward.”

Brazilian Sugarcane Growers Association

“UNICA is heartened by EPA’s recognition the RFS requirements for advanced biofuel can and should increase. Today’s decision appears to leave the door open for continued American access to sugarcane ethanol from Brazil, one of the cleanest and most commercially ready advanced biofuels available today.”

“EPA has taken another step toward a cleaner, healthier environment, and Brazilian sugarcane producers stand ready to make even higher volumes of advanced biofuel available to America. According to the latest estimates, Brazil is on track to produce nearly six percent more sugarcane ethanol this year compared to 2014 – an additional 450,000 gallons. Under the right market conditions, Brazil has the capacity to produce up to two billion additional gallons of this advanced biofuel for export according to installed capacity figures.”

“America and Brazil have built a thriving global biofuels market, creating economic growth and environmental benefits, through good policy implementation. UNICA applauds today’s decision by EPA to maintain that growth by encouraging production of clean, low-carbon fuels.”

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

August 19, 2015

Fretting Over FutureFuel

by Debra Fiakas CFA

Earlier this week FutureFuel Corporation (FF:  NYSE) reported financial results for the second quarter ending June 2015.   Sales of the company’s biodiesel and specialty chemical products increased 53.7% to $104.6 million compared to the prior-year quarter when reported revenue was $68.0 million.  The company delivered a profit as usual, but traders appeared unimpressed.  The stock gapped lower on the news and two days later set a new 52-week low price.  Granted net income was lower year-over-year by 30.9%, coming in at $3.8 million or $0.09 per share. 

A closer look at the sales mix reveals what has FutureFuel shareholders gnawing their nails.

Sales of the company’s various chemical products were essentially flat in the June quarter after registering a 13.0% leg higher year-over-year in the March quarter.  The June quarter plateau should not have come as a surprise given that the chemicals segment has been erratic at best, shrinking in 2013 after registering weak growth in 2012.

Chemical products include an diverse mix of herbicides, industrial formulas and a bleach activator.   Historically, the bleach activator has been FutureFuel’s bread winner, responsible for 15% to 20% of total sales over the last few years.  In the June quarter sales of this product dropped to just 6% of total sales.  The bleach activator is used in powdered laundry detergents, which have lost market share to liquid detergents in recent years.  FutureFuel’s primary customer for this product is terminating its order arrangement by the end of 2015.  Management has claimed negotiations are still underway, but if sales in the June quarter are any indication, a new supply agreement is not likely.

Orders for other chemicals helped make up the short-fall in bleach activator revenue.   Sales volume of proprietary herbicides doubled in the June quarter compared to the same quarter last year.  However, revenue increased only 75%, which the company attributed to ‘product mix.’  Apparently, certain contributors to the elevated volumes were lower priced items.  Revenue also increased 25% for intermediate chemicals used in the production of antimicrobial solutions and other custom chemicals.  As encouraging as these revenue pick-ups might be, the loss of a major customer for a principle product is certainly a ‘fret’ worthy turn in events.

This brings us to the biofuels segment, which contributed $71.9 million in total sales to the June quarter, representing 3.6 times biofuel revenue in the previous quarter and 2.0 times revenue the year-ago period.  Increased sales through common carrier pipelines offset volume declines in the June quarter.  The revenue accomplishment should have shareholders squat jumping high-fives!  Unfortunately, profits in the biofuel segment were nothing to celebrate.

FutureFuel reported a gross profit margin of 10.2% in the biofuel segment in the year 2014, and the profit margin increased to 12.3% in the first quarter this year.  However, in the June quarter pricing pressures got the best of FutureFuel, gobbling up profits and leaving the company with a profit margin of negative 6.2%.  In other words, it cost FutureFuel more to produce its biofuel products than it recorded in sales.  Management cited erosion in selling prices for transportation fuel and uncertainly in U.S. regulatory mandates for renewable fuels.  

Few if any analysts or economists are predicting a near-term recovery in crude oil prices.  What is more, in the lead up to elections no one should hold their breath waiting for Congress to set policy on much of anything let alone renewable fuels standards.  Thus it seems shareholders could expect more of the same volume and profit dynamic in coming quarters for FutureFuel’s biofuel segment.  This is definitely something to fret about.

Top-line stress is probably not the only factor sending FutureFuel shares into free fall.  Operating cash flow reveals more reasons for FutureFuel shareholders to worry.  The company generated $41.1 million in operating cash in the first three months of 2015.  However, in the June quarter FutureFuel actually used $6.2 million of its cash resources to support operations.    This is not a positive turn of circumstances.  While the company saved some cash by drawing down inventory by $8.5 million in the quarter, approximately $7.2 million in reported sales got bogged down in accounts receivable.  Another $7.9 million in cash was lodged during the quarter in an income tax receivable.  The company also paid down accounts receivable by $980,000. 

The ebb and flow of working capital accounts only creates temporary cash flow problems.  For FutureFuel it is really the quality of earnings that should worry shareholders.   The company reported $3.8 million in net income in the quarter, but a total of $1.8 million or 47% came from a mix of non-operating sources:  $627,000 came from a deferred income tax benefit, $770,000 from increased value in marketable securities, and $450,000 from the sale of investments.

FutureFuel has traded to a record low for the year, taking the price to an enticing 7.8 times trailing earnings.  The dividend yield is a very interesting 2.4% at the current price.  With $142.0 million in cash and another $85.9 million in marketable securities on the balance sheet, the company appears capable of withstanding a few more quarters of negative operating cash flows before the dividend would come under scrutiny.

For investors with a long-term time horizon, the dividend yield could be a good reason to fret less about the last quarter and look more carefully at the company on the basis of annual sales, profit margins and cash flows.  The temporary influences that make the quarter results look exceptionally good or bad get smoothed out.  The erosion in profit margins cannot be escaped by looking at full-year comparisons, but a dividend check helps make worthwhile the wait for resumption in sales growth.

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

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

August 18, 2015

Propel Fuels' Sales of Neste Renewable Diesel Jump 15x

Jim Lane

West Coast renewable fuel retailer says the launch of 100% drop-in renewable diesel has spiked sales on a per-outlet basis — 5X jump in renewable content, and 3X jump in gallons sold.

In California, Propel Fuels is reporting a 15X jump in per-outlet sales of renewable fuel for diesel engines, based on a 3X increase in gallons sold of its new Diesel HPR fuel and 5X increase in renewable content for Diesel HPR (100% renewable content, vs the 20 percent renewable content in B20 biodiesel, which Propel formerly sold).

With the news, Propel is expanding distribution to Southern California, adding 13 new locations in Los Angeles/Orange County (Fullerton, Harbor City, La Mirada, Lakewood, Norwalk, Torrance and Wilmington), San Diego (Chula Vista and Kearny Mesa), and the Inland Empire (Arcadia, Claremont, Hemet and Ontario). Propel debuted Diesel HPR at 18 locations in Northern California in March.

Diesel HPR is a low-carbon, renewable diesel fuel that meets petroleum diesel specifications and can be used in any diesel engine. Utilizing Neste’s [NEF.F] NEXBTL renewable diesel, Diesel HPR is designated as ASTM D-975, the standard for all ultra-low sulfur diesel fuel in the U.S., and is recognized as “CARB diesel” by the California Air Resources Board even though it contains no petroleum.

What’s the secret?

Propel-3For one, everyday low prices. The US Energy Information Administration is reporting an average retail diesel price of $2.96 in the state of California, for the week of August 10. The average retail price for Propel Fuels Diesel HPR, for 12 of its new locations in Southern California is $2.55 per gallon (Propel’s Torrance location is reporting a $3.89 per gallon price, a real outlier).

By the way, Propel’s 100-octane E85 is averaging $3.07 per gallon in Southern California, compared to $3.56 for 87-octane regular and $3.81 for 91-octane premium — a discount of 14 percent to regular and 19 percent to premium, not a compelling discount given the fuel economy differential.

(Note, for the discounts reported above, we’re comparing local (Southern California) Propel prices to a statewide average, so it’s not a precise apples-to-apples comparison.)

California retail fuel prices 081715

The other secret

Propel looks cool, and has good locations they’ve “re-thought the American fueling station”, as put it, offering customers a chance to offset their carbon, as well as re-fueling. In short, they’ve gone some lengths to change the retail mindset.

Propel Fuel

The secret in the Fuel

It’s not a top-secret fact, but it’s not widely known that Neste is supplying its NEXBTL fuel to Propel. Interested to learn more about that fuel, and the technology behind it? Our 8-Slide Guide to Neste is here.

Renewable diesel’s low-carbon fuel performance

According to the U.S. Department of Energy’s Alternative Fuels Data Center, renewable diesel’s high combustion quality results in similar or better vehicle performance compared to conventional diesel, while California Air Resources Board studies show that renewable diesel can reach up to 70 percent greenhouse gas reduction compared to petroleum diesel, and reduces nitrogen oxides (NOx) and particulates (PM 2.5) versus petroleum-based diesel.

Commercial and bulk fueling options

In addition to new retail locations, Propel has launched Diesel HPR commercial and bulk availability for business and government fleets statewide. Delivered in bulk to businesses and agencies, Propel’s HPR is bundled with the company’s CleanDrive emissions accounting software, allowing fleets to easily quantify and report GHG reductions and air quality benefits.

Where to find it, pricing, and customer testimonials

A complete list of locations is also available here. Directions and real-time pricing can be found on Propel’s mobile app available in the Android and Apple app stores. Customer testimonials are available here.

Reaction from stakeholders

“Drivers across Southern California can now experience the power, performance and value of Diesel HPR, while making a positive impact on the air quality of the region,” said Rob Elam, CEO of Propel. “Any diesel vehicle can fill with Diesel HPR since it meets the ASTM D-975 quality standard for petroleum diesel.”

“It’s good to see this high quality, low-carbon diesel coming to corner gas stations across Southern California,” said Mary D. Nichols, Chair of the California Air Resources Board. “This renewable diesel will now be conveniently located for all consumers, and joins a growing suite of new, cleaner transportation fuels in California thanks to our Low Carbon Fuel Standard and forward thinking companies like Propel.”

“We congratulate Propel Fuels on their initiative to introduce Diesel HPR to consumers in California and are excited to be their supplier of choice with our NEXBTL renewable diesel,” said Kaisa Hietala, Neste’s Executive Vice President of Renewable Products Business Area. “NEXBTL renewable diesel reduces emissions as well as enhances engine performance leading to lower maintenance and service costs.”

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

August 09, 2015

REG Buys Imperium Renewables

Jim Lane

The biggest US biodiesel, renewable diesel producer Renewable Energy Group (REGI), or "REG" buys the biggest US facility in asset deal.

The fully-operational 100-million gallon nameplate capacity biorefinery will be renamed REG Grays Harbor. The facility includes 18 million gallons of storage capacity and a terminal that can accommodate feedstock intake and fuel delivery on deep-water PANAMAX class vessels as well as possessing significant rail and truck transport capability.

REG will pay Imperium $15M in cash and issue 1.5 million shares of REG common stock in exchange for substantially all of Imperium’s assets. In addition to these payments, REG will pay either $1.75 million in cash or 175,000 shares of REG common stock at closing as elected by REG. For two years post-closing, Imperium may receive up to a $0.05/gallon payment for biomass-based diesel produced and sold. Were the Washington state-based plant to be used at 50% of operating capacity, the additional payments would be $5 million to Imperium’s investors.

At closing, Imperium will retain its net working capital value of approximately $25 million, and REG will also assume $5.2 million of Imperium’s debt from Umpqua Bank, which has agreed to provide REG Grays Harbor, LLC with an additional loan capacity of up to $5 million to fund capital expenditures and improvements at the Grays Harbor facility. Closing is subject to satisfaction of customary closing conditions.

With debt assumption and working capital retained by Imperium, the deal valued Imperium at $62 million, plus the value of the back-end deal.

Deeper look behind the story

Our 2015 5-Minute Guide to REG is here.

Reaction from the stakeholders

“Bringing the Imperium assets and their team into the REG network is a tremendous addition to our business,” said REG President and CEO Daniel J. Oh. “As we combine our companies, we will expand the reach of REG along the west coast, including production and distribution. We already sell into these markets as they have responded to the call for more clean, advanced biofuels through low carbon fuel standards. This will enable REG to be more efficient and timely in our delivery and improve our supply assurance. We look forward to working with Imperium’s experienced staff and plant employees, maintaining operational activities at Grays Harbor, and becoming active members of the community working with the Port of Grays Harbor and the cities of Hoquiam and Aberdeen.”

“REG’s growth over the last eight years has made them an industry leader and our biodiesel facility in Hoquiam will greatly expand their domestic production footprint and continued success.” said John Plaza, president and CEO of Imperium Renewables. “We hope our facility will help them continue to grow and diversify biofuel production and sales both locally and around the region.”

Umpqua Bank officials welcomed the deal. “We are very pleased to support REG in its acquisition of Imperium and growing their business here for the long-term future,” said Danielle Burd, Executive Vice President and Regional Manager at Umpqua Bank. “We had a great relationship with Imperium over the last several years and look forward to continuing that as a lender to REG Grays Harbor.”

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 30, 2015

EPA Slashes Corn Ethanol Targets Under Proposed Renewable Fuel Standard

Renewable Diesel Takes Smaller Cut

Jim Lane

“EPA continues to assert authority under the general waiver provision to reduce biofuel volumes based on available infrastructure,” says BIO. “This is a point that will have to be litigated. It goes against Congressional intent.”

In Washington, the EPA released its proposed standards for 2014, 2015, and 2016 and volumes for renewable fuels. The volumes, as widely expected, include substantial reductions from the statutory standards in the original 2007 Energy Independence & Security Act. The EPA also released a 2017 proposed standard for biomass-based diesel.

Yet, while attracting significant industry criticism on volumes, the EPA won some cautious praise for cautiously advancing renewable fuels targets for 2014-16.

In today’s Digest, we have a complete coverage of the volumes, round-up of industry reaction, plus a look at the EPA’s rationale, the infrastructure dilemma, the options to change EPA’s proposal in the comment period, and the industry’s short-term and long-term options should the rule be finalized as proposed.

At a glance: 2014, 2015, 2016 volumes


* The EISA Act did not set volumes past 2012 and 1.0 billion gallons for biomass-based diesel, but required EPA to set a volume based on market conditions each year.

Detail: Growing levels of renewable fuels




Detail: The proposed rule for 2015

The proposed volumes are (in billons of US gallons):

Proposed Statutory volume for 2015
Cellulosic 0.106 3.000
Biomass-based diesel 1.700 1.000
Advanced biofuel 2.900 5.500
Renewable Fuel 16.300 20.500

* The EISA Act did not set volumes past 2012 and 1.0 billion gallons for biomass-based diesel, but required EPA to set a volume based on market conditions each year.

The effective corn-ethanol mandate is (in billons of US gallons):

Proposed Statutory volume for 2015
Corn ethanol 13.400 15.000

Detail: The proposed rule for 2016

The proposed volumes are (in billons of US gallons):

Proposed Statutory volume for 2016
Cellulosic 0.206 4.250
Biomass-based diesel 1.800 1.000
Advanced biofuel 3.400 7.250
Renewable Fuel 17.400 22.250

* The EISA Act did not set volumes past 2012 and 1.0 billion gallons for biomass-based diesel, but required EPA to set a volume based on market conditions each year.

The effective corn-ethanol mandate is (in billons of US gallons):

Corn ethanol 14.000 15.000

Detail: The proposed rule for 2014

The proposed volumes are (in billons of US gallons):

Proposed Statutory volume for 2014
Cellulosic 0.033 1.750
Biomass-based diesel 1.630 1.000
Advanced biofuel 2.680 3.750
Renewable Fuel 15.930 18.15

* The EISA Act did not set volumes past 2012 and 1.0 billion gallons for biomass-based diesel, but required EPA to set a volume based on market conditions each year.

The effective corn-ethanol mandate is (in billons of US gallons):

Corn ethanol 13.250 14.400

The EPA says:

EPA writes: “EPA has evaluated the availability of qualifying renewable fuels and factors that in some cases constrain the supply of those fuels to the vehicles that can consume them. EPA has also considered the ability of the market to respond to the applicable standards by producing changes in production, infrastructure, and relative pricing to boost the use of renewable fuels.

“Based on these and other considerations, EPA is proposing volumes which, while be­ low the volumes originally set by Congress, would increase renewable fuel use in the U.S. above historical levels and provide for steady growth over time. In particular, the proposed volumes would ensure continued growth in advanced biofuels, which have a lower greenhouse gas emissions profile than conventional biofuels. EPA is also proposing to increase the required volume of biomass-based diesel in 2015, 2016, and 2017 while maintaining the opportunity for growth in other advanced biofuels that is needed over the long term.

“Due to constraints in the fuel market to accommodate increasing volumes of ethanol, along with limits on the availability of non-ethanol renewable fuels, the volume targets specified by Congress in the Clean Air Act for 2014, 2015 and 2016 cannot be achieved. However, EPA recognizes that the statutory volume targets were intended to be ambitious; Congress set targets that envisioned growth at a pace that far exceeded historical growth rates. Congress clearly intended the RFS program to incentivize changes that would be unlikely to occur absent the RFS program. Thus while EPA is proposing to use the tools provided by Congress to waive the annual volumes below the statutory levels, we are proposing standards that are directionally consistent with Congress’ clear goal of increasing renewable fuel production and use over time. The proposed volumes would require significant growth in renewable fuel production and use over historical levels. EPA believes the proposed standards to be ambitious but within reach of a responsive marketplace.”

The new EPA view, summarized

The EPA’s line of thinking is essentially this: they are considering that supply exists where that supply can find a market given existing infrastructure. So, if the market can only tolerate, say, 14 billion gallons of E10 ethanol, they do not consider capacity or production as “supply” rather, they look to alternative fuels (such as drop-ins) and, in that case, don’t see the production.

The practical goal for the EPA is not to use the RFS2 renewable fuels schedules as a driver to produce investment in capacity-building or infrastructure for distribution. Rather, the EPA opts for a more passive role of providing a market for those capacities that are built based on incremental, if any, changes in infrastructure.

Beyond the blendwall, the hidden issues

EPA wrote in 2013: “Although the production of renewable fuels has been increasing, overall gasoline consumption in the United States is less than anticipated when Congress established the program by law in 2007.”

In its own way, the EPA is signaling that it believes that the original mandates were set, as volumetric rather than percentage standards, at a time when it was believed that the overall gasoline market would be much larger. Lower gasoline volumes — which in their own way reduce emissions – in the EPA’s view bring on issues such as blend walls faster and more intensively, and require regulatory relief.

Options in the courts: Suing to enforce the 2015 statutory numbers

It’s going to be tough for the biofuels industry to sue to enforce the overall statutory volumes, given the shortfall in cellulosic biofuels — even though the EPA is wading into regions of doubtful legislative intent in using blendwall issues as a reason to cut the corn ethanol target. The authority of EPA to waive down cellulosic mandates in unquestioned, in the absence of production capacity — but their authority to waive down renewable fuel standard obligations in the absence of infrastructure being deployed is bound to suggest to incumbents that the best way to prevent renewable fuels is to ensure that there is no investment in distribution.

Why not balance less corn ethanol with more advanced biofuels?

The fear — rightly or wrongly — is that the advanced pool will be drowned in low-cost, imported ethanol that qualifies for the advanced biofuels pool — and exacerbates the blendwall issue that it sees in the marketplace. So, they have increased the advanced pool, but kept it quite close to the biobased diesel volumes.

At the end of the day, there’s not much production out there, outside of the biomass-based diesel capacity (representing renewable diesel and biodiesel) and the cellulosic fuels capacity. At scale, there are some providers such as Aemetis that can produce qualifying advanced ethanol at scale using the milo-biogas pathway, and there’s sugarcane ethanol.

Why is industry deeply disappointed?

RFS2 is based in production targeting, but it is ultimately about requiring distribution. The renewable fuels industry is taking the view that the E10 blendwall issue was well understood, at a technical level, by Congress when they passed the EISA Act — and that the law places the onus on the conventional fuel industry to develop distribution solutions, so long as the production is there.

Well, the production is there. The conventional fuels industry did not develop the distribution solutions, and the EPA is waiving the obligation. To the renewable fuels industry, it looks like rewarding the oil industry for doing nothing. And stranding renewable fuels capacity that was built in reliance on Congress and RFS2 to provide a market.

So, it’s a distribution war. Renewable fuels distributors haven’t built much to speak of — a few thousand outlets feature options for consumers to purchase high-blend renewable fuels. Congress gave every indication that they would expect rising RIN prices would compel obligated parties to find distribution solutions.

When RIN costs rose, the oil industry correctly foresaw that by waving the flag of “exploding prices at the pump,” they could count on the White House and Congress to cave in.

Industry reaction

Brent Erickson, executive vice president of BIO’s Industrial & Environmental Section

EPA has proven they still don’t understand the advanced biofuel industry’s need for policy stability. The RFS was designed by Congress to tear down the so-called blendwall by providing a market floor for biofuels that would enable us to attract capital for construction of new biorefineries and commercialization of advanced technologies. Instead, EPA is helping the oil industry build the blendwall to keep advanced biofuels out of the market.

Just as advanced biofuel companies began to successfully commercialize new technologies, EPA proposed to turn the RFS methodology upside down. That policy instability is responsible for chilling as much as $13.7 billion in investments that the advanced biofuel industry needed to build capacity to meet the RFS goals. Now EPA and the Obama administration claim to be scratching their heads as to why our industry hasn’t built more capacity.

And while the President took time on Thursday to warn that climate change will worsen storms in the future, EPA’s actions on the RFS have already resulted in 21 million metric tons of additional CO2 emissions — equal to putting 4.4 million more cars on the road or opening 5 new coal-fired power plants, which will only increase with today’s proposal.

EPA continues to assert authority under the general waiver provision to reduce biofuel volumes based on available infrastructure. This is a point that will have to be litigated. It goes against Congressional intent.

EPA has proposed higher volumes for advanced biofuels, still below the statutory volumes, but maintained a methodology that discourages investment in the industry. That will likely undercut future production, requiring additional cuts to volumes in future.

Michael McAdams, president, Advanced Biofuels Association

“The Advanced Biofuels Association looks forward to reviewing the complex, multi-year proposal unveiled today in detail and submitting our official comments on this important regulation. We are grateful for the EPA’s good-faith efforts to support this industry, today’s proposal is a step in the right direction and gives more growth potential to advanced and cellulosic biofuels relative to the original proposal. However, we continue to believe that the cellulosic waiver credit and other areas require legislative reform. We look forward to continuing to work with Congress and the Administration to reform and strengthen the RFS so it can deliver on the promise of next-generation renewable fuels.”

Bob Dinneen, president and CEO of the Renewable Fuels Association

“EPA has to be given some credit for attempting to get the RFS back on track by increasing the renewable volume obligations (RVOs) over time. But the frustrating fact is the Agency continues to misunderstand the clear intent of the statute — to drive innovation in both ethanol production and ethanol marketing. The Agency has eviscerated the program’s ability to incentivize investments in infrastructure that would break through the blend wall and encourage the commercialization of new technologies. By adopting the oil company narrative regarding the ability of the market to effectively distribute increasing volumes of renewable fuels, rather than putting the RFS back on track, the Agency has created its own slower, more costly, and ultimately diminished track for renewable fuels in this country.

“Today’s announcement represents a step backward for the RFS. EPA successfully enforced a 13.8 billion gallon RVO in 2013. The industry produced 14.3 billion gallons of ethanol last year. There is no reason to promulgate an RVO rule that takes us backward. All it will do is result in an ever-increasing supply of renewable fuel credits (RINs) that will further discourage private sector investment in infrastructure and technology. This doesn’t make sense.

“The EPA plan fundamentally places the potential growth in renewable fuels in the hands of the oil companies — empowering the incumbent industry to continue to thwart consumer choice at the pump with no fear of consequence for their bad behavior. That is not what the statute intended. And that is not what’s in the best interests of consumers — who will be denied greater access to the lowest cost liquid transportation fuel and octane source on the planet.”

Joe Jobe, CEO, National Biodiesel Board

“It is not perfect, but it will get the U.S. biodiesel industry growing again and put people back to work. I want to thank Administrator McCarthy and Secretary Vilsack for restoring growth to the program and for their commitment to renewable fuels.”

“Biodiesel has proven that Advanced Biofuels can do just what we said they would, which is create jobs and strengthen our energy security while significantly cutting harmful pollution from petroleum,” Jobe said. “Biodiesel has displaced more than 8 billion gallons of petroleum diesel in the U.S. over the last decade. That is an incredible achievement, and we will build on that success under the proposal the EPA released today.”

“However, more can be done, and we particularly look forward to working with the administration on strengthening biodiesel volumes for 2016 and 2017 during the comment period in the coming weeks.”

Brian Jennings, Executive Vice President, American Coalition for Ethanol

“Promises to get the RFS back on track and USDA funding for flex fuel pumps are appreciated, but EPA is yet again proposing to circumvent the RFS by limiting ethanol use to the amount oil companies are willing to blend with the gasoline they refine and not one gallon more. It’s like the NFL saying it’s ok for the New England Patriots to deflate footballs while everyone else must play by the rules.”

As expected, proposed volumes for the 2014 RFS largely reflect actual use. The Agency intends for renewable fuel use to increase from 2014 to 2016. But EPA’s proposed blending targets for 2015 and 2016 fall back on the E10 “blend wall” methodology which has disrupted RFS implementation for more than a year. Earlier this week the U.S. Department of Energy’s National Renewable Energy Laboratory released a report confirming that most retail infrastructure is already compatible with E15. The majority of cars on the road can use E15.

“EPA was forced to withdraw their original 2014 proposal because the law doesn’t allow them to use the blend wall to set levels and doing so undermines the integrity of the program. The good news is that there is still time to get the RFS back on track,” Jennings said. “We will provide ACE members and biofuel supporters a platform to once again blitz EPA with comments before the final rules are issued on November 30.”

Tom Buis, CEO, Growth Energy

“Today’s proposals are better than EPA’s initial proposed rule for 2014, but they still need significant improvement. We have sincere concerns that these proposed numbers are not moving forward to the degree that Congress had intended for the RFS.

“It is unfortunate that EPA chose to side with the obligated parties who have deliberately refused to live up to their obligation to provide consumers with a choice of fossil fuels or lower cost, higher performing, homegrown renewable energy at the pump. Everyone in Congress, as well as all parties in the renewables and oil industry, knew when this legislation was debated and passed into law that the only way the RFS goals could be met was by introducing higher blends into the market moving forward. Now the obligated parties, controlled primarily by Big Oil, have refused to live up to their obligation and the initial read on EPA’s proposal is they have simply acquiesced to the demands of Big Oil.

“One thing that everyone should keep in mind is that this a proposed rule. We will continue to analyze and review these proposals for 2014, 2015 and 2016. Furthermore, Growth Energy will file exhaustive comments with EPA. Just as we successfully commented on the original 2014 RVO proposal by EPA, which ultimately forced EPA to reconsider their initial flawed rule, we are confident that our forthcoming comments will highlight the changes that are necessary to meet the goals of the RFS.

Elizabeth Farina, President, UNICA (Brazilian sugar growers association)

“While UNICA is disappointed that today’s Renewable Fuels Standard proposal from the U.S. EPA significantly reduces target volumes for advanced biofuels below Congressionally mandated levels, we are pleased to see growing requirements for advanced biofuels in 2015 and 2016. This leaves the door open for continued American access to sugarcane ethanol, one of the cleanest and most commercially ready advanced biofuels available today.

“EPA identifies Brazilian sugarcane ethanol as an advanced biofuel because it reduces greenhouse gases by more than 60 percent compared to gasoline. This advanced biofuel from an American ally plays a modest but important role supplying the United States with clean renewable fuel. For the past three years, more than one billion gallons of sugarcane biofuel imported from Brazil flowed into American vehicles. During this time, sugarcane ethanol has comprised only 2 percent of all renewable fuel consumed by Americans, but has provided nearly 15 percent of the U.S. advanced biofuel supply.

“Our association looks forward to commenting on this proposal and will continue to play an active role in the RFS rulemaking process, serving as a source of credible information about the efficiency and sustainability of sugarcane ethanol. Likewise, Brazil will continue to be a strong, dependable partner helping America meet its clean energy goals.”

Jeff Lautt, CEO, POET

“Today’s proposal by the EPA puts the oil industry’s agenda ahead of farmers and rural America. While the EPA is correct in recognizing the intent of Congress to continue growth in biofuels, the targets announced today fall well short of rural America’s potential to produce low-cost, clean-burning ethanol.

“America’s farmers have answered the call laid out in the Renewable Fuel Standard to help wean our nation off of foreign oil. Agriculture has taken incredible strides in recent years, growing yields through efficient farming practices and technology improvements, and we have all reaped the benefits of that labor through greater availability of high-performance, domesticly produced ethanol. Rural America has upheld its end of the deal, and I ask that the EPA uphold Washington’s end.

“Some in Washington do understand what’s at stake and are still committed to rural America. The announcement by Sec. Vilsack today that UDSA would provide funds for flex pump infrastructure aims to increase consumer access to clean, high-performance fuel produced here at home. It is an effort obligated parties should have been driving since the RFS became law. We hope Sec. Vilsack’s commitment to clean fuels and rural America rubs off on some of his colleagues in the Administration.

“For the sake of consumer choice, rural jobs and strong markets for farmers, I hope the EPA fixes its mistakes in the proposed rule and recognizes our nation’s capability to power itself with clean, renewable fuel.”

Monte Shaw, executive director, Iowa Renewable Fuels Association

“Today’s RFS proposal gives in to Big Oil lies and turns its back on consumers, fuel choice, and the environment. The Obama Administration has no legal authority to reduce the ethanol numbers. For conventional biofuels, this is a path to nowhere. The proposed ethanol level for 2016 is less than what we already produced in 2014. This proposal will not crack the petroleum monopoly and will not allow consumers to benefit from the choice of lower-cost E15 and E85. As we’ve done over the past year, we’ll continue to work with all parties to fix this proposal.”

“It’s a positive that the proposal does allow for some growth in biodiesel. However, EPA inexplicably fast tracked Argentinian biodiesel imports earlier this year, and today’s proposed rule fails to take those imports into account. As this could actually lead to lower U.S. biodiesel production, we’ll be focused on working to improve the biodiesel targets for 2016 and 2017 during the comment period.”

“Last year Iowans swamped the EPA with negative comments on the previous RFS proposal. While this new proposal is better, it’s a far cry from good enough. We need Iowans to once again step up and tell the EPA to follow the law and to let the RFS crack the oil monopoly as Congress intended.”

Adam Monroe, President, Novozymes Americas

“Renewable fuels are a huge opportunity for the United States to achieve President Obama’s climate change goals, capture private investment, create jobs and save drivers money. Today’s proposal undermines all of that.

“We are disappointed that the agency is allowing Big Oil to maintain an artificial impediment like the so-called blend wall. While President Obama is pushing to reduce greenhouse gas emissions in other sectors, he is letting the oil industry attack climate-smart alternative energy.

“The only way the world will use more renewable energy is with bold leadership and bold policy. The EPA’s aspiration should not be a slow buildup in renewable fuel volumes, it should be an economy driven by clean technologies, supporting thousands of new jobs and billions in private investment. That all starts with aggressive goals for the RFS.

“During the comment period, we urge the Administration to rethink its approach and support an existing law that works: the Renewable Fuel Standard. Together, we can get this right. If America does not capitalize on the benefits of home-grown fuel, other countries will. In fact, they already are.”

Industry opponent reaction

Emily Cassidy, Research Analyst, Environmental Working Group

Using the Environmental Protection Agency’s own estimate, we calculate that the corn ethanol mandate has been worse for the climate than projected emissions from the controversial Keystone XL pipeline.

What makes matters worse is that the EPA is about to mandate that more corn ethanol must go into American gas tanks. Today the EPA proposed new minimum volumes of corn ethanol that refiners would be required to blend into gasoline this year and the next. Congress set this policy, called the Renewable Fuel Standard, in the Energy Independence and Security Act of 2007. At the time, lawmakers hoped that using ethanol and other renewable fuels would reduce carbon emissions and American dependence on foreign oil.

Last year, corn ethanol producers churned out 14 billion gallons, about 13.4 billion gallons of which were blended into the 135 billion gallons of gasoline the nation’s drivers used.

Extracting tar sands and turning them into oil is more energy-intensive than traditional drilling for petroleum. According to the Natural Resources Defense Council, dirty oil transmitted from Alberta, Canada, to the Gulf Coast by the Keystone Pipeline would emit 24 million tons of carbon per year. But our calculations show that last year’s production and use of 14 billion gallons of corn ethanol resulted in 27 million tons more carbon emissions than if Americans had used straight gasoline in their vehicles. That’s worse than Keystone’s projected emissions. It’s the equivalent of emissions from seven coal-fired power plants.

So far the federal corn ethanol mandate has resulted in a massive influx of dirty corn ethanol, which is bad for the climate and bad for consumers. The only interest it benefits is the ethanol industry. As we’ve said before, it’s time for Congress to correct course and reform the broken Renewable Fuels Standard to make way for truly green biofuels.

Comment period

Once the proposal is published in the Federal Register, it will be open to a 60 day public comment period through July 27.

What can industry do to change these outcomes?

The industry has two options, in general.

1. Demonstrate a stronger market for higher ethanol blends such as E15 or E85. This would contribute to restoring gallons lost in the overall renewable fuels pool — and, essentially, benefit corn ethanol producers.

2. Demonstrate a stronger biomass-based diesel production capacity, which should be a no-brainer, but also convince EPA that production capacity can and would translate into actual production.

Where can growth occur, outside of RFS2 rules and targets?

The RFS2 targets should incentivize all parties in renewable fuels to shift strategies more towards driving consumer demand over compliance-driven demand.

This means:

1. Build the higher-blend ethanol market based on price and positive community attributes as perceived by the consumer.

2. Build the biomass-based diesel market based on corporate demand for B5 blends based on social, and price-hedging opportunities — while limiting the practical impact of any differential in street prices of diesel vs biomass-based diesel by having low-level blends (that is, a $1.00 per gallon cent cost differential translates into a nickel a gallon at B5 blend levels).

3. Building markets in diesel and jet fuel based on overall price parity. That is, building a case that fuel price should include a) the cost of volatility and risk with fossil commodity fuels; b) the social costs, such as disappointing end-use customers who prefer renewable fuels, and c) differential in maintenance costs and engine replacement cycles.

4. Rely on the EPA to support long-term capacity building in cellulosic biofuels with appropriate market mandates.

The bottom line

Clearly the industry is apoplectic over the the strategic shift at EPA. As BIO’s Brent Erickson tipped, “EPA continues to assert authority under the general waiver provision to reduce biofuel volumes based on available infrastructure. This is a point that will have to be litigated. It goes against Congressional intent.”

For corn ethanol, there is going to be a strong push back based on hopes that persuading EPA to stick with a tough mandated number will prompt the conventional fuels industry to push through wider adoption of E15, which would be good not only for corn ethanol, but ultimately for advanced ethanol fuels when they are available in higher numbers.

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 22, 2015

Darling Ingredients: At the Margin

by Debra Fiakas CFA

This week Darling Ingredients (DAR:  NYSE) reported earnings of $100,000 on net sales of $874.7 million in the first quarter ending March 2015.  Darling is a recycler of sorts, collecting by-products of the food production industry and recycling the left-overs and waste into proteins, fats and leathers.  Nothing goes to waste.  Every last chicken feather, hide, gallon of used cooking grease and cake crumb gets up-cycled to a usable material for feed, food, fuel or clothing.  Its customers include pet food producers, personal care manufacturers and textile users, among others.

Darling used to sell its non-edible oils to the biofuel industry until it entered into a joint venture called Diamond Green Diesel with oil and gas giant Valero Energy, Inc. (VLO:  NYSE).  The joint venture provides a good hedge for Darling against declines in the prices for its oil, which can weaken against other oils from corn, soy or palm crops.   Diamond Green produced 37 million gallons of renewable diesel in the quarter.

The commodities business is a tough one and Darling had been under some pressure in recently months from weakened selling prices.  Sales in the three months ending March 2015, slipped compared to the year-ago quarter on lower selling prices for fat products.  The strong dollar also trimmed reported sales.   Management seems to have righted the ship with a cost cutting program and restructuring in some divisions.  The company also has some protection if raw materials prices increase  through sales contract include provisions for selling price adjustments.    During the earnings conference call management characterized margins in the feed segment as ‘normalizing’ and in the food segment ‘stable’ following restructuring efforts.

The breakeven earnings results were better than analyst expectations for the quarter and offered encouraging evidence that management had regained control of margins.   On a non-GAAP basis Darling generated $0.09 in earnings per share after excluding acquisition and integration costs and amortization.  This compares to the consensus estimate of non-GAAP earnings of $0.06 per share.  The appearance of an upside surprise was enough to bring investors and traders back to DAR, which gapped higher in the first day of trading following the earnings release.

Crystal Equity Research has a Buy rating on DAR.  The stock appears overbought in the short term, but management’s efforts to regain profit margins have borne fruit and the stock looks interesting for investors with a long-term horizon.

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 a Buy rating on DAR and Darling Ingredients is included in the Biofuel Group of the Beach Boys Index of alternative energy developers and producers.

February 02, 2015

FutureFuel's Future

by Debra Fiakas CFA

Last week the president of renewable chemicals producer FutureFuel Corporation (FF:  NYSE) turned in his resignation.  Lee Mikles is around sixty and seems a bit young for retirement.  He had been with the company from day one and served as the chief executive officer through the end of 2012.  He owns 2.3 million shares of FutureFuel stock or about 5% of the outstanding shares. 

Maybe Mikles is just looking for a better paycheck.  The last time the company disclosed compensation, Mikles was down for $36,000 in compensation as a director.  Along with the CEO and COO, Mikles has not been drawing a salary and receive no cash or stock bonus from FutureFuel. However, looking closer in the fine print of the footnotes, the company discloses that an affiliate of Mikles was paid $132,491 in 2013 related to his services to the company, an arrangement that was followed in all the years he worked for FutureFuel.  Similar arrangements were made for the company’s other officers.

Clearly, Mikles and his colleagues were not draining the FutureFuel bank accounts.  FutureFuel reported $378.9 million in total sales in the twelve months ending September 2014, providing net income of $49.5 million or $1.14 per share.  Operations generated $31.7 million in cash during the same period, implying that for every $1 of sale the company keeps 8 cents.  This is not a remarkably high rate, but given that FutureFuel is fairly consistent in generating profits and free cash flow, it takes the company’s cash conversion rate looks impressive.

At the end of September 2014, FutureFuel held $88.6 million in its bank accounts and held another $106.2 million in short-term investments.  The company has no long-term or short-term debt.  FutureFuel’s financial reports are so impressive it is hard to understand why Mikles would not want to hang around longer and just wallow in the flow of money.  Granted it was his name in the press release in December 2014, that announced the company’s intention to reduce the quarter dividend by 50%.  The dividend will be $0.24 this year, down from the $0.48 paid in 2014.

Still Mikles has helped preside over strong financial performance.  The company sells biodiesel and byproducts of the biodiesel process.  There is additional revenue from the sale of ‘renewable identification numbers’ associated with its renewable diesel.  FutureFuel turns about about 59 million gallons of biodiesel per year using a mix of oils, tallows and lards as feedstock at a plant in Arkansas.  The biofuel segment accounted for about 56% of total sales.  The other 44% of revenue comes from sales of specialty chemicals.  FutureFuel will produce chemicals to order, but mostly they just sell a line of performance chemicals like solvents, polymer additives, herbicides and bleach activator.   

The sales mix has been changing in favor of chemicals as price weakness and reduced demand for biodiesel in 2014, led to a decline in sales value and volume in that segment.  Fortunately, some products in chemicals segment have been gaining market share.

What is not growing at FutureFuel is profits.  EBITDA adjusted for non-cash expenditures declined to 15.4% of sales in the most recently reported quarter ending September 2014, compared to a much richer 23.3% in the same quarter of the previous year.  Both biofuel and chemicals segments have been hit by eroding profit margins.  Some might expect the biofuel division to experience a boost if policy makers in the U.S. re-establish a renewable fuel volume obligation and provide some clarity on credits to fuel blenders for using biofuel.

FutureFuel’s future appears to depend upon some serious blocking and tackling to maintain the company’s history of profits.  Perhaps it is this daunting task that has Mikles heading to the sidelines – at least in terms of operations.  Mikles will remain as a director, but all the troublesome day-to-day decisions for FutureFuel’s future will be someone else headache.

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.

December 11, 2014

REG Buying European Biodiesel From Used Cooking Oil Producer

Jim Lane REG logo

US biodiesel leader heads for the EU – what’s up with used cooking oil, and what is REG’s path forward with the German-based biodiesel producer?

In Iowa, Renewable Energy Group [REGI] and IC Green Energy announced that REG will acquire ICG’s majority equity ownership position in German biodiesel producer Petrotec AG (XETRA: PT8). Closing of the transaction is expected before year end.

Dan Oh
Last month, REG CEO Dan Oh told The Digest, “We’re not done growing, that’s for sure! We’ve done something of consequence every quarter. We tend to be product and logistics focused when looking at a new market — right now we are long biomass based diesel, and the two biggest markets are the US and EU, and our strength in lipids might feed into a number of products there.

“But it’s not just a case of looking for a good market, there are lot of good technologies developed overseas, too. We look far and wide, we’ve not done anything but we do state that “we are actively looking”, and we will lead with things we do well, and we want to retain a fantastic group of people that we have built up.”

Deal terms

ICG, Israel Corporation’s vehicle for investing in the alternative energy market, accepted an offer from REG European Holdings B.V. to purchase ICG’s 69 percent equity ownership in Petrotec AG for US $20.9 million, or US $1.235 per share, to be paid in newly issued REG shares valued at the 30 trading day volume-weighted average for the day prior to signing. The REG subsidiary will also purchase ICG’s loan to Petrotec AG in the amount of approximately US $15.4 million.

Next steps

In the next several weeks, REG European Holdings B.V. intends to make a cash tender offer for all other Petrotec shares at a price no less than the value per share to be received by ICG.

More about Petrotec

Petrotec is a fully-integrated company utilizing more than 15,000 collection points to gather used cooking oil (UCO) and other waste feedstocks to produce biodiesel at its two biorefineries in Emden and Oeding, Germany. Petrotec’s nameplate production capacity is 55.5 million gallons (185,000 MT) per year, produced predominantly from UCO. Petrotec’s collection service, treatment processes, and biorefineries, are certified by both German and European regulators. Its biodiesel is compliant with EU standard EN 14214 and is one of the most sustainable biofuels marketed in Europe.

The company has been benefitting of late from premiums awarded for using waste-based biodiesel that count towards renewable fuel obligations under the EU’s Renewable Energy Directive. Last year, we reported that with the Renewable Energy Directive’s double-counting feature for waste-based biofuels and the proposed quadruple counting for second generation biofuels in the RED reform proposals, Petrotec saw Q2 2013 production rise by 22%.

Back in 2012, we reported that Petrotec had moved into the Spanish market via a local office in Barcelona, after concluding there was existing market for the production of biodiesel from used cooking oil, especially now with the market gap left by policy prohibiting Argentine biodiesel. The company had started collecting used cooking oil and producing biodiesel on a tolling basis.

The company found itself mixed up in a bizarre dioxin scare back in 2011 when Petrotec sold dioxin contaminated fatty acids to an unnamed Dutch company for use as an industrial lubricant. Then, the Dutch intermediary sold the product to Harles and Jentzsh for use in animal feed. H&J mixed the biodiesel waste products into animal feed, leading to the destruction of “thousands of chickens” and instructions to “a thousand farms” to refrain from selling contaminated feed.

About ICG

ICG is best known in the sector as the lead investor in Primus Green Energy, which last year commissioned its 100,000 gallon-per-year natural gas-to-gasoline pre-commercial demonstration plant at its Hillsborough facility.

The demonstration plant utilizes Primus’ proprietary STG+ technology, which is a four-reactor catalytic process that converts syngas derived from natural gas or other feedstocks to gasoline, jet fuel, diesel or aromatic chemicals directly, without the need for further treatment. The process produces drop-in fuels that are ready for immediate distribution, sale and consumption using the existing fuel distribution infrastructure.

Reaction from REG

“REG’s investment in Petrotec is a natural extension of our business strategy which should enable us to better capture value from international trade flows and to participate in European biofuel markets,” said Daniel J. Oh, REG President and CEO.

“Petrotec’s people, culture, business model and technology are similar to ours at REG. We look forward to working with the Petrotec team as REG expands its business into Europe and further delivers the key benefits of our international industry: energy security and diversity, environmental stewardship and food security.”

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.

December 04, 2014

Biodiesel Christmas Caroling: FFA La La

Jim Lane

“On the way” forever, talked up by all, deployed by some – technologies that handle high free fatty acid feedstocks like used cooking oil are coming into their hey-day, via players like REG, Novozymes, Pacific Biodiesel, Blue Sun, Piedmont, COMAC and more.

Christmas come early for advanced biofuels?

One of the most alluring targets in advanced biofuels — although cruelly mis-named — is in the world of free fatty acids. Most of the oils currently used for biodiesel are sourced from soybeans, palm or rapeseed, and precisely because they contain less than 0.5% free fatty acid (FFA) content. Traditional biodiesel process designs have difficulty handling oils containing more than 0.5% FFA, meaning that, for many, waste oils with high FFAs have not been a viable feedstock option.

For example, used cooking oil, or “gutter oil” as it is known in China. At one time a few years back, restaurants would pay to have it picked up. These days, used cooking oil is sold, but at a considerable discount to virgin oils like soy or rapeseed — and that spells opportunity for those who have the technology to address conversion of high free fatty acid feedstocks.

For some time, Renewable Energy Group (REGI) has been translating its technical abilities with FFAs into an advantaged position in feedstock costs, and that had fueled in many ways its acquisition and expansion program.

The race for FFAs heated up this week with news from Denmark of the launch of Novozymes (NVZMY) Eversa, the first commercially available enzymatic solution to make biodiesel from waste oils. The enzymatic process converts used cooking oil or other lower grade oils into biodiesel. The resulting biodiesel is sold to the same trade specification as biodiesel created through traditional chemical processing. Piedmont Biofuels and Blue Sun Biodiesel have been using a Novozymes process — now, it’s poised for a break-out.

A solution that loves free fatty acids

“The idea of enzymatic biodiesel is not new, but the costs involved have been too high for commercial viability,” says Frederik Mejlby, marketing director for Novozymes’ Grain Processing division. “Eversa changes this and enables biodiesel producers to finally work with waste oils and enjoy feedstock flexibility to avoid the pinch of volatile pricing.” Eversa can work with a broad range of fatty materials as feedstock, but initial focus has been on used cooking oil, DDGS corn oil and fatty acid distillates. The enzymatic process eliminates the need for sodium methoxide, one of the most hazardous chemicals in traditional biodiesel plants. The radical reduction of harsh chemicals and by-products ensures safety for both personnel and the environment.

“Switching to Eversa can lead to a safer working environment for plant operators. The enzymatic process does not use high pressure or high temperature,” says Frederik Mejlby. “And when it comes to the actual enzymes, their organic nature and mild process conditions do not generate toxic components as in some chemical biodiesel processes.”

Better process economy

Making the change from a chemical catalyst to the enzymatic process requires retrofitting in existing plants. Biodiesel producers looking to utilize Eversa will therefore have to invest time and resources to make the switch to the enzymatic process. Novozymes pointed to Desmet Ballestra for the plant conversion tech. In spite what Desmet described as “the sizable task involved in modifying existing plants,” which are currently operating using the chemical conversion processes, they predict that enzymatic processing “will prove popular” with biodiesel producers.

“The enzymatic process is simple and does not need much pre-treatment. It is the best alternative for modifying existing plants to enable them to incorporate difficult-to-convert oils,” says Marc Kellens, Group Technical Director at Desmet Ballestra. “In conventional plants, 80 to 85% of the costs of biodiesel are linked to feedstock cost. So the more you are able to convert a cheaper feedstock into biodiesel, the more profitable the business is. The enzymatic process makes it possible to convert waste oils into biodiesel with relatively low capital expenditure by retrofitting a plant.”

Over at Pacific Biodiesel

The impact for biodiesel producers in being able to handle used cooking oil was demonstrated this week in Hawaii when Hawaiian Electric and Pacific Biodiesel Technologies signed a contract for the Maui-based biofuel company to supply biodiesel processed from waste cooking oil and other local feedstocks, primarily for use at the 110-megawatt Campbell Industrial Park generation facility with the capability for use at other O`ahu power plants as needed.

“The new technology installed at Big Island Biodiesel enables us to process the most degraded feedstock into the highest quality biodiesel available in the United States,” said Robert King, president of Pacific Biodiesel. “With this new contract, Hawaiian Electric will be purchasing approximately half our production volume, ensuring the continuous operation of the Kea`au facility. We are hopeful the PUC will agree that this contract for locally produced renewable fuel at a lower cost is a good thing for Hawai`i.

The two-year contract for a minimum of two million and up to three million gallons per year will go into effect in November 2015, subject to review and approval by the Hawai`i Public Utilities Commission. Pacific Biodiesel is currently under contract to supply biodiesel for the State of Hawai`i-owned Honolulu Airport Emergency Generation Facility scheduled to be in service by mid-2015. That 10-MW facility will provide electricity to Hawaiian Electric’s grid to supply all O`ahu customers under normal operations with the ability to isolate itself from the grid to power only the vital needs of the Honolulu International Airport in an emergency. The Campbell Industrial Park plant now uses biodiesel processed from waste fats and oils by Iowa-based Renewable Energy Group, Inc., a leading North American advanced biofuels producer, under a contract that will end in November 2015.

“This new contract accomplishes our goal of using locally produced biofuel to the greatest extent possible,” said Alan Oshima, Hawaiian Electric president and CEO. “Biodiesel for the Campbell Industrial Park plant will come from Pacific Biodiesel’s recently commissioned Hawai`i Island refinery at a lower price than we now pay for mainland supplied biodiesel.”

Recent research advances in used cooking oil

In the Emirates, the Masdar Institute of Science and Technology and Tadweer, the Center of Waste Management – Abu Dhabi have inked a two-year R&D pact to explore improvements in technologies for the conversion of waste cooking oil to biodiesel. The groups will be joined in the project by Australia’s Laboratory for Turbulence Research in Aerospace and Combustion, Department of Mechanical and Aerospace Engineering, University of Sydney. Principal investigator for the two-year effort will be Dr. Isam Janajreh, Associate Professor of Mechanical Engineering and Head of the Waste to Energy (W2E) Laboratory at Masdar Institute.

Dr. Fred Moavenzadeh, President, Masdar Institute commented: “The research agreement with CWM illustrates the UAE’s commitment to facilitating the production of clean energy and minimization of waste. With the support of the country’s leadership, we will continue our contribution to the development of clean energy technologies and ensure faster adoption of sustainable measures. We are confident that the outcome of this collaboration will encourage the community to support such green technologies.”

Boeing and COMAC

In China, Boeing and Commercial Aircraft Corp. of China opened a demonstration facility that will turn waste cooking oil, commonly referred to as “gutter oil” in China, into sustainable aviation biofuel. The two companies estimate that 500 million gallons (1.8 billion liters) of biofuel could be made annually in China from used cooking oil.

“Strong and continuing teamwork between Boeing and COMAC is helping our industry make progress on environmental challenges that no single company or country can solve alone,” said Ian Thomas, President, Boeing China. “By working together for mutual benefit, we’re finding innovative ways to support China’s aviation industry and build a sustainable future.”

Boeing and COMAC are sponsoring the facility, which is called the China-U.S. Aviation Biofuel Pilot Project. It will use a technology developed by Hangzhou Energy & Engineering Technology Co., Ltd. (HEET) to clean contaminants from waste oils and convert it into jet fuel at a rate of 160 gallons (650 liters) per day. The project’s goal is to assess the technical feasibility and cost of producing higher volumes of biofuel.

Biofuel produced by the China-U.S. Aviation Biofuel Pilot Project will meet international specifications approved in 2011 for jet fuel made from plant oils and animal fats. This type of biofuel has already been used for more than 1,600 commercial flights.

Deploying used cooking oil elsewhere for aviation fuels

Last month, SAS Airlines and Norwegian Air flew their first flights on biofuels, with a 48% blend with 52% fossil aviation fuel. The companies’ intention is to promote demand so fuel will be produced from Norwegian forests, rather than the used cooking oil feedstock used in the launch. Norwegian flew from Trondheim to Oslo while SAS flew from Bergen to Oslo.

Back in September, Finnair flew a A330 from Helsinki to New York partially on used cooking fuel-based jet fuel to highlight the opening of the UN Climate Summit. The fuel was supplied by SkyNRG Nordic, a JV between SkyNRG and Statoil Aviation. The airline says it is hoping to set up a biofuel fueling hub along with partners to help reduce the cost of aviation biofuels and strengthen the supply chain.

Earlier this year, the (Chinese) Civil Aviation Administration of China granted Sinopec Chinese Technical Standard Order Authorization (CTSOA) for aviation biofuels, certifying that the fuel has met all required industry standards. An April 2013 test flight using hydrotreated palm oil and recycled cooking oil feedstock on an Airbus 320 owned by China Eastern Airlines was the test case for the certification. Sinopec said it will now work on expanding the feedstocks it uses to produce aviation biofuel.

In June, UOP (a division of Honeywell (HON) announced that Honeywell Green Jet Fuel produced from its UOP Renewable Jet Fuel process will power 200 commercial flights on GOL Airlines during the 2014 FIFA World Cup™ in Brazil. The Honeywell Green Jet Fuel was made from inedible corn oil and used cooking oil. Each flight will use a blend of Honeywell Green Jet Fuel with petroleum-based jet fuel. UOP supplied nearly 92,000 liters of Honeywell Green Jet Fuel for the flights. Compared with petroleum-based jet fuel, this renewable fuel will reduce greenhouse gas emissions by 185 metric tons of CO2 over the course of the event based on life cycle analysis.

Used cooking oil, recent adoption for ground transport

In October, Lootah Biofuels has signed an agreement with Emirates Transguard, a leading security provider, to provide biodiesel for a B5 blend for the fleet. Lootah uses old cooking oil as their feedstock. The agreement aims at taking up the initiative for greener fuel option as well as reduction of UCO waste, thereby creating value for the green economy and environment. The UAE is making strides in incorporating biodiesel into their public transit system, as well. The Roads and Transport Authority plans to expand to 60 biodiesel-based buses in the fleet in the next three years.

Last month, Greasecycle added the University of British Columbia to its list of used cooking oil suppliers for its biodiesel supply chain, but the university will also get to send its students—already working on biodiesel—to work with the company first hand on research projects. The company already collaborates with three other universities in the province as well as hotels, restaurants and 30 Burger Kings.

In September, Recoleo said that it will begin collecting used cooking oil from more than 800 McDonalds around the country for processing into biodiesel. Before this new contract, the company was already collecting 400,000 liters of used oil per month from 1,500 households and 3,500 businesses while selling biodiesel to 5,000 clients.

The Bottom Line

It may be second-hand, cooking oil that is, but recycling is hot — allowing biofuels to serve as a backstop to the food industry and extending its sustainability and translating its waste into energy, rather than competing on the front end for virgin oil feedstocks. Virgin oils are going to dominate for a long time, but cooking oil and other high FFA feedstocks allow companies to increase production without necessarily driving up the feedstock costs — and that’s good news for advanced biofuels — and cooking, too.

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

November 11, 2014

Interview With Dan Oh, CEO Of Renewable Energy Group

Jim Lane REG logo

Leading a series this week, “The Strategics Speak", in which we’ll look at what a number of major strategic investors see in the landscape relating to industrial, energy and agricultural investment, Biofuels Digest visited with Dan Oh, CEO of Renewable Energy Group (REGI), which has long been the US’s leading independent biodiesel producer but in recent years has steadily diversified and expanded operations.

In many ways, REG is the entire industrial biotech business in a nutshelll. They’re fermentation (through REG Life Sciences), and thermocatalytic (through REG Geismar and their extensive biodiesel business). They use both sugars and lipids as feedstocks. They make both biodiesel and drop-in renewable diesel. They make fuels and an array of chemicals. They’re in the distribution and blending business — distributing their fuels blended with traditional fossil distillates. They have multiple plants and labs in the West, Midwest and Eastern sections of the country. They’re deep into some of the most exotic commercial synthetic biology out there.

In other ways, they achieve what others aspire to. Multi-feedstock, multi-product — it’s a reality, not a goal. Publicly traded after a successful IPO — a reality. Generating substantial cash flow — a reality. And don’t let the “aw, shucks” demeanor fool you for a moment — if they don’t “talk the talk” with the hyperbole of Silicon Valley, they “walk the walk” when it comes to building capacity, building revenues, and building reputation.

Dan OhThe Digest: The company has substantially diversified, in recent years, let’s start there.

Oh: That journey started in a practical sense in 2010, although we’ve always planned to be a broad energy & chemicals company. We’re grounded as a team in the lessons and disciplines of commodity agriculture, so we knew that we had to have to have a lot of options, more than just one raw material choice, adaptable technology, and many different products out of that.

So, we started with one feedstock and expand across the lipid spectrum, and in 2010 we started targeting other chemicals and fuels, beginning of a long we’ve of diversification. To date, we’ve invested almost $300m in diversification.

Lipids are a worldwide business as are sugars, and we are looking for base platforms that wecan grow and adapt, with a focus on the distillate area and the intermediate speciality chemicals. Right now, we’re building out biomass based diesel across North America, and ultimately taking it international, based on fundamental internal growth, M&A,plus technology upgrading and innovation. We’re generating great cash flow from advanced biofuels, and we have array of technology options out there, so we have got so many good choices that it is almost about what you’re not going to do rather than what you’re going to do.

The Digest: After a successful IPO, you now find yourself in a leading position when it comes to dialogue with Wall Street about industrial biotech. How do you talk about these advanced technologies there?

Oh: Money’s not brave. Wall Street want to see profitable companies, they want to see the downside protected and lots of upside. In our case, we are building an industrial business that happens to be green, and I think we’re getting credibility as an industrial company, with strong balance sheet, and looking backwards, over 100M in EBITDA each year on average. Our strategy is born from practical needs and experience, in the end, you’ve got to run a business, and be subject to standard finance practice just like everyone else, and let’s face it, all companies have a hard time raising money [at this stage].

The Digest: In the past year you acquired LS9, now known as REG Life Sciences, one of the hottest technology sets available. How it is going?

Oh: LS9 was a bit more like late stage private equity, there’s a body of work there that’s very good, now it’s time to move to commercialization and become profitable. We think the company will do better without, as a venture-backed company, worrying about about where the next round of finance is coming from, and not having to swing for the fences with a home-run product right away. The LS9 technology has the ability to iterate a lot of products, and on our side we have put together a platform of 500 people — and there are a lot of PhDs here, master degrees, these are not not minimum wage jobs here, this is a high talent business — when you combine out platform of people and logistics and distribution with a platform that can iterate a lot of products, you can see how to get that technology and those products into the market.

In many ways, these were two companies born of the same idea, both were originally designed to make biodiesel, we started with lipids, they started with sugars. The cool thing for us is that, from their earliest days until today, they continue to improve the tools, they are always innovating the science.

The Digest: The other major recent acquisition was the Dynamic Fuels / Syntroleum business. What’s the latest there?

Oh: We’re very pleased with the investment, and the transition from prior to current ownership, we’ve built from a lot of great decisions from the prior owners, and what we have been able to bring is a seamless commercialization team that understands refining, plus we have brought our feedstock pretreatment and refining technologies, and logistics system. It takes a total effort to make any plant work — you can’t just have a cool core technology. Now, as we have announced recently, we have achieved 90% utilization compared to nameplate capacity.

The Digest: For years now — whether it is the Renewable Fuel Standard, tax credits, or other aspects of energy policy, there’s been an extended dialogue with Washington DC about the advanced bioeconomy. Now, the midterm elections have swept Republicans to power int he Senate. How do you see that dialogue changing after the elections?

Oh: Advanced biofuels do have broad bipartisan support, in each region and state there are a body of politicians who see the benefits, and in general things come up on the “happy and satisfied” side of the scale when they look at the sector. we’ve talked wide and far to lots and lots of people,and we’re confident that that support is going to continue, and in fact the declining energy prices make it simpler for people to think about the good aspects of our energy policy in energy security, environment when there’s less extra cost pressure from energy, and it is a heck of a lot easier to absorb costs [from advanced technologies] into a low cost energy mix.

Our job is simple: we have to make quality fuel, we have to be affordable, we have to compete. But every gallon of biodiesel makes it easier to achieve the broader energy policy goals of diversifying the energy mix — and the benefit of biofuels on the agricultural sector are not difficult to see and there are more sectors that are benefitting from it, such as advanced manufacturing and high tech. Bottom line, you can be a hard core neoconservative, hard core environmentalist, or only interested in agriculture or some other industry, and you’ll find lots to like about advanced biofuels.

The Digest: There’s been quite a bit of expansion, yet you’ve spoken of international opportunities, should we expect to see more from REG? And if you target international expansion, will you be looking for advantaged feedstock, or a solid market, or what other factors might be on your mind?

Oh: We’re not done growing, that’s for sure! We’ve done something of consequence every quarter. We tend to be product and logistics focused when looking at a new market — right now we are long biomass based diesel, and the two biggest markets are the US and EU, and our strength in lipids might feed into a number of products there. But it’s not just a case of looking for a good market, there are lot of good technologies developed overseas, too. We look far and wide, we’ve not done anything but we do state that “we are actively looking”, and we will lead with things we do well, and we want to retain a fantastic group of people that we have built up.

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.

October 05, 2014

FutureFuel, Present Buying Opportunity

Tom Konrad CFA

FutureFuel Corp. (NYSE:FF) manufactures chemicals, biofuels (mostly biodiesel), and other biobased products.  About 60% of revenues have historically come from the Chemicals unit, with the balance of 40% coming from the Biodiesel unit. Both units saw sharp declines in revenues over the last two quarters for reasons that seem likely to be temporary (at least in part.)  The stock has sold off sharply as a result, falling from the $18-$21 range this spring to its $12 recent price


The entire biodiesel industry has been suffering from the expiration of the biodiesel blender's tax credit and the long-delayed release of the EPA's renewables fuels requirements. For the first time since they went into effect in 2007, the EPA proposed to cut the amount of biofuel that oil refiners must blend into their products, known as the Renewable Volume Obligations (RVO).  The ensuing controversy (with biofuels producers arguing against cuts against strong oil industry opposition) has led the EPA to delay the release of the 2014 target. 

According to Jim Lane, Publisher of Biofuels Digest in an interview, the EPA is directed to release the annual RVO by November first of the prior year.  That means that the 2014 RVO are already over 11 months late.  Lane expects them to be released this month.  The other major incentive for biodiesel is the blender's tax credit (BTC), a $1 per gallon credit given to fuel blender for every gallon of biodiesel blended with any amount of petrodiesel.  This credit expired at the end of 2013, and has not been renewed.  Most observers believe that it will not be renewed until the lame-duck session of Congress after the election in November, during which renewal is a possibility.  Past renewals have been retroactive: In 2013, FutureFuel received a $2.5 million benefit from the retroactive reinstatement of the BTC for 2012.

The lack of the BTC and long delay of the RVO have led to a tough climate for both biodiesel producers and blenders.  This is despite several positive developments Lane has observed.  He says the popularity for biodiesel is high, and more and more companies are approving biodiesel blends for use in their vehicles.

Without the incentives, FutureFuel reduced biodiesel production dramatically in the second quarter, as did most biodiesel producers.  This lead to dislocation in the market for biodiesel feedstocks: grease and oils.  Lee Mikles, FutureFuel's President observed in the second quarter conference call:
The feedstock availability is more robust right now than it had been... earlier in the year. You had a lot of feedstocks going offshore, it appeared to us, especially in the grease markets. ... [T]here’s been a big dislocation in the market all of a sudden that has dropped these feedstock prices pretty dramatically. With soy coming down so dramatically, it helps a lot because that’s the easiest feedstock to use if anybody uses it. Typically we don’t because it’s too high priced, but all of a sudden you’ve got this unlocking of feedstocks kind of across the board because everything kind of track soy, more or less. ...

I think there’s big opportunities in the back end of the year if you have the storage to be able to take it, which we do.
With the RVO likely to be released this month, and FutureFuel having been stockpiling cheap feedstock for the last few months, I expect that the fourth quarter will be extremely profitable for FutureFuel's biodiesel business.  Demand will be very high as customers scramble to fulfill their RVO in the last three months of the year.  If the BTC is renewed retroactively during Congress's lame duck session, we will see an added boost to profits in late 2014 or early 2015.


FutureFuel is also a manufacturer of specialty chemicals, and that side of the business has also been suffering.  In this case, the problems have been mostly "self-inflicted," as Mikles described them. 
[W]e are a chemical plant and our efforts to implement new chemical growth has not been what we’d hoped for. We’ve really struggled to bring up a new proprietary herbicide intermediate plant and in executing sales for new customers – not existing, new customers on the laundry detergent additive. These have terrific potential, but we have not delivered on them so far.

In addition, we had hoped to have a refined glycerin plant operating in the second quarter, but we were not able to make that happen. The expectation, though, is that that plant will be ready in the not-too-distant future. The timing of that is really uncertain, but I can say that it is progressing positively at this point.

So we continue to see declines in our larger contracts – that’s not anything new, that’s continued to press forward, but we endeavor to replace that, those reductions, and to build our product portfolio. We do remain optimistic about the future prospects.
While I don't have the expertise to evaluate the future prospects of a chemical plant, this sounds like it should also lead to significant business improvement in the next few quarters. 

Insider Sentiment

When evaluating small companies, I put special weight on management and other insiders putting their own money on the line.  While an insider might sell stock because they need the money for other reasons, the only reason for an insider to buy is because they think the market price undervalues the company's current prospects.

According to SEC filings, insiders were last selling the stock in March, at around $20 a share.  There have been no sales since then, but an Executive Vice President bought 1500 shares at $16 a share in May, and a director bought 5,000 shares at $14 in August.  Since the price is currently $12, I think we can reasonably expect more insider buying after third quarter results are released and insiders are again able to trade the stock.


FutureFuel has two major business segments, and the stock has fallen by almost half since its peaks in March and April.  The EPA's release of the 2014 RVO this month, the possible renewal of the BTC during Congress's lame duck session, and the likely improvements in the company's Chemicals business over the next few quarters all lead me to expect strong increases in the company's profits over the next few quarters.

The current price of $12 seems likely to be a relatively short lived buying opportunity.  The recent downtrend could easily be reversed if the 2014 RVO are higher than most observers expect, or by less dismal than expected third quarter results, when they are released in November.  

Even in the current climate, FutureFuel remains profitable and has a strong balance sheet.  If Federal incentives for biodiesel are removed permanently, the biodiesel industry will survive as feedstock prices fall to reflect the drop in subsidized demand.  If that his the case, FutureFuel will likely be a consolidator, with the opportunity to purchase biodiesel production capacity at pennies on the dollar from its less well-capitalized competitors.

Disclosure: Long FF.

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 18, 2014

Future Fuel's Enticing Earnings

by Debra Fiakas CFA

Who doesn’t like a bargain?  FutureFuel Corporation (FF:  NYSE) is trading near $13.15 per share, below nine times net earnings.  Yet, the enticing earnings multiple might be only part of the story.

The stock has gapped down in price twice in the last six months, trailing off after each leg down.  The stock now appears oversold.

Based in Missouri, FutureFuel produces biodiesel and biobased speciality chemical products.  In the twelve months ending June 2014, the company reported $396.9 million in sales, providing $53.5 million in net income or $1.52 per share.  The company converted 9% of sales to operating cash.   That might seem impressive, but what has investors in a funk is that sales are shrinking.  In the June 2014 quarter the company reported a weak $68.0 million in total sales, compared to $106.0 million in the same quarter in the prior year.

Thus FutureFuel probably is not the bargain that the low earnings multiple suggests.  A review of recent trading patterns suggests the stock has so much negative sentiment that it could trade as low as $5.00.

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

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

August 20, 2014

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

Jim Lane REG logo

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

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

In announcing results, the company highlighted:

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

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

Expansion: new facilities

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

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

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

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

The Digest’s Take

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

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

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

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

July 01, 2013

Green Diesel At Scale

Jim Lane

A now-complete 142 million gallon green diesel monster project will easily deliver big on renewable energy targets and greenhouse gas emissions reduction.

But it also offers a material path to profits for its parents, Valero Energy and Darling International.

In Louisiana, Darling International (DAR) announced that Diamond Green Diesel, the joint venture between Valero (VLO) subsidiary Diamond Alternative Energy LLC and Darling International , has reached mechanical completion and the startup process will lead to full production of renewable diesel.

Once in full operations, the 9,300 barrel-per-day (142.5 million gallon) plant in Norco, Louisiana will process recycled animal fat and used cooking oil as well as corn oil into renewable diesel fuel that has comparable properties to petroleum-based diesel. The renewable diesel can be shipped by pipeline and meets low-carbon fuel standards.

The Diamond Green Diesel plant in Norco, during construction.

According to company estimates, the facility will reduce greenhouse gases by more than 80 percent over conventional petroleum-based diesel; fulfill almost 14 percent of a national mandate to boost production for biomass-based diesel; and create more than 700 jobs at peak construction in Louisiana.

The plant features Honeywell (HON) UOP’s Ecofining pretreatment and hydrotreating/isomerization process to convert animal-based oils into hydrocarbon fuels — similar but not exactly the same as the hydrotreating processes used by Dynamic Fuels (also in Louisiana) as well at Neste Oil’s massive plants in Singapore, the Netherlands and Finland.

The project will sell diesel into the market on an unsubsidized basis, at the rack price — supplementing its bottom line with the value of renewable energy RINs that are used by obligated parties to satisfy their obligations under the Renewable Fuel Standard.

Darling International Chairman and Chief Executive Officer Randall Stuewe said, “We are proud to report the mechanical completion and startup of Diamond Green Diesel. This joint venture will be a producer of high quality renewable diesel capable of fulfilling the RFS2 biomass-based diesel mandate. Our partnership with Valero will benefit Diamond Green Diesel through multiple operational synergies.”

Renewable diesel – 3 reasons it really, really matters.

As we wrote in “Renewable Diesel Surges” last year:

1. It’s a drop-in biofuel, requiring no infrastructure change – and there are generally no limits on its distribution except those imposed by cost and geography, and the size of the global diesel pool itself, which could absorb capacity from  hundreds of advanced biofuels projects.

2. It’s renewable, here now, made at home, and at-scale today. No need to wait for the promise of algal biofuels, or other hot technologies still in the process of commercializing at scale. More than 600 million gallons of capacity already exists – Dynamic Fuels plant in Louisiana, and three from Neste Oil (NEF.F) in Rotterdam, Singapore and Finland.

3. In the case of Dynamic Fuels, Diamond Green and Emerald Biofuels, all three projects can utilize animal waste residues – a classic case of turning low-value, noxious feedstocks into high-value molecules.

Existing feedstocks rule, scale matters

To work as a financial project, Diamond Green Diesel will be the largest consumer of recycled restaurant grease and animal fats in North America (1.1 billion pounds annually). As much as 11% of US used cooking oils and animal fats will be processed at the Diamond Green Diesel facility

As we wrote in naming this project to our “Diamond Dozen“:

“Overwhelmingly, one trend is clear: all of the projects expected to reach significant scale by 2017 features a feedstock that is already aggregated, or already in existence and easy to aggregate. Novel feedstocks such as energy grasses or canes – that’s a sure ticket to small-scale or the very long term.

“Take the existing US corn ethanol fleet, for example. Three companies are expected to build 1.2 billion gallons of advanced biofuels (Butamax, Gevo (GEVO) and POET-DSM) over the next five years using corn starch, cobs and stover. Then there’s the existent wood basket – which forestry companies have long since demonstrated an ability to grow, harvest and aggregate on a sustainable basis.

“Animal residues and palm oil (already aggregated) represent another 709 million gallons, and then we have more than 600 million gallons from natural gas. Even the advanced fermentation technologies expect to use existing supplies of sugars and CO2.

“The message is clear. The bottleneck in advanced biofuels – the underlying problem in the “Where are the gallons?” equation – lies in the feedstocks. There are. these days, plenty of technologies available that can generate 70-130 gallons per ton of biomass at what, according to their analysis, will be at competitive prices to $100 oil.

RINs matter

In December, Dynamic Fuels filed this with the SEC:

“The economics of the U.S. biomass based diesel industry are currently challenged by significantly lower RIN (renewable identification number) prices. D4 RIN prices averaged $1.39 for the first six months of 2012. As of December 10, 2012, the D4 RIN price was $0.56.   RIN prices at these levels have not been seen since the implementation of the RFS2 program by EPA in July of 2010.

“The regulatory framework underpinning biomass based diesel production remains intact.  The biomass based diesel mandate for 2013 is 1.28 billion gallons, or 28% above the 2012 mandate.  We expect markets to adjust positively in 2013 due to the higher mandate.”

The Economics

In a presentation that Darling made to shareholders and analysts, the company went through the economics of its fuel pro-forma, showing a projected $1.03 in profit per gallon. Note that this is based on operating costs only.

However, the good news is that, on a dollars per gallon of capacity basis, the project is not all that expensive by advanced biofuels standards. Valero projected the cost in 2011 to be $368 million — which works out to be $2.59 per gallon of capacity, or $0.17 per gallon per year if amortized over 15 years (excluding interest costs, because in this case Valero financed the plant without tapping a $241 million DOE loan guarantee.

Items to watch in those profit projections — diesel prices and RIN prices. Gulf Coast ULS diesel is selling at $2.82 this week, down from the $3.07 projection in the Darling forecast. Meanwhile, as Dynamic Fuels indicated, RIN prices were in the $0.56 range in December, though they have subsequently climbed back to more than $0.80 in the past quarter.

One more item – feedstock costs. $0.44 per pound for blended fat. Man, is that price getting high for waste fats.

The Bottom Line

A signature mechanical completion. We hope the commissioning period is short enough that the plant may start making a material contribution to US biobased diesel production figures in the 4th quarter.

But this much is sure. It’s not only transformative fuel— with emissions in the 80% reduction range — but it’s profitable fuel, sold on an unsubsidized basis (no tax credits) although greatly assisted by the economics within the Renewable Fuel Standard. It’s expected to become a material contributor to Darling’s bottom line — and if profits continue to be available, will do much to persuade Valero amongst others of the benefits of continuing to invest in renewable fuels.

Disclosure: None.

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 28, 2013

Biodiesel's Big Comeback

Jim Lane
Biodiesel 335.jpg
Filling up with Biodiesel in 2007.  Photo source: Tom Konrad

Darling of the mid-2000s, still beloved by its many fans — biodiesel is increasingly a key to delivering advanced biofuels volumes now — and even more so between now and 2022.

Presentations by NBB CEO Joe Jobe and REG CEO Daniel Oh at ABLC 2013 explained the how and why.

In the excitement over cellulosic biofuels and drop-ins, it is easy to forget that the backbone of advanced biofuels in the US and around he world is biodiesel — and not the least of the many services that biodiesel has rendered is enabling the biofuels industry to make up for a shortfall in the production of cellulosic biofuels, by over-delivering on the targets for biomass-based diesel.

While the boom years of biodiesel capacity building are long over, the sector has been going through a renaissance in the past two years, which was plainly in evidence from the bullish outlooks presented at the Advanced Biofuels Leadership Conference by National Biodiesel Board CEO Joe Jobe, and Renewable Energy Group [NASD:REGI] CEO Dan Oh.

Jobe presented on the first morning of ABLC, alongside the chiefs of the other four trade associations, and while the theme of stewardship and sustainability was a common one – touching on issues such as the protection of RFS2 and RIN fraud — the growth scenarios he presented were the most aggressive and the record of growth delivered in the past year was the most impressive.

Meeting RFS2 targets

He discussed the 5×15 initiative — converting 5 percent of the US diesel market to biodiesel by 2015, and said that the industry was well on the way to delivering on that goal.

The longer-term? The biodiesel industry is aiming for 10×22 — or 10 percent of the US diesel market, just north of 5 billion gallons, by the last year of the current Renewable Fuel Standard. That would deliver nearly 8 billion gallons towards the 2022 RFS obligation, because biodiesel gallons count for 1.5 ethanol-equivalent gallons because of their higher energy density.

Were US biobutanol production able to reach its current blend wall in the same period through conversion of the ethanol fleet — replacing 16 percent of the US gasoline market, or roughly 18 billion gallons of projected 2022 demand — that would total 23.4 billion ethanol-equivalent gallons, and between this total and biodiesel, the US would need just 4.6 billion gallons of ethanol-equivalent drop-in fuels to meet its 2022 obligation. Without requiring E15 ethanol blending or putting additional infrastructure requirements on auto manufacturers or the supply system.

That 4.6 billion gallons of ethanol-equivalent fuel would translate to 2,8 billion gallons of actual operating drop-in fuel capacity — and global capacity is over 21 billion gallons today. In short, RFS2 presents reachable targets — but biodiesel is key to accomplishing them.

With such a rosy picture of growth — it’s astonishing that in the entire debate on food vs. fuel there is hardly ever a word about biodiesel — and ranchers, poultry farmers and food manufacturers are never seen targeting biodiesel for the kind of all-out assault that is seen with corn ethanol.

Over to REG

The reason was plain from REG CEO Dan Oh’s presentation at ABLC – looking at how biodiesel is highly complimentary to the food and ranching industries — and supports a “food, then fuel” production system.

More on Renewable Energy Group


First, some background on REG for those less familiar. The company has increased sales from $132 million in 2009 to $1.015 billion last year, and EBITDA rose from a 2009 loss of $12M to last year’s $188M. The company has increased biodiesel sales to 188 million gallons last year, and now owns 227 million gallons of capacity — and has another 150 million in development or construction.

Encouraging both protein and carbohydrate production

In his ABLC presentation, Oh noted that biodiesel is the driver for meat and meal producers to realize higher income off their leftover fats and oils — in turn, encouraging farmers and ranchers to produce more, taking pressure of food prices by assuring them of a secondary market for the byproduct stream.

The protein boost

Soybeans are 80% meal and 20% oil — by provising a growing market for the oil, biodiesel producers help to support the expansion of meal production. This vital cattle feed is helping to hold down the lid on food prices despite China quadrupling its meat consumption in the past 30 years.
According to REG and a December 2010 study by Centrec Consulting, global soybean meal prices could increase by $36 per ton without the biodiesel market — and loss of the biodiesel sector would cost US livestock producers $4.6 billion over a five-year period. Hence the low levels of noise and outrage over biodiesel, compared to the hoo-hah over corn ethanol.


But the value does not stop at soybean oil and meal. There’s the animal fats, oils and greases market to consider – the residues captured and monetized by renderers like Darling. Overall, REG contents that the US biodiesel market consumed 1.29 billion pounds of animal fats in 2011 – providing another channel of monetary gain for the global farmer and rancher community, and lessening price pressures all along the food chain.

According to REG, biodiesel adds $16.79 in value per head of cattle, $2.89 for swine and $0.33 for poultry.
Then, there is the restaurant market. You might recall that restaurant owners have generally taken a dim view of the RFS because of the price pressures they contend that the energy policy causes on grain prices.
However, they are generally less outraged by the impact of biodiesel — which has almost single-handedly converted restaurant cooking oil from a $25 per store per week liability — and an odious component of landfill — to a $0.30 per pound or higher commodity that relieves environmental impact of restaurants and institutions while contributing to the bottom line.

The Bottom Line

Put all those benefits together, you not only get a good idea of why biodiesel’s popularity endures — and why, as so many cleantech IPOs have sunk more than 50 percent off their high values, REG continues to trade just a few percentage points off its IPO price of $10.00. As an investment proposition, we’ll know more shortly because REG reports its quarterly earnings next week (Wednesday, May 1).

But the positive impacts ripple far beyond the balance sheet.

Disclosure: None.

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.

March 28, 2013

Renewable Energy Group Profits Exceed Subsidies

by Debra Fiakas CFA

Earlier this month biodiesel producer Renewable Energy Group, Inc. (REGI:  Nasdaq) reported a tidy profit of $22.3 million on record $1.0 billion in total sales.  Reported net income was $43.5 million, including accounting treatments for corporate recapitalization undertaken in the year.  Results from 2012 were noteworthy on a couple of counts. 

It was the first time in the company’s ten-year history (including years of operation among predecessor firms) that sales exceeded $1.0 billion.  REGI produced 188 million gallons of biodiesel from a variety of feedstock, including non-edible corn oil, used cooking oil, animal fats and soybeans.  Feedstock flexibility has helped drive down direct costs.  Gross margin in 2012 skyrocketed to 14.8% compared to 7.4% in 2012 and 4.3% in 2010.
Renewable Energy Group Houston Plant

The company’s profits also exceeded government subsidies for biodiesel production, providing a strong endorsement of REGI’s low-cost business model.  Even without the $8.3 million in total government biodiesel subsidies received in 2012, REGI would have reported a profit.  Granted, the company’s predecessor firms on a combined basis achieved this “profit” status twice before in 2005 and 2007.

In my view, the two achievements demonstrate that with scale, renewable fuel producers can turn a profit and deliver value to shareholders.  REGI is dependent upon a supplier network for feedstock.  However, like the squeaky wheel, a large buyer gets attention and probably the best the market has to offer.  Management has made a point of how well-tuned their feedstock buyers are to drum beat of daily supply and pricing.  That certainly helps get the low-priced feedstock REGI needs.

The four analysts with published estimates for REGI seem to think the company can maintain production and sales in 2013, but real top-line growth is not expected until next year.  The consensus estimate for 2013 is $1.43 on $1.1 billion in total sales.  That means REGI shares are trading at 5.2 times the current year earnings estimate.  That seems like a bargain to me for a company with a ten-year production history, growth prospects and profits.

There has been building momentum in REGI shares since last fall and the stock has nearly doubled.  However, every month or so, the stock takes a breather, providing value-oriented investors to nibble away a few shares are interesting prices.  A long-term price objective near $12 or $13 is not unreasonable.
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. 

March 11, 2013

Soladiesel Algae Fuel is a Monster Hit

Jim Lane

Sales increase 35 percent at participating test sites — and survey results reveal driver preference for algae-based Soladiesel over conventional fuels.

In California, Propel Fuels and Solazyme (SZYM) announced that sales grew by 35 percent at Propel stations, offering SoladieselBD in a B20 blend during a 30-day retail pilot program, compared to non-test sites.

The pilot was conducted at Propel’s Clean Fuel Points in Redwood City, San Jose, Berkeley, and Oakland.

In addition, a follow-on consumer preference study with Propel’s customers found 92 percent of participants noted that they would be more likely to purchase algae-derived fuel for its environmental benefits; 70 percent indicated that they would purchase the fuel more frequently if it were derived from algae; and nearly 40 percent of customers indicated they would pay a premium for algae-derived fuel.

The pilot program marked the first commercial availability of algal derived fuels — and in the pilot program, SoladieselBD B20 was retailed at a parity price with conventional diesel fuel.

Solazyme and Propel picked up the Consumer Product of the Year (Fuels) in the 2012 Biofuels Digest Awards for the retail effort with of Soladiesel. As we noted last November in the Digest: “$27 per gallon? $15 per gallon? Fooey! Try algae-based fuels at “the same cost as regular diesel.”

What’s next

For now, the two companies are keeping mum about future roll-out plans.

In December, Propel Fuels closed on the initial phase of its Series D round of funding with $11 million in equity capital from existing investors Nth Power, Craton Equity Partners, and @Ventures as well as a new investor, Gentry Venture Partners. In addition, the company secured $10 million in debt financing.

With the new funding, Propel will be able to accelerate the build out of its network of stations that offer drivers the cleanest, most sustainable, domestically produced fuels on the market today. Propel currently operates stations throughout California and Washington State with more than 200 stations planned for new and existing markets over the next two years.

Solazyme’s cost performance and capacity-building

Solazyme’s lead microalgae strains producing oil for the fuels and chemicals markets have achieved key performance metrics that they believe would allow them to manufacture oils today at a cost below $1,000 per metric ton ($3.44 per gallon or $0.91 per liter) if produced in a built-for-purpose commercial plant.
In 2012, Solazyme increased their owned capacity to approximately 8.000 metric tons through the expansion of a Peoria facility as well as the completion of their Phase I and II Solazyme Roquette Nutritionals facilities — but expects to have 550,000 metric tons of production capacity by 2015, which would support over $1 billion in product revenue.

At the same time, Solazyme has entered into non-binding offtake agreements with Dow Chemical and Qantas. Dow Chemical will purchase up to 20 million gallons (76 million liters) of Solazyme’s oils in 2013, rising to up to 60 million gallons (227 million liters) by 2015. Qantas will purchase a minimum of 200 to 400 million liters of Solazyme’s jet fuel per year.

Fuel performance and company reaction

Life Cycle Associates, an independent greenhouse gas measurement firm, determined that Soladiesel provides an 85-93% greenhouse gas emissions reduction when compared to conventional petroleum-based diesel. In addition, testing by the National Renewable Energy Laboratory (NREL) indicates that in a 20 percent blend, SoladieselBD significantly outperforms ultra-low sulfur diesel in total hydrocarbons (THC), carbon monoxide (CO) and particulate matter tailpipe emissions. This includes an approximate 30 percent reduction in particulates, a 20 percent reduction in CO and an approximate 10 percent reduction in THC.

“Our fuels have already been successfully demonstrated in fleet vehicles, corporate buses, military applications and the first U.S. commercial flight on biofuel,” said Bob Ames, VP of Fuels, Solazyme. “The successful pilot program with Propel further exhibits strong consumer appetite for the superior performance and environmental properties of Soladiesel.”

“Propel is committed to providing drivers true choice at the pump by bringing to market the world’s highest quality and most sustainable fuels,” said Matt Horton, CEO of Propel Fuels. “The results show strong preference for algae-based fuel, and we are thrilled to have partnered with Solazyme to enable our customers to be the first in the country to purchase this next generation biofuel.”

More on the story.

Disclosure: None.
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.

February 04, 2013

Biobased and Biofuel Investments: A System

Jim Lane

A Biofuels and Biobased investment primer: An 18-combination, 8-character system for classifying bio investments
Here’s our investment primer on how to size up the risks and the rewards and tune them to meet your goals.
And, a system for organizing opportunities.

So, you’re thinking about investing in bio? Here’s the good news – you’re not alone. Here’s the bad news – you’re not alone.

There are retail, private equity, hedge fund, sovereign wealth, strategic, grower, VC and institutional investors snooping around too, and making active investments.

For one thing, carbon’s making a comeback as the economy recovers and the weather continues to get wilder, whackier and scarier. As DOE Deputy Chief of Staff Jeff Navin observed, “Just because the appetite to tackle it went away, didn’t mean the [climate change] problem went away”.

As investors are discovering, the whole world changes when the rain doesn’t fall where it used to fall.

Though there are hundreds of companies, you can parse it all down into some pretty simple categories – in order to measure the rewards (which, generally speaking, you’ll hear a lot about from the promoters) against the risks (er, less chatted up).

That’s what we’re going to cover today — with three broad strokes: stage, stream and degree of novelty. There are only 18 combinations. They are the first keys to unlocking opportunities.

3 Streams

There are lots of ways to sector out the biobased space. The most useful way is to divide it, like oil &gas, into upstream, midstream and downstream. The way these work are a little different, and here’s how.

Upstream. In a word, feedstocks – typically crops or residues. Could be anything as mainstream as year’s corn crop, to something as exotic as carbon monoxide and water or municipal solid waste and sludge. A seed company or a grower fits into this category. More exotically, an algae grower does too. Sometimes, a polluter does, if there’s a residue in the mix. If you’re invested in Syngenta, Monsanto or Ceres, you are right here.

Midstream. These are the processing technologies. Could be standard fermentation that has been used for centuries to make alcohols from grain – could be exotic technologies that make bio-oils and char. They could be owner-operators of projects, or technology licensors. If you are invested in Solazyme, Gevo, Renewable Energy Group or Amyris, you fit right here.

Downstream. These are the molecules themselves – their distribution into the marketplace.

2 degrees of novelty

There’s known, and there’s novel. For example, gasoline is known, ethanol is novel (though less so).

Known molecules cause no infrastructure change or change in other processes. Making renewable diesel or jet fuel is an example.

Novel molecules can be substitutes with new uses, such as using biofene as a lubricant— or known molecules that have never been feasible before (e.g. using adipic acid as an intermediate pre-cursor for nylon 6,6 – which wasn’t economically feasible before).

Known molecules have equivalent performance. Novel molecules can be varied – they can perform better, or worse.

3 investment stages

There’s early stage, mid-stage and late-stage. Now, everyone has a different definition – for instance, late-stage can mean “pre-IPO” for VC investors. SO, here’s how we look at it.

Early stage. The proof of concept phase. Not just proving that, for example, you can train an given organism to secrete a hydrocarbon. It means — from the first moment of the idea until the point where, at any scale, the process is shown to work and is feasible.

This assumes that results hold up during scale-up, the molecule performs as expected in an engine or in green chemistry, input and product prices hold, and that the process bolts into the rest of the field-to-wheels supply chain as expected).

Proof-stage. The point from proof of concept to proof of process.

Late-stage. Process is proven, economics are known. From here, it is a a matter of lining up location, customers and capital in an optimal way. For example, Shell’s Gas-to-Liquids project in Doha, Qatar.

OK, so you’re done. There are 18 different combinations – ranging from “Early-stage, novel, upstream” (e.g. a jatropha seed developer) to a “late-stage, known, downstream” (e.g. investing in a fuel marketer that is distributing, as an offtaker, renewable diesel from a producer’s sixth commercial plant).

You can use acronyms if you like. You use U, M or D for stream, E, P or L for stage, and K or N for novelty. In the examples cited above, you have ENU, and LND. There are just 18 combinations.

Assessing risk and opportunity

From that point, you can start to make some rational investment risk assessments. It’s helpful to line up opportunities within categories (like for like), and compare.

For example, early-stage investments tend to be smaller, and riskier – than later-stage. The “will it work?” factor looms large, early-on. Later, you have more certainty — and, as a result, less upside. The more you understand technology and market forces, the more you will like the early-stage.

Upstream technologies are more fully exposed to the biobased sector, than midstream and downstream, while the farther you move down the stream the more you are exposed to a market in a given molecule (downstream), or the arbitrage between the molecule price and feedstock price (midstream).

In terms of novelty — for sure, novel technologies have transformative economics on price as well as cost – known molecules tend to offer opportunities in terms of cost savings (cheaper production) or market share shifts (as customers adopt, for example, equally-priced molecules with attractive carbon attributes).

By contrast, novel technologies can have superior performance, or can eliminate a step in a chemistry – even if they cost more, they can offer customers amazing opportunities. But the more novel the molecule, feedstock or technology, the more important the IP protection is, and potentially devastating the loss of patent protection is — speed to market will matter in terms of producing ROI.

A real-world example

Let’s take a popular area for investment these days — adding technology to enable an existing ethanol plant to make biobutanol.

They are currently in proof-stage, making known molecules, and midstream. Call it a MPK.

So, there you have it. The biobased world of thousands of molecules, a hundred feedstocks and several dozen technologies, parsed down into 8 simple letters, and 18 combinations, that you can use to rate opportunities for risk and reward.

In the retail investing world, in debt-side investing, or in pre-IPO equity investing — there are companies of all combinations available. Parse away.

Disclosure: None.

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

January 21, 2013

Solazyme's Oilcane Boom

Jim Lane

Though building capacity globally, Solazyme’s operations in Brazil are getting traction fast – and raised $235M last week.

How much oil could be produced in Brazil via sugar-munching microalgae? Today, the Digest looks at Solazyme’s (SZYM) progress and the bigger picture.

In California, two monster announcements came out of Solazyme headquarters last week. One related to project finance and one related to raising cash.

In midweek, Solazyme Bunge (BG) Renewable Oils received approval for project financing in the form of a $120M (R$245.6M) loan from the Brazilian Development Bank (BNDES).

The BNDES funding will support the joint venture’s first commercial-scale renewable oil production facility in Brazil, which is being constructed adjacent to Bunge’s Moema sugarcane mill in São Paulo state. The 8-year loan will have an average interest rate of approximately 4%.

At week’s end, Solazyme announced the pricing of its offering of $115 million in Convertible Senior Subordinated Notes due 2018. Solazyme also granted the initial purchaser a 30-day option to purchase up to an additional $10 million aggregate principal amount of Convertible Notes solely to cover over-allotments. The Convertible Notes will bear interest at a fixed rate of 6.00% per year. The initial conversion price will be approximately $8.26 per share of common stock and, under certain circumstances, Convertible Note holders will be entitled to additional payments upon conversion.

What’s up? Why raise capital now?

At latest glance, Solazyme had $167M in cash and was burning through roughly $20M per quarter – so why the rush?

Raymond James’ Pavel Molchanov explains: “Bankers the world over tell their clients that “you raise money when you can, not when you must”. At a time when the capital markets “window” is open for clean tech firms – amid a broad-based resurgence of market optimism – we also recognize management’s logic in taking advantage of this in order to bulk up the cash balance.

Interestingly, the stock was down but not crushed. As Molchanov noted, “[Yesterday's] 9% drop was less than the implied dilution of 23% (assuming full conversion), making the market’s response far gentler than that which greeted Gevo’s (GEVO) similarly sized capital raise (equity plus convert) last June.”

Bottom line, the company raised a net of $230 million in debt this week, at a 5 percent interest rate. Any advanced biofuels (or renewable oils) company would, generally, commit mayhem to get those opportunities. Which brings us to the source of investor optimism, which is more related to cane-crush than stock-crush.

The Moema project

Solazyme Bunge Renewable Oils broke ground in June 2012 and is scheduled to be operational in the fourth quarter of 2013. It will service the renewable chemical and fuel industries within the Brazilian marketplace and will initially target 100,000 metric tons per year of renewable oil production.

In November 2012, Solazyme and Bunge announced in a framework agreement that they intend to expand production capacity from 100,000 metric tons to 300,000 metric tons globally by 2016, and that the portfolio of oils will broaden to include a range of healthy and nutritious edible food oils for sale in Brazil.

READ MORE: Solazyme and its hybrid vigor

READ MORE: Solazyme, Bunge break ground

Brazil’s above-ground oil fields

Let’s look at the opportunities — breaking them, as Caesar divided Gaul, into three parts. First, Solazyme’s current opportunity’s based on their cost structure. Third, we’ll look at the comparable value of ethanol vs renewable oil. Second, a look at Brazil’s oil production capacity.

Production cost

What’s Solazyme’s production cost – the last we have on that topic is this, from the company’s 2011 IPO: “our lead microalgae strains producing oil for the fuels and chemicals markets have achieved key performance metrics that we believe would allow us to manufacture oils today at a cost below $1,000 per metric ton ($3.44 per gallon or $0.91 per liter) if produced in a built-for-purpose commercial plant. This cost includes the cost of anticipated financing and facility depreciation.”

Ethanol vs oil

Latest we have from Solazyme on yield forces us to do some sleuthing. Last we have from them is that their Bunge partnership gives them access to up to 8 million tons of annual crush, and they indicated a maximum production of 400,000 tons of oil per year. They never have put those two figures together in one place, so caveat emptor – but it indicates roughly a rate of 20 pounds of cane required to produce a pound of oil. Now, generally, you get around 2 pounds of sugar from a pound of (good) cane — indicating a potential yield of up to 50 percent.

That compares pretty favorably with ethanol yields — where you get roughly 7.5 pounds of ethanol (1 gallon) from 12 pounds of corn starch.

As we said, caveat emptor – the data stream is pretty thin. For now, consider these reasons to think that the management at Bunge is rightly focused on value-add opportunities in producing oils from sugars — rather than definitive economics.

Brazil’s capacity

Keeping with the same data, and the same warnings on using it, let’s look at Brazil’s oil capacity. In this case, we’ll look well beyond the 8.5 million hectares that is currently in sugarcane production in Brazil – and towards the 63 million hectares of land that has been authorized for production agriculture in Brazil’s long-term plan — converting idle or underused land in the country’s southwest (and farther from the Amazon as Miami is from New York, for those worried about deforestation.)

That. er, is a lot of land — and is expected to support, to a great extent, a large rise in cane cultivation. The opportunities in ethanol and sugar being well understood, the opportunity for renewable oils is novel and worth a look.

How much capacity is that? Well, consider that Brazil raises 660 million tonnes of cane from its current 8.5 million hectares. With comparable yields, there could be 4.9 billion tonnes of cane. That’s enough to produce, in this example, 244 million tonnes of oil. Now, Solazyme believe it can generate premium values (as much as 30 percent above market) for its tailored oils, based on their performance characteristics.

Now, take soybean oil — price is now around $1140 per tonne. Ethanol has been trading in the $700-$800 per tonne range. Suggesting there is a lot of upside in upgrading to oil — or simply, a more balanced “portfolio” approach to matching supply and demand with both oil and ethanol opportunities in hand.

Disclosure: None.

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

January 13, 2013

Methes: The McDonald's of Biofuel

by Debra Fiakas CFA
Methes logo.gif Few would make the connection, so Methes Energies International (MEIL: Nasdaq) chief executive office explains his company’s unusual business model in McDonald’s terms.  Methes, which is a contraction of ‘methyl ester,’ has developed a biodiesel system that accommodates various feedstocks that yield methyl esters.  The system is a handsome, compact configuration of stainless steel tanks and piping that are all capable of automated operation.

The company operates its own commercial-scale facilities in Ontario, Canada.  Sales of biodiesel represent the majority of Methes revenue, which totaled $10.3 million in the twelve months ending September 2012.  This first leg of the Methes business model is comparable to sales of Big Macs at McDonald’s company owned stores.

Two models of the Methes system are available for sale as turn-key biodiesel plants.  It is an attractive market in the U.S., Canada and Europe where government mandates require transport fuel producers to blend a minimum amount of renewable sources into fuel before it is sent to the gas station.  In the U.S. gas blenders must purchase a minimum of 1.3 trillion gallons of renewable fuel in 2013 and 1.6 trillion gallons in 2014.

Few gas producers have invested in their own renewable fuel capacity.  One exception might be Valero (VLO:  NYSE) which snapped up ethanol plants from Vera Sun and others after the wave of bankruptcies in that sector in 2009.  Valero also has a renewable diesel joint venture with food-by product recycler Darling International (DAR:  NYSE) that is expected to go into production in the first quarter 2013.  The vast majority of the renewable fuel mandate must come from independent producers.

It makes sense for aspiring renewable fuel players to use a proven system and tap the expertise of an established player.  Methes sells licenses for its turn-key systems along with proprietary operating software.  Methes engineers can also remotely monitor a licensed system for optimum performance and maintenance.  Methes gets paid a royalty of $0.11 per gallon for the system and assistance.  Methes can also sell feedstock to its licensees.  Call this the franchise component of the business model where Methes sells equipment (friers, grills and McDonald’s seating and décor) along with feedstock supplies (ready to cook fries and burgers).

At least two licensees in Canada are already operating Methes systems.  Each of the two plants can produce up to 1.3 million gallons of renewable diesel per year.  Methes recently announced the sale of a license in California to U.S. Energy Initiative (USEI:  OTC/PK) for a system that can produce up to 1.3 million gallons per year, which Methes calls the Denami 600.  A second system, the Denami 3000, has a capacity of 6.5 million gallons per year.

Methes Energies has yet to reach profitability, but management is confident its unusual business model is viable.  They expect profits as its installed base expands in North and South America.  In the meantime, Methes is using cash to support operations  -  $2.0 million in the most recent twelve months.  Cash resources are thin, so an investor taking a long position in Methes needs to appreciate near-term pressures.  Successfully translating the McDonald's business model to biofuel production will take a bit longer to prove out.
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. 

December 29, 2012

Amyris hits the comeback trail

Jim Lane

Amyris[1].jpgBiofene production starts up in Paraiso, Brazil – sales expected to commence in Q1 2013 – Total, Temasek, Biolding inject fresh capital.

What’s next for biofuels’ “Comeback Kid”?

By now, most of the “smart set” that found itself excited about Amyris (AMRS), and about advanced synthetic biofuels during the IPO fever, have moved on.

They read Dan Grushkin’s “The Rise And Fall Of The Company That Was Going To Have Us All Using Biofuels” in Fast Company, wrote off Amyris and possibly the entire sector, and presumably migrated their enthusiasm to low-cost natural gas, battery technology, or tablet computers.

But Amyris is still there, and this week achieved what, for many, was the last-chance, must-hit milestone. The company’s purpose-built, 50 million liter industrial fermentation facility in Paraiso, Brazil has successfully begun production of Biofene, Amyris’s brand of renewable farnesene.

“Our own farnesene plant at Paraiso has been successfully commissioned, with initial farnesene production underway. We anticipate sales from this facility during the first quarter of 2013,” Melo concluded.”

So what exactly is farnesene, again? It’s a fragrant oil chemical – that distinctive acrid odor you detect in a Granny Smith Apple, that’s it. You also find traces of it in the hops used for some very nice Czech pilasters and Irish lager beers. It’s used as a component in its own right by manufacturers around the world.

Amyris’ storied IPO and post-IPO peril

The Amyris strategy — commercialize farnesene for the chemical markets, then turn to farnesane, which you produce by adding hydrogen. Farnesane is the company’s showcase diesel molecule, and forms the basis of its breakout from a speciality pharma and chemicals maker to a fuel player, though that business will ultimately be run by Total.

In its 2010 IPO, there were partnerships announced with Bunge (BG) and Cosan (CZZ) for lubricants, Soliance for renewable cosmetics, M&G for PET production (the key ingredient in clear plastic bottles) and a series of deals with Procter & Gamble to incorporate farnesene in specialty chemical applications within P&G’s products.

Then came the expected ramp-up to 6-9 million liters of production for 2011 – and then the story changed when the company’s scale up timetable imploded and it was forced in early 2012 to pull its guidance on future production.

Back in 2010, in “Amyris: Farnesene and the pursuit of value, valuations, validation and vroom,” Biofuels Digest warned, “There are concerns about how robust the engineered yeast will prove in an industrial-scale setting. Concerns generally raised by those familiar with Amyris’s technical challenges.”

We noted that “a flurry of JVs and partnerships focused both on the chemicals and fuels markets, demonstrates that Amyris is fully embarked on an integrated strategy of flexible product lines, an impressive array of partnerships and contract manufacturing arrangements to keep the company on its “capital light” path.” But we flagged the “Major open question? Performance of the magic bug at industrial scale.”

Following the failure to achieve its stated production goals, post-IPO, the stock was crushed — from a high of $33 to a low point of $1.45 – recovering in recent months to yesterday’s close of $2.64. The company restructured management, and put all its chips on getting its 50 million liter Paraiso plant up and running.

Fresh Capital Raised

Meanwhile, its key investors — notably, French oil giant Total — hung tough, and stayed with the vision. This week, with Biolding, Total and Temasek pumping in another $42.5 million, in acquiring another 14.2 million shares, or an additional 19 percent of the company’s equity.

Singapore’s sovereign wealth investment fund, Temasek, was the largest investor in the round, adding $15 million to their investment total, putting them behind only Total on the shareholder tote board.

The deal didn’t come cheap for Amyris — by contrast, it sold 17 percent of the equity, just before the IPO, to Total for $133 million.

“Cash proceeds were $37.25 million, plus Total converted $5 million from an outstanding convertible note,” said Raymond James equity analyst Pavel Molchanov in a note to investors yesterday. “The “implied” equity sales price is $2.98, a small premium to yesterday’s closing price, though there is no getting around the fact that this is still a substantially dilutive deal.”

“A private placement with existing investors should help fund operations,” wrote Cowen & Company’s Rob Stone and James Medvedeff, “but we already model $20MM/year in funded R&D as well as $146MM additional debt to fund losses and Sao Martinho capex in 2013-15.”

But it’s a capital lifeline and as CEO John Melo noted, “We are encouraged by the continued, strong commitment from our major investors, particularly as we start up our new industrial fermentation facility for the production of our renewable hydrocarbons in Brazil.”

The new scale-up timeline

Amyris these days doesn’t offer forward production guidance although they noted that farnesene sales from Pariso were expected in Q1 2013. “We expect the plant to ramp throughout 2013 and achieve full utilization by 1Q14,” said Molchanov.

Stone and Medvedeff added, “Ramp risk remains and we model losses through 2015. [We] lifted 2014-15E shipments about 8% and 11%, but we trimmed 2013E 19% as we see a slow ramp. We estimate feedstock and operating cost may be 15-20% higher, but AMRS should still benefit from additional sales and spreading of fixed costs, particularly as initial volume is targeted at higher value end products.”

READ MORE: Captive company for Total?

The bottom line

The capital raise is dilutive, and the opening of Paraiso was expected — accordingly, AMRS shares dropped yesterday on NASDAQ following the announcement.

But it’s a remarkable production milestone for the company — substantially de-risking the venture as a whole and offering hope to Amyris’ investors and backers that the company is getting back to playing offense and putting points on the board after a lengthy period in which the doubters reigned.

Next steps: producing at capacity at Pariso and — the big challenge moving forward— moving down the cost curve so that the company continues its journey towards the long-desired markets in fuels and larger volume lubricants and chemicals.

Disclosure: None.
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.

December 12, 2012

Dyadic: a 5-Minute Guide

Jim Lane

Dyadic LogoDyadic International, Inc. is a global biotechnology company that uses its patented and proprietary technologies to conduct research, development and commercial activities for the discovery, development, manufacture and sale of products and solutions for the bioenergy, industrial enzyme and biopharmaceutical industries.


140 Intracoastal Pointe Drive
Suite 404
Jupiter, Florida 33477

Year founded:


Stock Ticker:

Pink Sheets: DYAI

Type of Technology(ies)

Patented and proprietary C1 platform technology based on a unique fungal microorganism which is programmable and scalable in producing enzymes and proteins in large quantities


Dyadic’s C1 platform technology is effective in producing enzymes from a broad variety of feedstocks

Fuel Type

Dyadic’s C1 platform technology can be used to produce many types of biofuels including, but not limited to, cellulosic ethanol, biobutanol and biodiesel.

Offtake partners

    Abengoa Bioenergy (ABGOY)
    Codexis Inc. (CDXS)

Co-products (if applicable)

Industrial Enzymes

3 Top Milestones for 2010-12
  •     Entered into non-exclusive license agreement with Abengoa Bioenergy
  •     Reported record revenues and profits for fiscal year 2009
  •     Signed term sheet for potential exclusive outlicense of C1 technology for biopharmaceutical applications to EnGen Bio, Inc.
3 Major Milestone Goals for 2013-15
  •     Consummate additional licensing and other strategic collaborations to monetize Dyadic’s technologies
  •     Increase sales of industrial enzymes
  •     Consummate additional research and development collaborations
Business Model: (e.g. owner-operator, technology licensor, fee-based industry supplier, investor)
  •     Technology licensor
  •     Industrial enzyme sales
Competitive Edge(s):
  •     Patented and proprietary C1 technology
  •     C1 platform technology is programmable (genome has been sequenced and annotated)
  •     C1 technology can produce enzymes and proteins on commercial scale (up to 150,000 liter fermentors)
  •     Dyadic provides partners with ability to license the C1 platform technology for in-house/on-site manufacturing of customized enzymes and proteins
Distribution, Research, Marketing or Production Partnerships or Alliances.
  •     Non-Exclusive License Agreement with Codexis Inc.for use of C1 technology for biofuels, chemicals and pharmaceutical intermediate production
  •     Non-Exclusive License Agreement with Abengoa Bioenergy New Technologies, Inc.for use of C1 technology for biofuels, chemicals and/or power production
  •     Non-binding term sheet with EnGen Bio, Inc. for potential outlicense of C1 technology for biopharmaceutical applications
  •     Multiple research partnerships

Dyadic has been producing enzymes in up to 150,000 liter fermentors for over a decade

Demonstration and soon-to-be commercial stage through Dyadic’s licensees and partners


Disclosure: None.

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.

November 14, 2012

Solazyme's Parity-Cost, Algae-Based Biodiesel on Sale to Public

Jim Lane

$27 per gallon? $15 per gallon? Fooey! Try algae-based fuels at “the same cost as regular diesel.” Month-long pilot program kicks off in the San Francisco Bay Area.

In California, Propel Fuels and Solazyme (SZYM) are bringing algae-derived fuel to retail pumps for what we believe to be the first time in history. The two leading renewable fuel brands have come together to offer Solazyme’s algae-based SoladieselBD to drivers through Propel’s Bay Area network of retail renewable fuel locations. The month-long pilot program provides the industry’s first opportunity to test consumer response to this advanced renewable fuel.

Solazyme’s algae-based SoladieselBD meets or exceeds ASTM quality specifications and has shown performance enhancements including cold temperature operating performance. The fuel is compatible with existing diesel engines and the fuel’s performance is guaranteed by Propel.


The fuel will be sold at the same price as conventional diesel fuels and will be available exclusively at Propel’s Clean Fuel Points in Redwood City, San Jose (N. First St.), Berkeley, and Oakland.

“Propel is committed to providing our customers with access to the highest quality, most sustainable, domestically produced fuels, so we’re proud to introduce the next generation of fuels to the retail market,” said Matt Horton, CEO of Propel Fuels. “Propel’s growing station network provides the critical link between these future fuels and today’s consumer fuel tanks, giving our customers a chance to make history.”

The Technology

Solazyme’s technology platform converts plant sugars into oils by feeding the sugars to microalgae in standard industrial fermentation equipment. The algae consume the sugars and convert them into oils rapidly and efficiently.

Testing undertaken by the National Renewable Energy Laboratory (NREL) shows that, in a 20% blend, SoladieselBD significantly outperforms ultra-low sulfur diesel in total hydrocarbons (THC), carbon monoxide (CO) and particulate matter tailpipe emissions. This includes an approximate 30% reduction in particulates, a 20% reduction in CO and an approximate 10% reduction in THC.

“Solazyme’s revolutionary algae-based technology platform has supplied our development partners and customers with advanced biofuels that meet or exceed some of the world’s most stringent fuels specifications and requirements, “ said Bob Ames, VP of Fuels, Solazyme. “We’ve successfully demonstrated our land-based fuels in fleet vehicles and corporate busses, and are excited about this pilot program with Propel because it enables us to make these fuels available to the public.”

More on the story.

Disclosure: None.
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, 2012

EPA Ups Renewable Diesel Mandate By 30%

Jim Lane

Biodiesel pump photo via Bigstock
What will bigger targets mean for producers, livestock, obligated refiners, and the diesel-using public? In Washington, the EPA issued its final rule for 2013 establishing 1.28 billion gallons as next year’s biomass-based diesel volume requirement under the Renewable Fuel Standard (RFS), up from 1.0 billion gallons in 2012.

“This 1.28 billion gallon level is in-line with what the EPA had originally proposed for 2013 dating back to last year,” commented Raymond James energy analyst Pavel Molchanov. “However, the delay in formalizing this target had led investors and biodiesel industry participants alike to question the EPA’s commitment to this level. The RVO was originally expected to be completed in July, and with the election fast approaching many had thought the final ruling may not occur until mid-November.”
What does this mean in the context of the overall RFS2 targets for 2013?

The 2007 EISA Act called for 2.75 billion gallons of advanced biofuels in 2013 – that’s up from 2.0 billion gallons in 2012. That can come from any qualifying source (a registered fuel that provides a 50 percent lifecycle reduction in emissions, compared to petroleum-baed fuels), and includes sugarcane ethanol, some advanced forms of corn ethanol, biobutanol, and all forms of biomass-based diesel. Obligated parties can also buy RIN credits in lieu of blending “wet” gallons of fuel.

Overall, it means that the diesel side is expected to pick up 40 percent of the increase in RFS2 mandated volumes for 2013 (280 million out of 750 million gallons). That’s relatively conservative – given that biomass-based diesel accounted for 50 percent of the 2012 pool. According to producers, it’s highly feasible to achieve the production volumes.

Do biomass-based diesel fuel mandates cost the public?

The Yes view. Mandates invariably cause fuel prices to increase – in many cases, massively so – by requiring fuel distributors to utilize fuels with favorable environmental or social attributes, instead of choosing the lowest-cost supplies.

The No View. Mandates can reduce fuel costs by reducing demand for imports – and even small reductions in import volumes through alternative production – in these times of tight refining capacity – can have substantial depressive impact on prices.

The social cost view. Fuels cost more than money. They can have impact on air quality and health (particularly among children); energy imports come with hidden social and financial costs in burdening the nation’s military with the task of defending fuel shipping lanes; energy imports also reduce local employment in energy production and reduce the direct and indirect local economic impact that flows from job creation.

The EPA responds. Yes, there is a financial cost – but it’s a rounding error. “The AEO projects that the U.S. will consume 44.9 bill gal of blended diesel in 2013.75 Averaged over this diesel pool, the quantifiable costs of the 1.28 bill gal mandate translate into a per gallon cost of between $0.006 and $0.008 in 2013.”

Why don’t ranchers and poultry farmers freak out over increases in the biomass-based diesel portion of the Renewable Fuel Standard?

Generally, because they use soybean meal rather than soybean oil to feed livestock – so there’s less competition between livestock and fuel on the biomass-based diesel side. Plus, animal residues have to be used somewhere – and they have made an excellent feedstock for fuel production at the 75 million gallon Dynamic Fuels facility (owned by Syntroleum and Tyson), and will be the key feedstock at the 130 million gallon Diamond Green Diesel facility (jointly owned by Darling and Vaero).

Other changes in RFS2 relating to home heating fuel: Amended Definition of Home Heating Oil

This year, the EPA amended its rules to expand the scope of renewable fuels that can generate Renewable Identification Numbers (“RINs”), to include fuel oil that will be used to generate heat to warm buildings or other facilities where people live, work, recreate, or conduct other activities. This rule will allow producers or importers of fuel oil that meets the amended definition of heating oil to generate RINs, provided that other requirements specified in the regulations are met. Fuel oils used to generate process heat, power, or other functions will not be approved for RIN generation.

Industry reaction

Randy Olson, executive director, Iowa Biodiesel Board

“We applaud this smart growth in biodiesel production, which keeps America‚s domestic energy industry moving forward. When the United States manufactures its own products, it benefits society. Encouraging production of American-made fuel brings economic development and energy security – two of our nation’s top priorities. 

”As the nation’s leading biodiesel producer, Iowa stands to gain more jobs and economic growth from this policy. The new biodiesel production will create and support green manufacturing jobs at Iowa’s 13 biodiesel plants instead of sending money overseas for oil. It will also enhance the rural economy by supporting Iowa farmers. This includes livestock farmers, because demand created for soybean oil has the positive effect of lowering meal prices from what they otherwise would be.”

Daniel J. Oh, President & CEO, Renewable Energy Group (REGI)

“This announcement offers certainty throughout the biodiesel supply chain, will grow green collar jobs and enhances our nation’s energy independence. We applaud and thank President Obama and his administration, including Secretary Vilsack and EPA Administrator Jackson and her team, for their public support and due diligence in working with the biodiesel industry to implement these sustainable growth numbers. They have reaffirmed that RFS2 is working as intended for biodiesel and that it will continue to do so.

“We believe the biodiesel industry, and REG specifically, are positioned to utilize the waste, by-products and recycled fats and oils from American agriculture and food production to meet the 2013 RFS2 number.”

John Plaza, CEO, Imperium Renewables

“This policy will be critical in ensuring strong demand for biodiesel nationally and help companies like Imperium increase production going forward. This showcases the leadership needed to increase America’s ability to source our energy right here at home.

“Imperium Grays Harbor employs 45 full time employees, several of whom are veterans of Iraq and Afghanistan, in the production of American-made biodiesel at competitive prices. This policy will enable us to increase production, continue to support family wage jobs in Washington state and result in several million dollars in additional revenue to the county of Grays Harbor and the state of Washington in the form of port fees, payroll and sales taxes and other economic benefits.

“A strong and stable RFS has been key to the development of the US biodiesel industry and is important as the industry continues to grow and provide increased economic benefits and job creation. The biomass-based requirement alone will reduce the import of petroleum-based diesel next year by nearly 31 million barrels and keep over $4 billion in US dollars from going overseas.”

Bipartisan support

In thanking RFS2 supporters on Capitol Hill, Iowa’s Randy Olson pointed to a concerted, bipartisan effort, including support from Sen. Charles Grassley (R), Sen. Tom Harkin (D), Rep. Leonard Boswell (D), Rep. Tom Latham (R), Rep. Bruce Braley (D), Rep. Dave Loebsack (D), and Rep. Steve King (R) — plus the backing of former Iowa governor and now Secretary of Agriculture Tom Vilsack.

Shares impact: Renewable Energy Group

Over at Raymond James, Pavel Molchanov writes, “REGI production margins rely heavily on RIN values, which should increase now that the RVO is in place. Approximately one-third of REGI’s per gallon selling price for biodiesel is tied to the value of RINs – which are the enforcement mechanism of the RFS2 program. Obligated parties are required to deliver RINs to show compliance to the RFS2, as such when mandated volumes increase (and outstrip production levels), the RINs become dear and increase in value – this occurred in mid-2011. In recent months, the lack of clarity around the 2013 mandate has resulted in lower RIN values. Changes in the RIN value have a direct impact on REGI’s production margins. We estimate a $0.10 per gallon increase in the realized RIN value would serve to boost 2013 EBITDA by ~25%.

Disclosure: None.

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 05, 2012

Neste Renewable Diesel Capacity Hits 2 Million Tons But Feedstock Constraints Loom

Debra Fiakas
Neste Oil Rotterdam.png
Image: Neste Oil Rotterdam Facility.  Source: Neste Oil

Finland’s Neste Oil Corporation (NEF: F) brought its fourth renewable diesel plant on-line in September 2011, earning bragging rights to the world’s largest facility of its kind.  Located at the Port of Rotterdam, the plant has the capacity to produce 800,000 metric tons of renewable diesel that Neste brands NExBTL and claims is the “cleanest and highest-quality renewable diesel on the market today.”  Along with Neste’s three other plants already in operation in Finland and Singapore the fourth plant in Denmark brings Neste’s total production capacity to 2.0 million metric tons per year.

Start-up Date Location Capacity
September 2007 Porvoo, Finland 200,000 tons/year
September 2009 Porvoo, Finland 200,000 tons/year
November 2010 Singapore 800,000 tons/year
September 2011 Rotterdam, Denmark 800,000 tons/year

 Neste’s augmentation of renewable fuel production capacity is also impressive against the total production capacity in the world.  The Renewables 2011 report published by REN21 reported 16.6 million metric tons in total renewable diesel production in 2010.  Two of Neste’s plants came on-line subsequent to that production measure period, adding 1.6 million metric tons or ten percent to world production capacity and potentially increasing renewable fuel production by 10% if both its Singapore and Rotterdam plants operate at full capacity.

It is worth noting the location of Neste’s two largest plants  -  bustling ports with easy access to ocean and rail shipping lines.  Leadership at Neste are not small thinkers.  They apparently view the renewable energy industry the same way they have viewed the fossil fuel stream  -  globally.  With access to rail and ocean shipping services, they are in a better position to source feedstock and distribute final production  -  in volume.

Neste positioning itself as a large producer of renewable fuel, begs the question of feedstock supply.  Investment in upstream supply seems a logical next step after investment in production capacity.   So far upstream supply has remained highly fragmented and localized and investment in the segment is limited to the large agriculture producers such as Archer Daniels Midland (ADM:  NYSE) and Tyson Foods (TSN:  NSYE)

In my view, investors need to consider upstream supply as an investment opportunity.  As new production capacity comes on line, those who control the feedstock supply become more powerful in setting prices or in controlling ownership of production.  Darling International (DAR:  NYSE) is the largest independent food by-products recycler and presents a unique upstream play.  Waste Management (WM:  NYSE) is one of the largest handlers of municipal waste.  I expect these two new age upstream suppliers to take on more importance as renewable fuel production reaches large scale. 

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 a buy recommendation on DAR shares.  DAR, WM, Neste, and ADM are included in Crystal Equity Research’s Alternative Energy Indices in the Waste-to-Energy, Ethanol and Renewable Diesel Groups of the Beach Boys Index.

January 19, 2012

Renewable Energy Group Raises $72 Million in Biodiesel IPO

Jim Lane

In Iowa, the Renewable Energy Group IPO priced last night, and the company’s shares began trading Thursday on NASDAQ under the REGI symbol.

The company sold 7.2 million shares at $10 per share, well below its midpoint target of $14 per share announced last week, with total proceeds of up to $82.8 million if all over-allotments are covered by underwriters. Without over-allotment sales, the offering will raise $72 million.

UBS Securities LLC and Piper Jaffray & Co. are acting as joint book-running managers for the offering. Stifel, Nicolaus & Company, Incorporated and Canaccord Genuity Inc. are acting as co-managers.

Of the shares of common stock in the offering, Renewable Energy Group is offering 6,857,140 shares and selling stockholders are offering 342,860 shares. In addition, Renewable Energy Group has granted the underwriters a 30-day option to purchase up to 1,080,000 additional shares of common stock to cover over-allotments, if any.

Disclosure: None.

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.

October 01, 2008

What I Sold: Nova Biosource Fuels (NBF)

Preparing for a world in which financing will be much more difficult to come by, I have been selling companies which are likely to need financing in the next couple of years.  A listing of the companies I've discussed so far is at the end of this entry.

My sale of Nova Biosource Fuels (AMEX:NBF) continues my general moves out of biofuels, also discussed in my entries on Pacific Ethanol and Dynamotive Energy Systems.  I have long argued that electric propulsion is a superior way to power ground transport than even "Second Generation" biofuels such as cellulosic ethanol.  My forays into biofuels have therefore been attempts to find companies better positioned in the industry, rather than an attempt to get exposure to the whole industry, as I have tried to do with geothermal power.  Even those picks have fared poorly, however, and my review of the cash flows and balance sheets of my holdings has led me to dispose of the majority of my biofuel investments.

Nova Biosource was brought to my attention by James Kingsdale at Energy Investment Strategies.  Nova's ability to handle a wider range of biodiesel feedstocks, should protect them somewhat from a commodity squeeze arising from expensive high grade oils and low prices for diesel fuel.  However, protection from a commodity squeeze is not protection from lack of new sources of financing.  As of the most recent quarter, Nova had a $15M operating cash outflow for three months, with only $17.6M in current assets and $8M in current liabilities.  The company has been meeting its cash flow needs with short term borrowing.  Any hiccough in terms of availability of funding could put Nova between a rock and a hard place.

Other entries in this series:

  1. Held: UQM Technologies
  2. Sold: Carmanah Technologies
  3. Sold: Pacific Ethanol
  4. Sold: Dynamotive Energy Systems
  5. Ten stocks to buy at the bottom.

DISCLOSURE: No position.

DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.  

September 30, 2008

What I Sold: Dynamotive Energy Systems (OTC:DYMTF)

This entry continues a series on companies I sold as part of a portfolio cleanup prompted by the mess on Wall Street.  In the first entry I described what I plan to do with the cash, followed by the reasons why I sold Carmanah Technologies and Pacific Ethanol.  UQM Technologies was one I didn't sell.  

I have not  mentioned Dynamotive Energy Systems (DYMTF) before.  I have mixed feelings about the company.  They use fast pyrolysis to make cellulosic biofuels, which I believe will prove to be one of the more economic pathways to cellulosic biofuels.  However, I believe that cellulosic biofuels are not usually the best use of limited biomass.  Rather, I have argued that cellulosic biomass can be more profitably used to displace coal in electricity generation, or to displace corn in feed for livestock.  Nevertheless, there is a strong regulatory and popular push towards cellulosic biofuels, which led to my speculation on Dynamotive last year.

According to the company's Q2 2008 financial statements, they had $1.3M in current assets, $9.5M in current liabilities, and a three month operating cash flow of -$341K.  They've been funding their deficit with short term loans and new share issues, a process which I expect will become much more difficult in the current financial environment, with negative implications for the share price.

DISCLOSURE: No position.

DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.  

March 15, 2008

Will Petrosun's Algae Biodiesel Grow on Investors?

by Tom Konrad

Celluslosic Ethanol is all the rage.  A less noticed, but significant "Biofuel 2.0" is biofuel based on algae.

Follow the Biomass

As I have consistently argued (see these recent articles on John Deere, Biogas, Cellulosic Ethanol vs Biomass Electricity, and Renewable or Green Diesel)  the people most likely to make money from biofuel are not the processors and distributors (who compete directly with petroleum or other fossil fuel-based products, and so have little pricing power), but the producers of feedstock, which, like oil, is in very limited supply, and so they will have pricing power.

When it comes to converting sunlight into biomass, algae is the most productive type of plant.  According to this chart from Five Star Consultantsfivestar.bmp , Biodiesel from algae has the potential to produce enough fuel to drive a Prius-type car 370,000 miles per acre per year (MAY), compared to 2,000 to 31,000 MAY for conventional biodiesel crops, while ethanol from switchgrass could produce 32,500 MAY.  Furthermore, some strains of algae are as much as 40% oil by weight, leading to the hope of a large supply of oil which is much easier to convert into biodiesel than it is to ferment even corn (let alone cellulosic biomass) into ethanol.

With an order-of magnitude advantage, it would seem that algae is the green wave of the future, and actually so productive that it could produce enough biomass feedstock for us to continue to drive our SUVs with our current reckless abandon. 

Theoretically, biodiesel produced from algae appears to be the only feasible solution today for replacing petro-diesel completely... In practice however, biodiesel has not yet been produced on a wide scale from algae, though large scale algae cultivation and biodiesel production appear likely in the near future (4-5 years). -

Ponds or Reactors?

There are two basic approaches to growing algae: open pond and closed reactor.  The open pond method, which is what Petrosun Drilling (OTC:PSUD) recently announced they are pursuing, involves growing the algae in open ponds of water, much like it grows in nature.  Open ponds are clearly quite cheap, but they require a reliable supply of water to replenish that lost from evaporation (making them impractical in all but the wettest parts of the country (Petrosun's first farm will be on the Texas coast, and use saltwater, which helps with this problem.)  The lack of temperature and weather control can further decrease yields from the theoretical potential.

The other problem with open ponds is that it is impossible to keep other types of algae (a.k.a. weeds) out, meaning that high percentages of oil in the final crop will be impossible to attain. This means that biofuel produced from pond algae will require much more extensive processing to be turned into fuel.  It's easy to grow pond scum, but turning it into something useful is harder.

The other option is the algae bioreactor, one type of which (from Solix biofuels) was referenced in the chart above.  The Solix technology uses closed plastic bags agitated by rollers, has climate control with the use of controlled radiative cooling, and uses concentrated carbon dioxide emissions to enhance algal growth.  (The best description of the technology is at Algae @ Work, a company which was started by Solix's former CTO seeking to apply the technology to carbon capture.)  

To me the bioreactor approach (Solix's technology is only one version) seems most likely to achieve the promise of extremely high yields, and even that is not without problems.  Large scale bioreactors are complex systems.  As such, they will be expensive and take great efforts to move from the lab to commercial scale.

Ken Regelson, the author of the chart above, and he believes that Solix does not have "a prayer of achieving their expected yields per acre" but that he used the number from Solix because he has yet to get authoritative numbers from anyone else.  

What about Petrosun?

I wrote this article because readers wanted to know about Petrosun Drilling (OTC:PSUD), an oil exploration company that has been promoting their algae biodiesel efforts since September.  Other than Petrosun, the only public companies I know of which are seriously looking into algae based biodiesel are large conglomerates: Boeing (BA), Chevron (CVX), Royal Dutch Shell (RDS-A) and Honeywell (HON), which can take the long view and have large research budgets to finance their efforts for as long as it takes.  If you click through the company names to the news stories, you will note the common theme: These are all research stage projects.  

Petrosun has not filed even an unaudited quarterly report since March 2007.  Given that it is also promoting exciting technology, I detect the whiff of snake oil salesmen.  Although readers are clearly interested in this company, until they begin to file current information, I don't consider it worth my time to investigate further.  Petrosun's main product is much more likely to be snake oil than algae oil.

Even if Petrosun does execute on its algae farms, will there be any first mover advantage?  It seems unlikely to me; growing algae in open saltwater ponds will depend on access to suitable land near coastlines... later entrants who can acquire suitable land should be able to produce algae just as efficiently as Petrosun, since they do not seem to have any special technology or expertise.  After all, the company is simply an unsuccessful oil exploration company with a algae farm division.

DISCLOSURE: Tom Konrad and/or his clients have positions in these stocks mentioned here: HON.

DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.


February 10, 2008

Ten Solid Clean Energy Companies to Buy on the Cheap: #7 Deere & Co. (DE)

The first and last word in any discussion of biofuels should always be "Feedstock."  Feedstock is the "Bio" out of which biofuels will eventually be made, whether it be corn, sugar, jatropha, algae, palm oil, switchgrass, forestry waste, or municipal solid waste.  

Before the era of peak oil, we lived in a world of plenty, which meant that we could squander energy, not only by driving Hummers, but by feeding energy intensive products such as corn crops to livestock, and by dumping "free" sources of energy such as garden waste and used cooking oil into landfills.

The era of cheap energy is over.  The signs are all around, and even peak oil deniers point to expensive-to-extract reserves such as deep water drilling, Canadian tar sands, and even Colorado's Oil Shale.   These sources of oil are not only more expensive to extract, they are are also more carbon-intensive, meaning that regulation of greenhouse gas emissions will raise their price further.

Commodity Squeezes

In terms of biofuels, I've long argued that there is simply not enough feedstock available, and that even if there were enough feedstock to replace all the oil products we use today, there are many other potential uses which will compete for the output of scarce land and water, such as a replacement for coal in electrical generation, and fodder for livestock.  Biodiesel producers may find that the best quality oil is bought up by refineries to make green diesel instead.  In fact, it seems that almost any form of biomass can be converted to Bio-crude and processed in a conventional refinery.  We'll even have to decide if municipal waste should be recycled, burned for electricity, or turned into cellulosic ethanol.

I'm unconvinced that anyone knows exactly how the limited feedstocks we have available will be used, or what process will be most efficient in converting them into their final form.  This makes it difficult to find a biofuel investment that I can be confident will succeed.  One biofuel technology after another has been caught by a commodity squeeze, first corn ethanol and now biodiesel makersPolyannaish investors expecting limitless supplies of feedstock for cellulosic ethanol should take note.  Higher commodity prices do not always lead to more supply.  Sometimes higher prices lead to lower demand, and the next boom could easily become the next bust.

The Sure Winner

John DeereThe only sure winners from limited and increasingly valuable biomass will be the people who produce it: farmers, foresters, and (perhaps) trash haulers and recyclers.  What do farmers do when they have spare cash?  They buy farm equipment, quite often from Deere & Co. (NYSE:DE)  Few stock have ridden the biofuel boom as well as Deere, with the stock rising 400% in the last four years in a nearly uninterrupted uptrend, without the thrills and spills that have turned so many investors off of corn ethanol.  

The beauty of Deere as a biofuel investment is that there is no need to know what the biomass will be used for, or what form it will come in.  In nearly every scenario I can envision, Deere is likely to be a major supplier to the industry which grows it.  From algae to Jatropha, if Deere does not yet sell equipment to plant, tend, and harvest it, it seems a good bet that they will design one.  This technology agnosticism, combined with their wide dealer network in agricultural areas, makes the company seem to me the safest way to bet on biofuels as a trend.

Deere's close relationship with farmers also gives them an opportunity to profit from another up-and-coming crop: Wind.

Even with a 9-year run up, the stock currently trades at a trailing P/E of 22, and despite its construction arm, has not yet been hit hard by the turbulence in the housing market.  Since I expect the housing situation to only get worse over the coming months, a sharp decline in construction income or a continued broad market decline may be just what prospective investors need to pick up this solid biofuel play on the cheap.

Click here for other articles in this series.

DISCLOSURE: Tom Konrad and/or his clients have long positions in DE.

DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

November 14, 2007

Waste Vegetable Oil: A Slick Way to Biofuel Your Portfolio

In August, I argued that Biodiesel stocks could be in trouble from more efficient ways to turn the oils and fats they use as feedstock into fuel, and concluded the article by saying that the likely winners are suppliers of oils and fats, not the processors.  James Kingsdale, of Energy Investment Strategies has been thinking along the same lines.  Last week he wrote an excellent overview of the major biofuels industries, including some stock picks.  

One of those stock picks was the diamond in the rough I wish I had known about when I wrote Biodiesel's Nightmare: Renewable Diesel back in August. James writes:

 Darling International, Inc. (NYSE: DAR) ... is a renderer and a collector of waste greases. Renderers collect waste fat and bones from meat producers and turn them into products. Both waste greases and animal fats are potential high FFA biodiesel feedstocks, although Darling presently is not using them for that purpose...

While biodiesel from palm oil is causing deforestation, and the prices of vegetable oils rise because farmers are changing their crop rotations to produce more corn for ethanol, biodiesel (or renewable/green diesel) from waste vegetable oil has a positive environmental impact because it diverts something that would otherwise have to be disposed of to a useful purpose.  

Biodiesel from waste vegetable oil is the greenest biofuel available.  As a member of the Denver Biodiesel Coop, I use it in my car... now I can use it in my portfolio as well.

DISCLOSURE: Tom Konrad  and/or his clients do not have positions in any of the companies mentioned here.

DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

August 23, 2007

Hither and Yon: Transmission and Biofuels

In the most recent two installments of Energy Tech Stocks' interview with me cover my views on transmission stocks, and biofuel stocks.  Readers of AltEnergyStocks know that I am a big fan of electricity transmission, a theme I keep coming back to.  You also know that I have a very ambivalent relationship with both ethanol and biodiesel.  So I liked Bill's transmission article, but I just wasn't able to convey to him the subtleties of how I feel about biofuels.  But he got one thing right: the owners of biofuel feedstock are likely going to be the biggest winners.

Relevant articles on Biofuels

Competition in Ethanol

An Insider's View of the Ethanol Industry

Let Them Eat Grass

Blue Sun Biodiesel

Biodiesel's Competition

My Biodiesel Jeep

The Answer is Trading in the Wind

While you're on the Energy Tech Stocks site, read a little about trading of wind power futures (here and here.nbsp; While I personally have no interest in speculating in wind futures, I predict this will be a great boon to wind farm owners and climate scientists everywhere.  I also predict hedge funds which will use strategies based on emerging inverse correlations between wind power futures and natural gas futures, probably sooner than anyone might guess. 

DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

August 12, 2007

Biodiesel's Nightmare: Renewable Diesel

Until algae farms move from the research and demonstration stage, biodiesel usage is going to be tightly constrained by available feedstock.  The feedstocks for biodiesel are oils and fats, which naturally occur in quantity only in animals or the seeds of plants.  As such, the quantity of oil available is much smaller than the sugars, starches, and cellulose which occur not only in the seeds and fruits of plants, but also in the stems and leaves, and can be used to make ethanol.  Because sugarcane contains the best ethanol feedstock, sugar in the stem (not just the fruit) of the plant, Brazilian ethanol can compete effectively with gasoline without subsidies.

From Trash to Cash

Biodiesel can also compete with diesel on the basis of price, in large part because it is much simpler to convert oils and fats into biodiesel than it is to convert sugar into ethanol, and the oils commonly used for biodiesel today were essentially treated as low-value byproducts (e.g. soybean oil) or zero-value waste products (e.g used cooking oil) of food production.  When petro-diesel cost $1 a gallon, biodiesel was limited homebrew in the garages of a few hippie types, but now that it is around $3 a gallon, turning low value oils and fats into high value fuel can be big business.

US Biodiesel Consumption.  

Source: National Biodiesel Board.

How big could the biodiesel business get?  With US production of soybeans at about 3 billion bushels, if the entire soybean crop were converted into biodiesel at 1.4 gallons per bushel, we would have about 4.2 billion gallons of biodiesel, or around 6.5% diesel fuel consumption in the US.   There are many other potential feedstocks for biodiesel, but soy oil accounts for most of US oil production, so we can safely say that domestic biodiesel production will not exceed 10% of domestic consumption without some new source of feedstock.  In fact, potential biodiesel supply is falling, since farmers are changing their crop rotation to include less soy and more corn for ethanol.  All told, the potential demand for biodiesel far exceeds the potential supply, which will be limited by the supply of potential feedstocks, instead.

Currently biodiesel supply is limited by production capacity, but in the long term, as more production facilities are built, supply will be limited by available feedstock.  At this point, commodity arbitrage will set the price of biodiesel close to its main substitute, petro-diesel, and the price of commodity oils will follow along for the ride, but low enough to allow biodiesel producers to earn a return on investment.

New Kid on the Block

The above analysis assumes that biodiesel production is the best way to take vegetable oils and fats, and make them into transport fuel.  This may not, in fact, be the case.  Last spring, ConocoPhillips (NYSE:COP) announced a deal with Tyson Foods (NYSE:TSN) to use fat from Tyson's rendering plants to make "renewable diesel" fuel in COP's refineries.  The key point here is that COP is making what they call "renewable diesel" not conventional biodiesel.  They developed their renewable diesel process using soy oil in Ireland, using their existing oil refinery there.  

I first heard of this process last October at an NREL presentation (they called it "Green diesel" and could not identify COP as the oil company they were dealing with,) but details remain sketchy.  The fact that they refer to the process as a "proprietary thermal depolymerization production technology" and the fact that they are using existing refinery infrastructure should cause alarm to biodiesel firms and investors.   

Why should this cause alarm?  Because COP claims its "renewable diesel" is chemically equivalent to conventional diesel.  If this is true, it's quite possible that it has a lower cloud point than biodiesel, and so could be used at a broader range of temperatures.  In addition, since COP is using conventional refining equipment, they may also be achieving higher energy yields.

According to NREL's Overview of Petroleum and Biodiesel Lifecycles, Biodiesel conversion requires 80 kJ of energy for every 1000 kJ of energy in the biodiesel, while petro-diesel requires only 64 kJ to produce an equivalent amount of fuel.  While the difference in energy costs is fairly minor, transportation fuel is a commodity business, and COP's ability to use the existing pipeline infrastructure into which their refinery is already integrated, as well as its ability to avoid the large capital expenditures required to build a biodiesel refinery from scratch are likely to give them a large cost advantage over biodiesel producers in this thin margin business.

With the exception of small biodiesel producers using local and distributed biodiesel feedstocks such as waste vegetable oil from restaurants, I expect that petroleum refineries will end up having an economic advantage making renewable diesel in comparison to conventional biodiesel producers.  This means that commodity oils and fats available in large enough quantities to interest refineries will be bid up in price to a point where less efficient biodiesel producers will be unable to operate profitably.

All of this may happen remarkably quickly as well.  ConocoPhillips and Tyson say that their deal could ramp up to 175 million gallons by 2009, or about 10% of United States 2006 biodiesel production.  How soon will refineries be competing directly with biodiesel producers for soy and other vegetable oils?

While we can only speculate about the relative economics of renewable diesel and biodiesel, having a new competitor cannot be good for the biodiesel industry.  Biodiesel producers might be sustained by federal biodiesel tax credits, but depending on government subsidies is not a sustainable business model, especially when you are competing with an industry with a long track record of successful lobbying.

The likely winners I see are the suppliers of feedstock.  When the deal was announced, a Tyson spokesman said he expected the deal to increase annual earnings by between $.04 and $.16 per share.

DISCLOSURE: Tom Konrad  and/or his clients do not have positions in any of the companies mentioned here.

DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.


July 02, 2007

The Energy Balance of Snake Oil

It's no secret that money is flooding into the alternative energy sector, but not all of this money comes from sophisticated, investors. Unsophisticated investment is a lighting rod for the scam artists. Because there is both an urgent need to deal with the the problems posed by global warming, energy security, and resource depletion, and the new money is rapidly accelerating the advance of technology in renewable energy, new innovations are very plausible.

There are many ways to lose money in alternative energy, even without being taken by a scam. The current emotional climate in the industry makes even the most solid companies' shares gyrate wildly. Even mildly profitable, relatively unexciting picks like LED-maker CREE go on wild rides from $35 in April 06 to $15.25 at the start of February this year, only to shoot back up to over $25 today. A speculative technology startup such as Beacon Power Corp. (NASDAQ:BCON) , on the other hand, is likely to be even more volatile, having dropped almost 80% in a little over a year, and now looking as if it is headed into an upswing (as our own Charles Morand hopes.)

With all the risk already inherent in investing in a booming (or is it bubbling?) emerging industry, shell companies founded just to raise money from unsophisticated investors are at least one risk we can protect ourselves against. Below are a few basic precautions. I plan to illustrate them and how they apply to U.S. Sustainable Energy Corp. (OTCBB:USSE), a company that recently announced a "revolutionary new process" for creating biofuel from soybeans, which was brought to my attention by a comment on an article I had written on Green Diesel.

1. Stick to the exchanges. With a stock market listing comes regulation and oversight. A stock market listing is not a guarantee that a company is for real, but the extra oversight of the exchange means that if you stick to companies listed on the NYSE, the NASDAQ, and the AMEX, you're very unlikely to be buying into a scam. Even stocks which don't trade on an exchange in the United States often trade on exchanges abroad, but not all exchanges are equal. You're much safer with stocks on the London Stock Exchange than on London's Alternative Investment Market. Another quick screen is to check to see if any legitimate mutual funds or ETFs own the company you are interested in (in fact, for new investors looking to create their own alternative energy portfolios, a good starting point is the holdings of the industry mutual funds and ETFs.)

If you use one of these strategies, essentially trusting the regulator or the investment company (mutual fund) to weed out the scams for you, you don't need to worry much more about scams (unless you've ventured onto some of the wilder and woollier exchanges.) But the cautious approach may preclude investing in a technology that you just have to have in your portfolio. In that case, all is not lost, there are several other ways to sniff out scams. You may end up rejecting a few legitimate companies, but given the risks, why take a chance?

USSE: Traded on the bulletin board, with little or no oversight. Even worse, they got their stock market listing as the result of a reverse merger with a shell company, Laforza Automobiles, which means they also avoided the scrutiny that comes as part of an IPO. Recently, legitimate companies have chosen to use reverse mergers simply to avoid the headache of going public under Sarbanes -Oxley, but it is not a good sign, especially with a Bulletin Board stock.

2. Technology. It may sound obvious, but when picking an investment advisor, an investor will be better served by trying to understand how that advisor manages money,and if she/he is any good, rather than just picking the most likeable person who wants to put them in a "balanced portfolio of mutual funds." Unfortunately, many people do exactly the opposite. This same trap lurks in assessing technology, and scammers know that the typical American has a dismal understanding of basic science. Checking the science with an expert in the field, or even a blog/bulletin board search can go a long way to protect you from hoaxes. Countless startups with sound technology have failed because of bad management, soif there is any doubt about the plausibility of a company's technology, it's just not worth the risk.

USSE: Since their technology sounds somewhat akin to Pyrolysis followed by Fischer-Tropsch conversion, I asked Tom McKinnon, professor at the Colorado School of Mines, because I know he does research on pyrolysis chemistry. He responded:

  1. The stated feedstock is corn and/or soy which makes it sound like an oil crop process, but the rest of the text doesn't make any reference to vegetable oils.

  2. The three products (char, pyrolysis oil, and gas) are more consistent with a pyrolysis processso why did they mention corn and soy. It would be a waste to use oil crops for pyrolysis when you can use low grade biomass as a pyrolysis feed.

  3. The pyrolysis gas is not suitable for FT synthesis without a lot of effort (at least that is my recollection, I haven’t gone back and dug into this.)

  4. The high energy content of the fuel indicates that it contains very little, if any, oxygen. Typical pyrolysis oils contain phenols and a whole witches' brew of nasty reactive oxygenates.

  5. Pyrolysis oils are generally quite unstable and degrade fairly quickly (time scale of weeks). I don't think anyone in their right mind would put pyrolysis oil into an expensive diesel engine, so maybe these guys have some other process.

Clearly, their technology is either revolutionary or a hoax. I also had a hunch that their claim of producing over 3x more energy in their output than biodiesel from the same feedstock seemed very high, and perhaps that there was actually more energy in their output than in their input. This would make their process another variant on a perpetual motion machine, and as such, violate the laws of physics. To do my calculations, I needed to know the BTU content of a bushel of soybeans (their stated feedstock), so I did a web search, and came across a discussion of none other than USSE. It turns out I was not the only skeptic thinking along these lines. If it's not perpetual motion, it's darn close.

It's also interesting to note that their "letter of validation" is from a Ph.D. wildlife ecologist and Biologist with an M.S. from a State University. I guess that all the engineers and chemists had something else to do that day, rather than tour the facilities of a company with a revolutionary new process that will help solve both peak oil and global warming.

3. Management. It's worth looking at management's background. Often shysters wrap up one scam, only to start another. Make sure you get biographical data from sources other than the company's website. You will want to make sure that the board of directors includes outside members with both the ability and motivation to oversee management and make sure that they do not make off with the firm's money.

USSE: Checking the company's management and board of directors , we note that the two lists are almost identical, with the exception of an extra member of the board, David Crow, a former (according to the site) senior vice president of "Pratt and Whitney." As the only person who has any chance of resembling an independent director, I looked him up and found him under the emeritus faculty at the University of Connecticut. He does seem to be an expert on gas turbine engineering, which would be useful for the power plant that USSE is planning, but he seems to have no experience which would help him in his duties of overseeing management.

4. Conservatism. Scammers have the incentive to boast about their company's future, solutions to big problems draw more suckers than fixing mundane, everyday problems. They will also gravitate towards business plans that are easy for everyone to understand and that people can see in their everyday lives. Not constrained by actually needing a real product to sell, they will almost invariably come up with a product that will make most people think "Wow, that'd be great." Conversely, you don't have to worry too much about the company that is trying to sell its widget that will make sewage treatment plants 5% more efficient.

USSE: Quote: "Our patent-pending liquid biofuel provides clean, renewable energy at a fraction of the cost of traditional biodiesel. It's also a superior fuel: it produces more energy and doesn't degrade engine performance, among other benefits."

I'm hardly the first person to point out that something smells in the state of Mississippi, but I hope this example will help give my readers the tools to avoid the next revolutionary new technology to teleport in.

DISCLOSURE: Tom Konrad and/or his clients have positions in these stocks mentioned here: CREE, BCON. He is neither long nor short USSE (his broker does not let him short penny stocks.)

DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

May 14, 2007

3 Alternative Energy Stocks You Need to Know

In the face of a declining overall energy market today, three of our favorite alternative energy stocks posted strong gains on high volume.

The Oil Services HOLDRs ETF (OIH) was down 2% and the PowerShares WilderHill Clean Energy ETF (PBW) was down 1.7%. Indeed, the vast majority of the energy stocks that we track were in the red. But bucking the trend were two energy stocks that we have profiled in the recent past and a third company that we will begin covering today.

First on the list is our favorite wind energy play, Welwind Energy International (WWEI). We recommended Welwind during October of 2006, when it was trading around $0.07. It closed today at $0.18, up 26% on 4X average trading volume. That is more than a 900% gain in the six months since we first initiated coverage on Welwind.

Next on the list of breakout stocks today is Nova Biosource Fuels (NVBF). Nova just announced a move from over-the counter to the AMEX, which will be effective on Monday, May 14. Nova recently held its official groundbreaking ceremony at the site of its planned biodiesel refinery in Seneca, Illinois. The plant is expected to have a 60-million-gallon per year biodiesel production capacity from locally generated, low-cost feedstocks, including rendered animal fats and oils and recycled vegetable and animal- based greases. Nova’s stock price increased by 4.5% today on 12X normal trading volume.

Our final stock is getting its first mention on Gold Stock Bull today. Despite being the darling of the ethanol investment community and attracting funding from none other than Bill Gates, we have been hesitant to recommend Pacific Ethanol (PEIX). We watched the stock quadruple during 2006 from $10 to nearly $45, but couldn’t see any fundamental justification for the rise and held off. PEIX has since retreated to around $15 in an overall downturn amongst ethanol producers.

So what is driving our optimism with Pacific Ethanol? A shift from hype to substance. The Sacramento, Calif.-based company swung to a first-quarter profit, earning $1.9 million, or 5 cents per share. During the same quarter last year, Pacific Ethanol lost $612,000, or 2 cents per share. This first-quarter profit was generated from revenue that more than doubled to $99.2 million from $38.2 million. Pacific Ethanol sold 37.5 million gallons of ethanol, almost twice as many as it did a year ago, and ethanol prices were up more than 20 percent.

Pacific Ethanol’s share price responded by climbing 9.1% on 6X normal trading volume. Despite fears by some investors of an oversupply in ethanol during the back half of 2007, we believe PEIX will continue pushing higher. We have a price target of $22 for 2007, which is a 47% increase from the current price. The chart below shows clear support at $15 and we believe a bounce off this price floor is imminent.

Pacific Ethanol currently has one plant operational, one plant about to open and three other plants under construction. The operational plant is located in Madera, California and has a capacity of 35 million gallons per year. It is the largest ethanol plant on the west coast.

Their second plant is being constructed in Boardman, Oregon and will also have a capacity of 35 million gallons per day. Construction is scheduled to be completed in the next few months.

Pacific Ethanol also has begun construction on three 50 MGY name plate capacity production plants that will open mid 2008. Magic Valley, Idaho will serve growing markets in the Intermountain West, while Pacific Ethanol’s Stockton, California and Imperial Valley, California plants will help meet the growing demand for ethanol in California.

The energy bill passed by Congress in 2005 requires an increase in ethanol use by refiners to 7.5 billion gallons by the year 2012. With Democrats now controlling both houses and looking likely to take over the presidency, we can only expect additional government incentive for alternative energies such as ethanol.

A significant portion of Ethanol demand is coming from the fact that states across the country have banned MTBE (Methyl Tertiary Butyl Ether), a fuel additive formerly required to increase octane levels of gasoline. MTBE has found its way into drinking water and many believe is cancer-causing. Ethanol is the only other commercially viable additive that will bring gasoline into compliance with state and federal clean air regulations. Consumption and production of ethanol has continued rising at a record pace and should be considered as part of any investment portfolio.

Good luck and happy investing!

Jason Hamlin is Founder of Gold Stock Bull, a site that has been tracking the secular bull market in gold and silver since its inception, back in early 2002, as well as the emerging bull market in energy since it took off in early 2004.

April 11, 2007

Current Structure of the US Ethanol Industry "Problematic", Says the IMF

The International Monetary Fund released its Spring 2007 World Economic Forecast today.

Fuel Vs. Food

There is a short sub-section in Appendix 1.1 ("Recent Developments in Commodity Markets") that I thought might be worth sharing with you. If you download the PDF version of the report and scroll down to page 44, you will find the said sub-section under the heading "Food and Biofuels".

In it, the IMF notes that food prices (as measured by its own food price index) rose by 10% in 2006, driven partly by a poor wheat crop in certain countries but also by (mandated) demand for biofuels in the US and Europe (see graph below).

The report notes that, looking ahead, the prices of crops like corn and soybeans, which are the main feedstocks for ethanol (US) and biodiesel (Europe), respectively, should: (a) continue to rise and (b) begin moving in line with the price of crude oil, which is currently the case with sugar because of its role in the Brazilian ethanol industry.

About the recent news that US farmers are planning to plant more corn acreage next year, the IMF has this to say:

"For 2007, the United States Department of Agriculture is estimating a record corn crop, as planting areas increase by 10 percent from 2006 at the expense of soybeans and cotton. Still, demand fueled by the increase in domestic ethanol production capacity is expected to outpace the production rise."

IMF economists also point out that the price of "partial substitutes" such as wheat and rice, as well as the price of meat and poultry, should trend upwards as a result of higher corn and soybean prices. Finally, high crude prices could place further upwards pressure on the price of corn because corn farming in the US is highly energy intensive.

The IMF - Not Especially Bullish on Corn Ethanol

It is the sub-section's final paragraph, in my view, that best captures IMF's view of current US and European biofuels policy. It reads as follows:

"While on a small scale biofuels may be beneficial by supplementing fuel supply, promoting their use to unsustainable levels under current technology is problematic, and long-term prospects for biofuels depend heavily on how quickly and efficiently second-generation substitutes (such as plant waste) can be adopted. Many energy market analysts also question the rationality of large subsidies that benefit farmers more than the environment.

While new technology is being developed, a more efficient solution from a global perspective would be to reduce tariffs on imports from developing countries (for example, Brazil) where biofuels production is cheaper and more energy efficient."

This reaffirms some of the contentions that were made on this site in the past:

(a) The way the US is proceeding with its approach to ethanol will inevitably place inflationary pressures on domestic and global food prices, which will result in tensions at home and abroad.

(b) The main reasons for pursuing ethanol in the manner in which it is being pursued in the US right now are, in order: (a) placate the farming lobby and earn valuable political support in America's hinterland; (b) placate the wean-America-off-foreign-oil lobby; (c) placate the soft environmentalist lobby; (d) combat climate change...oh, wait a minute...I guess no one's settled that thorny energy balance question yet, have they?

(c) Not letting emerging markets export ethanol tariff-free to the US is bad economically for a lot of people, from poor Brazilians to middle-class Americans

(d) Cellulosic ethanol is the only way forward if biofuels are ever to displace oil in a sustainable manner

To Conclude...

"Old news!", you might say...well you're right, except for this: it's one thing when I or some other insignificant blogger bashes (or celebrates) corn ethanol; it's quite another when the top economic think-tank in the world tells you that it sees real long-term viability problems with the way that this industry is currently structured.

To be sure, it's not like the IMF dedicated a large amount of space to this issue, and I'm quite certain that most of the economists who participated in producing this report don't loose sleep over it at night. But the strong terms used in that little sub-section further reinforce what the corn ethanol bears have been saying: enjoy it while it last, because it's not structured to be sustainable in its current form for much longer...and I'm not talking about environmental sustainability here.

DISCLOSURE: The author does not hold a position in any company involved in biofuels

February 28, 2007

A (nearly) Pure-play Biodiesel Stock

On January 29th, M~Wave [NASDAQ:MWAV] and private vertically integrated Biodiesel distributor Blue Sun Biodiesel announced a merger between the two, with Blue Sun becoming a division of M~Wave, and the merged company being renamed Blue Sun Holdings. Managerial control will also pass to "certain directors and the officers of SunFuels."

If this merger goes through as planned in the second quarter of 2007, US investors will have their first opportunity to invest in a stock focused on a biofuel which is much less controversial among environmentalists than corn-based ethanol. Estimates of the well-to-wheels Energy Return on Energy Invested (EREoI) for biodiesel range from about 1.93 and up, depending on the feedstock, although few numbers are available. The most commonly quoted EREoI for biodiesel is 3 or 3.2, but I've never found a reputable reference for that, and it will clearly vary widely depending on the oil feedstock, with waste oil being "best."

Speaking of feedstock, Blue Sun is a vertically integrated company with several farmer cooperatives raising oil exclusively for Blue Sun, often using varieties of mustard and canola being developed in-house by Blue Sun, although they have also used soy bought on the open market.

They have their proprietary blend of additives, which allows their Blue Sun Fusion biodiesel to offer superior cold weather performance. I've had several conversations with one of their distributors who uses their B100 in a dual tank diesel pickup, and he has been able to drive on B100 when the temperature is as low as 15 degrees F (-9C) (Unless you, like him are a mechanic who happens to carry around a spare fuel filter in your trunk and a spare tank on your vehicle, I would not recommend trying this... he has also had his fuel filters clog when he pushes the envelope too much... ). I'm no mechanic, and so I stick to B20 except during the summer when the temperature stays comfortably above 40F(+5C).

Their additives, according to a study by the National Renewble Energy Laboratory, allow the usual lower maintenance requirements due to the increase lubricity of biodiesel, and reduction of carbon monoxide, hydrocarbons and particulates also seen with most biodiesels, but Blue Sun's blend shows reductions in NOx as well, something that can be a serious issue for biodiesel producers, as we saw when Texas considered banning biodiesel because of increased NOx emissions last fall.

Finally, along with the announcement of the merger with M~Wave, they also announced a partnership with ARES Corporation to build biodiesel production facilities throughout North America, with the first in Clovis, NM. They had previously relied on contract biodiesel production at first tier facilities. Bringing production in house, combined with their own additives, they will have control of the entire biodiesel production and distribution chain (their distributors sign detailed agreements with them on how the biodiesel will be handled all the way to the pump) will likely help them cement their chosen market niche as the high quality biodiesel leader, which will give them a chance to compete with agricultural giants such as ADM and Cargill in the rapidly growing biodiesel marketplace.

Another publicly traded competitor is Earth Biofuels [OTCBB: EBOF], but their main competitive advantage is celebrity endorsement (BioWillie), rather than quality. Of course, investors considering buying MWAV as an early in to this quality biodiesel play should keep in mind that it ain't over til the fat lady sings when it comes to mergers and acquisitions.

Tom Konrad, Ph.D. is an independent investment advisor registered in the state of Colorado who helps people reach their investment goals while protecting the environment.

DISCLOSURE: Tom Konrad and clients hold positions in MWAV, as well as a private equity position in Blue Sun.

DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

May 24, 2006

Green Star Products Unveils Advanced Biodiesel Reactor

Green Star Products Inc (GSPI) announced that they have developed and successfully commercially tested their advanced biodiesel reactor.

GSPI reactors require an amazing two minutes to complete the biodiesel conversion reaction versus over one hour for the rest of the industry. This means that GSPI's processing rate through the reactor is at least 30 times faster than the rest of the biodiesel industry. [ more ]

May 16, 2006

Green Star Products to Construct Total Bio-Refineries

Green Star Products Inc (GSPI) announced its plans to construct total Bio-Refinery Complexes for production of both biodiesel and biomass ethanol at each facility.

The first Bio-Refinery is planned to be in North Carolina (see GSPI press release dated April 20, 2006) and the location of the second facility is to be announced soon in the northwestern sector of the United States.

Each GSPI-designed Bio-Refinery will have a start-up production of between 10 or 20 million gallons per year with quick expansion capabilities. The facility infrastructure will be capable of expanding to 60 million gallons per year (and further expansion capabilities could reach 100-million gallons per year), ranking them among the largest fuel production facilities in the world. [ more ]

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