April 2012: Correlation coefficients: oil, natural gas, biofuels and the broader US equity indices

Last month, I correlated oil, Natural Gas and broad equity market ETF’s to the Groundbreaking Energy BioIndex, an equally weighted index of 8 biofuels equities.

I have updated that correlation table for 2012 YTD as of April 3oth:

The correlation between Oil (USO) and the BioIndex weakened in April, while the BioIndex and UNG (Natural Gas) exhibited a slight positive correlation.  Natural Gas still appears to be moving contrary to the broader market indices.  This will be an interesting trend to monitor in May, as Natural Gas price action and technicals are suggesting a bottom and positive momentum (see graph below).

Compare this to last month’s correlation table.

Conclusion

Natural Gas prices suggested that support is forming at current price levels.  With the BioIndex exhibiting some positive correlation with UNG, it will be interesting to see if the constituents of the BioIndex trace UNG upward, to the extent that UNG appreciates in May.

The BioIndex displayed negative price momentum in April, while UNG seems to be forming a bottom.

Biofuels: Gains slip sliding away. Our April and YTD assessment

April saw few, if any, bright spots, and a multitude of negative events in the biofuels sector.  Green Plains Renewable Energy (GPRE) lost all of their 2012 gains and more, after reporting a net loss of $12.7 million (0.39 cents/share) for the quarter mainly attributed to weak ethanol margins.  They ended up losing 27% on the month.  In the ethanol business, Cosan (CZZ) predictably saw momentum cool, as we predicted last month, losing 8% on the month, faring better than West Coast ethanol marketer Pacific Ethanol (PEIX) who lost 14%.   Solazyme dove like a submarine, losing all of their healthy March gains, and returning -23% on the month.  Kior’s month was par for their shareholders, in volatile trade, Kior lost 24%.  Amris lost another 36% for their masochistic shareholders on the month, bringing their YTD return to -74.49%

April Highlights:

• Gevo not only maintains price level, but adds 4% on the month
• The US Food and Drug Administration approves the use of Codexis enzymes in the Merck Januvia® manufacturing process.  Shares surge over 20%, then retreat to less than a 5% gain on the day.

April misery:

• Green Plains Renewable Energy reports a 2nd quarter loss of 12.7 m /- $0.39 cents per share
• Amyris’ slide accelerates, losing another 36%, to bring YTD return to nearly -75%
• Political rhetoric starts associating biofuels maker Solazyme with failed solar power firm Solyndra, and shares lose more than 40% in the month
• The BioIndex is strongly negative on the year, despite a positive Dow and Nasdaq. The BioIndex has lost 11.95% YTD.

A summary of Biofuels’ YTD price action by sector:

I have summarized YTD price action by the fuel stream that each firm touts as a primary market.  I have categories for Renewable Oil/Diesel, BioButanol, BioEthanol and Refining/Catalysts.  The idea is to get a sense of the price momentum in each market segment, and to see how firms in the segment are performing relative to one another.  In order to benchmark, I’ve normalized the QQQ and SPY indices into a similar price range as the market segments to reveal any broader trends.  My summary is below:

Renewable Oil/Diesel

March enthusiasm translated into tremendously negative sentiment in the sector. Kior and Solayzyme registered significant losses, while Future Fuel continued to slip.

BioEthanol

As predicted last month, CZZ ran into some headwinds, losing 8% on the month.  GPRE’s quarterly results triggered a sell-off.  PEIX also suffered from low ethanol price margins.  The Ethanol sector underperformed the broader market indices in April.

 

Refining/Catalysts

Amyris continues its free-fall. Codexis’ price is struggling to find support, even with FDA clearance this month on Merck’s use of enzymes in their production process.

BioButanol

Some investor enthusiasm over GEVO waned during the month of March. GEVO's YTD returns are the best in peer class.

Comparison of our March assessment to April:

Our March assessment:

The violent volatility exhibited in KiOR trading provides substantial opportunities for directional traders.  Until production comes online, investors are making educated guesses about the potential for earnings.  KiOR has over $200 million in debt, without a dollar of revenue, but their technology is compelling, and should be competitive in the crude market, once production commences at their Mississippi plant later this year.  Enthusiasm over renewable oil in particular seems to be growing, and we like SZYM in this sector, because of their demonstrated ability to fulfill large quantity biofuel orders for the Department of Defense, and their diversification with exposure to the chemical and cosmetic markets.

FutureFuel continues to provide outstanding results, and demonstrates strong management.  Why their stock price hasn’t appreciated is worth further investigation.

This may be a buying opportunity for investors interested in getting exposure to Codexis, but due to the negative sentiment in the sector, and continued questions about executive leadership there, we’re a little reluctant to buy.

We continue to like SZYM, FF, and CZZ, though there may be some short-term downside for CZZ in April, based on momentum patterns.  We’re neutral on CDXS on this point, and negative on AMRS.

The 2012 US Presidential elections will have significant influence on the biofuel sector.  Obama continues to tout biofuels as a significant component of his administration’s energy policy, while there has been posturing viewed as negative towards biofuels by the GOP.  The Department of Defense has loudly re-emphasized their commitment to sourcing fuel domestically, and biofuels will be a major component of that strategy.

Our April assessment:

Enthusiasm in the sector is waning, attributable to an unclear US political environment, low natural gas prices, and slowing growth in European and Chinese economies.  The risks in the sector seem to be deterring significant investments in the sector amidst the macro-level economic picture.

May will be a significant month for biofuels on the financial markets.  It appears at this stage as if the price trend in natural gas is starting to change.  Technical analysis, and volume metrics suggest that natural gas is finding a bottom.  If prices shift upward, it may benefit the sector.  However, low ethanol margins will take a while to improve, which will hurt ethanol producers into Q2.  We have tempered our expectations of the sector for this fiscal year.  Investors seeking exposure to the sector should investigate producers with some degree of diversification, such as Rentech Inc. (RTK), and, Solazyme, whose Algenist line boasts significant margins with wide retail distribution.  We like Codexis enzymatic technology, but they may have been too early to the game.

We maintain enthusiasm for Cosan, though see some short-term turbulence in May.  We see substantial downside risk in May to all other companies in the bioindex.  The Keystone pipeline debate and renewed interest in imports from the Alberta Oil Sands pose a significant risk to biofuels demand, as does the risk of US Presidential administration change.

We predict a stabilization, at the least, in the price of US natural gas in May.  Look for our updated oil/nat gas/bio fuel correlation tables this week.

–Thomas Mirc

groundbreakingenergy.com

Enzymatic catalysis: the hidden advantages. Can enzymes be used like a financial derivative?

Many in the biorefining industry are touting the advantages of enzymatic catalysis.  The use of enzymes to stimulate catalytic reactions has several cost advantages to biofuel producers.

1) Enzymatic catalysis results in higher yield rates, in that, ultimately, more fuel is produced from the biomaterial source.  On average, given the same input quantity, a producer using enzymatic catalysis in the biorefining process will return more more saleable biofuel.  This quality will ultimately lead to efficiencies of scale for biorefiners using enzymatic catalysis.

2) The purchase of custom enzymes for catalysis is on average more expensive than sourcing a corrosive akaline catalyst like potassium oxide, or sodium hydroxide, and then using water to wash the fuel.   The cost ratio of enzymatic catalysis costs to akaline/water based catalysis quoted to me by several biorefineries is from .16-.30 cents higher on average.  However, given the higher yields, and the ability of enzymes to be reused for multiple production runs, enzymatic catalysis saves biorefiners in feedstock procurement costs, sometimes as high as 25% to 30%.  This is a scalable variable operating cost reduction, which also gives companies the ability to reduce exposure to feedstock price volatility.

3) Enzymatic catalysis eliminates the need for fuel washing with water.   Biorefineries use 125 to 250 gallons of water for every 5000 gallons of fuel produced.

I’ll hone in on point #3.  Given the increasing global contention over water, (ironically one of the sources of contention is water used in hydraulic fracturing in the natural gas industry, like in this community), it is likely that we will see more of a commodity-type market rationing system emerge globally.  The highest bidder will receive rights to contracted amounts of water.  A December 2011 article in Forbes alluded to several market water rationing systems being considered, globally.   With biorefiners facing tremendous challenges already in predicting feedstock prices at any given time, the outlook for industrial water suggests that, at the very least prices globally for water will rise, and for high-volume users, these price changes may be volatile based on local demand.   If higher water prices become a reality, biorefiners locked into akaline/water based catalysis will have yet another volatile raw material price to forecast and manage, on top of feedstock costs.

Similar to fixed-income swaps, futures contracts, and options, enzymes, financially can serve a similar purpose.

Enzymes = a hedge against feedstock and water price and procurement volatility.

But like financial derivatives, enzymatic catalysis comes with substantial risks as well.  Biorefining operations must procure new refining equipment, and develop new process flows.  This results in a higher fixed-cost and cost structure, which may offset variable cost savings gains for low-volume producers.

Methanol and ethanol, used in the refining process have known qualities that inhibit enzyme-based catalytic reactions in some cases.  More research is being done in this area, but some strategies to overcome this inhibition have fixed and operational cost implications, such as switching from a multi-phase alcohol addition strategy to a continuous-addition strategy.

Conclusions:

While enzymatic catalysis appears to have clear cost advantages, the employment of enzymes at a commercial scale for biofuel production is relatively untested.  Publically-traded companies like Novozymes, Codexis, and Amyris are innovators in this area and Novozymes has a healthy non-biofuel enzymatic business, with substantial momentum in the biofuel space.  Amyris and Codexis have struggled financially, though major partnerships with Shell, Cosan, and Chevron provide a glimmer of long-term financial support.

Recently, Piedmont Biofuels, a North Carolina biodiesel firm began commercial-scale production using an enzymatic based plant.  This plant is the first commercial scale enzymatic-based biodiesel plant to come online in the US. 

The widespread adoption of enzymatic catalysis will depend in large part on continued demand for ethanol and biodiesel.  If demand remains robust (largely hinged on the US RFS), then large-scale producers will seek a cost advantage in procurement, which should lead them to companies like Novozymes and Codexis.

Sources:

Enzymatic transesterification for biodiesel production: http://nopr.niscair.res.in/bitstream/123456789/3816/1/IBB%2040%286%29%20392-399.pdf

http://www.forbes.com/sites/greggfisher/2011/12/12/water-a-precious-commodity-2/2/

http://www.enzymetechnicalassoc.org/benefits_paper.pdf

http://www.ksat.com/news/Fracking-to-blame-for-water-shortage/-/478452/9142696/-/i9ptf2z/-/index.html

http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=3&sqi=2&ved=0CGIQFjAC&url=http%3A%2F%2Fcmcd.hms.harvard.edu%2Factivities%2F_media%2Fbcmp201%2Flecture10.pdf%3Fid%3Dbcmp201%253Aclass%26cache%3Dcache&ei=piqXT7eiG-fi2QWEwbXNDQ&usg=AFQjCNFuEPHvh2qMxCsAMYwv582yC4WNkA&sig2=lTDdZOqF6JUzzGogKtToUw

Surprising correlations between Oil, US Manufacturing and US Consumer Spending since 2003

I’m currently reading (and loving) Daniel Yergin’s compelling “The Prize: the Epic Quest for Oil, Money and Power”.  It’s fascinating to think that the same geopolitical topics and oil regions with which the world is collectively struggling today are the same topics and regions that have been disputed since the days when Standard Oil, Royal Dutch Shell and the Anglo-Persian Oil Company were collectively battling for control.  With all of the political rhetoric recently circulating about geopolitical oil market manipulation and ineffective energy policy, and Yergin’s book as recent contextual support, I thought I’d perform an analysis on how closely the international Baker Hughes deployed rig count has correlated with oil spikes.

To provide additional dimensions, I collected ISM manufacturing data, and Gallup consumer spending data, to assess influence of oil on these economic indicators.

It’s common energy industry knowledge that rising commodity prices provide the financial incentive to deploy rigs, and that inevitably, as prices spike, supply starts to outpace demand, resulting in price drops.  This is the oil/gas price cycle that has recurred for a century.  I wanted see this visually depicted, and see if any anomalies arose.

In adding consumer spending, and ISM manufacturing data, I expected a strong negative correlation between the price of oil and consumer demand.  I expected that periods of high oil prices would result in subsequent month periods of immediate reduction in consumer spending.

The findings:

Despite consistently rising oil prices starting in mid 2009, consumer spending has remained somewhat stable, while manufacturing sentiment has modestly risen. The rig count substantially tracked the Brent Crude oil price with high correlation.

Correlations:

Conclusions:

The analysis revealed some very interesting findings.  You can see visually that although Brent Crude has risen to near 2008 levels, consumer spending has not tracked oil as it did in 2008, or dropped considerably.  In fact, Consumer Spending was positively, not negatively correlated with the price of oil.  The rig count very strongly tracked the price of oil.

There is no clear takeaway here.  Oil demand remains steady in western nations, and is accelerating in the Asia Pacific region.  This trend has emerged since 2008, and is likely to provide support for high oil prices for some time to come.  The deployed rig count, therefore should presumably remain near the current rate, to the benefit of drillers and oil and well services companies.  US natural gas prices are a wildcard, as the forecast low prices for the foreseeable future present opportunity for the US manufacturing and transportation sectors.

Sources:

Rig Count

Baker Hughes International: http://gis.bakerhughesdirect.com/RigCounts/

Consumer Spending

http://www.gallup.com/poll/151151/consumer-spending-monthly.aspx

Note: Gallup tracks daily the average dollar amount Americans report spending or charging on a daily basis, not counting the purchase of a home, motor vehicle, or normal household bills. Respondents are asked to reflect on the day prior to being surveyed. Monthly results are based on telephone interviews with approximately 15,000 national adults; Margin of error is ±1 percentage point.

http://www.gallup.com/poll/151151/consumer-spending-monthly.aspx

Institute for Supply Management PMI

http://www.ism.ws/ISMReport/content.cfm?ItemNumber=10752

Brent Crude

Energy Information Administration: http://205.254.135.7/dnav/pet/pet_pri_spt_s1_m.htm

(Bio)refining the future and doing it their way: my tour of Piedmont Biofuels, Pittsboro, NC

On Friday, April 6th, I took a tour of Piedmont Biofuels, located approximately 35 minutes from Raleigh, North Carolina.  Piedmont is one of 5 biodiesel refineries in central North Carolina, but is the only one to attain a BQ9000 rating from the National Biodiesel Accreditation Program.  This accreditation is important, because North Carolina state fuel contracts are incumbent on the BQ9000 rating.  This accreditation places Piedmont as the only biodiesel producer in the state of North Carolina that can be awarded a state biodiesel fuel contract.

The accolades for Piedmont don’t stop there.  Piedmont Biofuels is one of only 521 national companies organized as a B-type corporation.  Certified B Corporations are a new type of corporation which uses the power of business to solve social and environmental problems.

On June 22nd, Piedmont Biofuels will become the first US biodiesel refinery to produce biodiesel through enzymatic catalysis at commercial scale.  They are using Novozyme’s enzymatic components in a process branded as FAeSTER.

Piedmont Biofuels is a cooperative, which requires that customers become members prior to purchasing biodiesel from Piedmont.

  Piedmont Biodiesel Quick Facts:

  Production Output: 1,000,000/gallons per year

  Conversion processes used: transesterification, enzymatic

  Process Inputs: Methanol, KOH

  Saleable products: Biodiesel/Glycerine

 Employees: 15

 (Bio)refining the future – the tour:

The facilities

Piedmont stores B100 biodiesel on site, outdoors.  B100 requires thermal insulation, so the storage tank is encapsulated by a greenhouse-type structure.

Piedmont’s facilities are located in what was an abandoned industrial park that housed a Cold War era materials manufacturer.  In 2006, Piedmont began constructing their biorefinery.  Over the next six years, as their operations evolved, small firms who could benefit from Piedmont’s refining process or byproducts began basing their operations on the Piedmont Biofuels campus.  Today, 50-60 employees of multiple green companies are working on the Piedmont Biofuels campus on any given day.

Piedmont’s facilities consist of an external methanol tank with input streams into their bioreactor, water tanks with input streams, and export streams for methanol, water, and glycerine.  Their bioreactor is versatile, and can handle reactions with multiple feedstocks.  Some of the feedstocks used historically have been soybean, canola, waste vegetable oil (WVO), animal fat and almond oil.

Refining Process

Piedmont employs two main refining processes, transesterification via methanol, and enzymatic catalysis.  To enhance process efficiency, Piedmont employs both a methanol recovery process and a closed-loop agroponic waste water recovery process.  The result is a production process with virtually no waste of inputs, and biodiesel and glycerine as production products.

Piedmont’s production processes are efficient.  100 gallons of water are used for every 4000 gallons of fuel produced.  In enzymatic catalysis, no water is used in the process, and enzymatic components can be used for as many as 10 process runs.  Lyle Estill, VP of Piedmont Biofuels insists that enzymatic catalysis is the future of the biodiesel industry, due to the positive economics.  Enzymes add 16 cents a gallon in processing costs, but save 20 cents in feedstock procurement and water costs.   There is much enthusiasm on the Piedmont campus of the full-scale enzymatic production poised to begin on June 22nd.

Piedmont has also commissioned the construction of several mobile biorefineries, which consist of an small scale refinery housed in a trailer, which is towed by a truck or tractor trailer.  These mobile refineries have the power to fuel the vehicle towing them for an entire cross country trip, without having to add additional petroleum fuel.  I though about the potentially positive implications in the transportation and military sector, especially after reading about the Marines recent exploration of green energy in Afghanistan.

Emphasis on Quality

Piedmont Biofuels places a tremendous emphasis on quality control, and the lab was active during the tour.  Piedmont relies on terminal lots, which identify specific batches of biodiesel, the formula and feedstock used to create that batch.  Terminal lots allow customers to trace their fuel back to Piedmont in the event they have an mechanical issue.  The emphasis on quality has been beneficial, as Piedmont has not had a quality issue with their fuel since they were established in 2006.

Customers

The majority of business comes from oil companies who purchase biodiesel for various uses.  Profit margins are higher on biodiesel sold directly via retail distribution.  Glycerine that results from the production process is also sold.

Challenges

Piedmont Biofuels has persevered over substantial challenges in their 6 years of operations.  They have had to re-engineer the plant and facilities 3 times, mainly due to feedstock compatibility.  Piedmont fuel is distributed via 9 locations in 2012.  Their persistence is beginning to yield dividends.  After years of operating losses, Piedmont boasts low but positive profit margins, and became operationally profitable in 2011.  Feedstock volatility, both in sourcing and in pricing, may be the largest challenge to the company in the future.

According to Lyle Estill, the unpredictability of feedstock price movements or availability forces the company to shift sources, formulas, and operational schedules on short notice.  Competition over feedstock, particularly from the rendering industry, is another feedstock-related challenge that has resulted in litigation, of which Piedmont has been on the winning side, thus far.  If upstream markets mature and stabilize biorefiners may be able to use  financial hedging strategies via local commodities contracts.  But until then, stable demand from the rendering industry over animal fat will drive up that feedstock price, and competition over best use, food or fuel, will continue.  Cellulosic biomass may address the food versus fuel issue, though cellulose has not been proven as a viable commercial scale feedstock to date.

Other challenges noted by Piedmont are the political environment, on both a Federal and State level.  While North Carolina has been progressive in some ways, like setting state targets for biofuel production and displacement of petroleum fuel over the next 8 years, state subsidy for fuel production has wavered year-t0-year and recently disappeared.  This is despite nearby states stepping up their subsidy programs.  South Carolina, Pennsylvania and Kentucky boast a .20, .50 and 1.00/gallon incentive, respectively for biodiesel produced in those states.   It is challenging to attract new biorefiners to the state when, they can locate within an hour drive and receive a .20/gallon subsidy.   Federal support for the industry is there via EISA 2007 and the Clean Air Act/Renewable Fuel Standards, though biofuels appear to be heading to partisan battleground between Democrats and Republicans in this presidential election year.

Conclusion

Piedmont Biofuels is providing biofuels industry leadership through their innovative use of process technology, their ability to rapidly evolve their operations to overcome market challenges, and their overall creativity.  Their plant is testament to their scientific aptitude, do-it-yourself mentality and unique culture.  Most importantly to them, they’re doing it (queue the Sinatra music) “their way” with a dedication to ecological sustainability, creativity and community cooperation.

It is becoming clear to me that in order to create a favorable investment climate in the biodiesel industry, investors and entrepreneurs must focus on improving and evolving processes and the supply chain upstream and downstream from biorefiners like Piedmont, in order to maximize the value of biorefineries.  For example, if upstream entrepreneurs focus on minimizing feedstock volatility by making supply more predictable and standardizing financial transactions, biorefineries can spend more resources on improving their production operations and quality control practices which should result in higher margins.  If downstream entrepreneurs focus on improving the distribution network by creating biodiesel compatible pumps and credit card meters, adoption should increase, which will “pull” demand through the biorefineries.

If you are anywhere near Raleigh or Durham, North Carolina, you absolutely have to take a tour of Piedmont Biofuels.  The allure of seeing the first commercial-scale enzymatic catalytic producer of biodiesel in the US (World?) should be enough to get you there.   Tours are given on certain Fridays of each month.

If you can’t make it in person, take a virtual tour, available on Piedmont Biofuels website: http://www.biofuels.coop

March 2012: Correlation coefficients: oil, natural gas, biofuels and the broader US equity indices

Last month, I correlated oil, Natural Gas and broad equity market ETF’s to the Groundbreaking Energy BioIndex, an equally weighted index of 8 biofuels equities.

I have updated that correlation table for 2012 YTD as of March 31st:

Witness the tremendously strong negative correlation between UNG, QQQ and SPY!  Compare this to last month’s correlation table.

Conclusion

The Biofuels equities price movements, in aggregate, do not appear at all to be directly correlated with the broader Nasdaq and SPY.  BioIndex price movements, however, do continue to be negatively correlated to the price of US oil (via the USO ETF) to a moderately strong degree.

Natural Gas price movements exhibit a tremendously strong negative correlation with the broader equity indices, and that correlation grew in March.  Perhaps UNG investors can get some relief from the beating they have taken in 2012 by using UNG as a directional hedge against negative movements in the broader market.  Time will tell if this becomes a viable strategy.

Price action amongst oil, natural gas, biofuels and the broader equity markets, YTD. The distinct opposite trend pattern between Natural Gas and the QQQ and SPY is visibly apparent. Note the dramatic turnaround in the BioIndex that started in the beginning of March, much of which was attributable to the rapid ascendancy of KIOR.

Biofuels: Six Flags over Wall Street! The wild ride continues. Our March and YTD assessment

KiOR buyers and sellers are waging war with each other in 2012.  The amusement park-like volatility has not just been turbulent, it’s been violent.  January saw KiOR gain nearly 38%, followed by a 40% loss in February.  This month, KiOR took off like an artillery shell late in the month, to end March with a 54% gain!  YTD, after being in negative territory last month, KiOR is the star performer in Groundbreaking Energy’s BioIndex, besting peers Gevo, Solazyme, and Cosan.  KiOR, Gevo, Solazyme, and Cosan are outperforming the Nasdaq, while Green Plains Renewable Energy remains in positive territory, YTD.

The catalyst sector remains solidly negative, as Amyris and Codexis languish in deeply negative territory.  Amyris lost another 3.7% to bring their return to -58% YTD.  Codexis continues to lose momentum in the wake of their executive flight syndrome, losing another 7.4% on the month, to bring their yearly return to -33.4%.

KiOR's wild ride continues, while SZYM, CZZ and GEVO continue to outperform the Nasdaq and broader equity market. AMRS and CDXS languish in negative territory.

February Highlights:

• KiOR indicates that their Mississippi BioCrude plant is 75% complete and on schedule.  Their shares surge, resulting in a 53.7% gain on the month.
• Ceres (CERE) shares juped 20% on March 19th, after they indicated that their research group has genetically mapped the biofuel crop miscanthus, which should have the ultimate effect of lowering production costs
• FutureFuel, an Arkansas producer of biochemicals and biodiesel announced very strong earnings on March 15th, with positive trends in revenue, net income, EPS, and operating costs.  Despite a 6% surge in share price, FF ended March slightly negative relative to February’s closing price
• Renewable Energy Group (REGI) is slowly climbing from their February IPO
• Solazyme surged, and reviews for their algae-based cosmetic line Algenist are positive, translating into retail sales

February Areas of interest:

• Cosan and Gevo have hit some headwinds.  Although both have performed strongly YTD, CZZ’s surge that started in January stalled in March, with a slightly negative monthly return.  Gevo lost just over 8% on the month.
• Political positioning towards biofuels in the 2012 US Presidential campaign.   Negative commentary by the GOP, positive support from Democratic politicians.

A summary of Biofuels’ YTD price action by sector:

I have summarized YTD price action by the fuel stream that each firm touts as a primary market.  I have categories for Renewable Oil/Diesel, BioButanol, BioEthanol and Refining/Catalysts.  The idea is to get a sense of the price momentum in each market segment, and to see how firms in the segment are performing relative to one another.  In order to benchmark, I’ve normalized the QQQ and SPY indices into a similar price range as the market segments to reveal any broader trends.  My summary is below:

Renewable Oil/Diesel

View the dramatic ascendancy of KiOR. Directional traders have had tremendous opportunities with this equity. SZYM surged as well. There appears to be growing investor enthusiasm in this sector. FutureFuel continues to achieve strong financial results, but increases in the stock price haven't followed.

BioEthanol

CZZ momentum cooled off, and it tracked the Nasdaq. PEIX is stagnant.

Refining/Catalysts

Amyris continues its free-fall. Codexis lost support at the 3.80-3.90 level this month, and lost over 7% from its February close.

BioButanol

Some investor enthusiasm over GEVO waned during the month of March. GEVO's YTD returns are still near the best in peer class.

Comparison of our February assessment to March:

Our February assessment:

The enthusiasm over KiOR has dissipated.  IsoButanol enthusiasm remains steady, and GEVO is benefiting.  Ethanol enthusiasm grew this month, and Cosan, Pacific Ethanol and Great Plains Renewable Energy are all fetching positive returns for the year.   I continue to suggest cautious and dilegent review of GEVO’s financials prior to buying into the momentum.  The Refining Catalyst segment, which consists of Codexis and Amyris is showing substantial weakness and warning signs.  In my assessment, I believe that the selling in Codexis this month that was triggered by the CEO departure announcement was well overdone.  Their revenue figures are decent, new products should add to the top-line, and gross margin improvement is desperately needed.  These factors suggest that a leadership change may benefit the company.  I do not believe in Amyris at this point.

I continue to like Cosan, am still cautiously optimistic long-term on Codexis, though I have tempered my earnings estimates.  I am eagerly awaiting Future Fuel’s March 15th SEC filing, and believe there may be some upside post-release.   I have performed an analysis of Solazyme’s cosmetics segment, and believe it could add more than $20m this year to revenues, making me more positive on SZYM.

Our March assessment:

The violent volatility exhibited in KiOR trading provides substantial opportunities for directional traders.  Until production comes online, investors are making educated guesses about the potential for earnings.  KiOR has over $200 million in debt, without a dollar of revenue, but their technology is compelling, and should be competitive in the crude market, once production commences at their Mississippi plant later this year.  Enthusiasm over renewable oil in particular seems to be growing, and we like SZYM in this sector, because of their demonstrated ability to fulfill large quantity biofuel orders for the Department of Defense, and their diversification with exposure to the chemical and cosmetic markets.

FutureFuel continues to provide outstanding results, and demonstrates strong management.  Why their stock price hasn’t appreciated is worth further investigation.

This may be a buying opportunity for investors interested in getting exposure to Codexis, but due to the negative sentiment in the sector, and continued questions about executive leadership there, we’re a little reluctant to buy.

We continue to like SZYM, FF, and CZZ, though there may be some short-term downside for CZZ in April, based on momentum patterns.  We’re neutral on CDXS on this point, and negative on AMRS.

The 2012 US Presidential elections will have significant influence on the biofuel sector.  Obama continues to tout biofuels as a significant component of his administration’s energy policy, while there has been posturing viewed as negative towards biofuels by the GOP.  The Department of Defense has loudly re-emphasized their commitment to sourcing fuel domestically, and biofuels will be a major component of that strategy.

–Thomas Mirc

groundbreakingenergy.com

Cost hurdles in ethanol production and how some firms are at the leading edge of innovation

Author’s note: The following text in the block quote is derived from Biomass to Biofuels: Strategies for Global Industries, Chapter 13, Fuel Ethanol Production From Lignocellulosic Raw Materials Using Recombinant Yeasts (Grant Stanley and Barbel Hahn-Hägerdal), March 2010 (WILEY).   This formed the basis for the opinions and subject matter covered in this article.

A challenge to creating a sustainable biomass-to-biofuels industry is that the removal of inhibitors [which fall into 4 groups: aldehydes, ketones, phenols, and organic acids] by physical or chemical means is not currently cost effective.

“Converting all pentose sugars to ethanol would reduce production cost of bioethanol by as much as 22% , so considerable research is being made in developing microorganisms that efficiently ferment both hexose and pentose sugars to ethanol.”  (Pg 260)

Historically, ethanol production has relied upon a multi-step production process:

Lignocellulose biomass -> pretreatment -> hydrolysis -> fermentation -> distillation -> ethanol -> distribution

Each step uses distinct enzymatic components and process mechanics. And each step adds layered cost for the producer, which is passed on to the end consumer. A manufacturing approach called Consolidated Bioprocessing (CBP) aims to reduce the costs in the production chain by consolidating cellulose production, hydrolysis and fermentation steps into a single operation.  The desired effect is a significant reduction in production cost, that would result in producers subscribing to CBP having more market power.  With a streamlined, cost-effective production process, producers can reap higher margins on produced ethanol, or influence market price through a low-cost provider pricing strategy to gain market share.  In other words, CBP is a significant competitive advantage for a producer.

A New Hampshire company, Mascoma, founded by Dartmouth biofuel pioneers Charles Wyman and Lee Lynd, has created a cost-effective CBP production process for cellulosic ethanol.  A visual depiction of this process can be found here.

Mascoma has flirted with the IPO process, even committing a filing to the SEC.  Here’s a brief summary.  Regardless of what happens with the IPO process, Mascoma’s production process and research will positively impact the cellulosic ethanol industry for years to come.

Other firms are making similar strides.  QTEROS, a Massachusetts engineering firm, has developed a CBP platform which should expedite commercialization of cellulosic ethanol.  Here’s a brief description of that platform.  QTEROS partnered with a Pune, India-based Praj Industries Ltd. in 2011 to develop CBP processes in Indian ethanol plants.  Praj is a bioprocess engineering and consulting firm with a large footprint in India.  Praj is publically traded on the National Stock Exchange of India.

Both QTEROS and Mascoma have active partnerships with some “big oil” names, including BP’s Alternative Energy fund (QTEROS), and VALERO (VLO), who has partnered with both firms.  More about Mascoma’s partners here.

Other firms are looking at processing improvements to enhance ethanol yield, outside of CBP.  Virdia, a California firm, has developed a process known as the CASE process to enhance the sugar yield from woody biomass.  More about this here.  Upstream processing innovations aimed at reducing production cost with the aim of enhancing producers’ market power will continue at a furious pace.

Summary

Companies that reengineer processes to CBP will see production efficiencies and lower costs, enabling higher margins, or allowing them to cut cost to gain market share.  QTEROS will help existing companies effectively scale from pilot plants to full commercialized volumes via their CBP platform, as will Praj in India. Mascoma will provide the enzymatic components and processes, and downstream producers like Valero, BP, and, presumably, some of the larger ethanol producers like POET, Archer Daniels Midland, Green Plains Renewable Energy, Flint Hill Resources and Abengoa.

Sources:

• Mascoma (website)
• Biofuels Digest
• QTEROS (website)
• Praj (website)

–Thomas Mirc

The future is here, despite some US GOP politicians’ shortsidedness about the GOP’s positive contributions to biofuels space

As an investor and analyst, I don’t usually get too embroiled into political discourse, especially in an election year.  But recent quotes from Republican presidential contenders have me astonished at their shortsidedness over their own parties’ initiatives and history with advanced biofuels.  Of course, this ignorance may be feigned in order to curry favor with Republican conservatives, but derisive statements about the industry marginalize the contributions of the hundreds of thousands involved in the industry.  Worse yet, the negative effect on public perception hurts investment potential in the sector and overall public perception about what is in fact, reality.

Recently, GOP candidate Newt Gingrich has been referring President Obama with the derisive moniker “President Algae” over his support for algal-based fuels.  Read more about this here.  In making these statements, Gingrich is exhibiting his shortsideness in an area where the GOP provided some visionary leadership in 2007.   You see, the Energy Independence and Security Act of 2007, which was signed into law under Republican President George W. Bush, refers to algae several times, and sanctions a report to Congress on the viability and sustainability of algae as a renewable fuel source.  This report was largely favorable towards algae, spurring public and private investment into the sector.  Although this law was originally sponsored by Democrats, as the Clean Energy Act, GOP lawmakers negotiated a bill that was more focused on US energy independence by inserting provisions to benefit US fuel producers.  This visionary leadership, in many ways, created the market for cellulosic biofuels.

Here’s a little background on EISA (source: Wikipedia: http://en.wikipedia.org/wiki/Energy_Independence_and_Security_Act_of_2007 ):

Years after a Republican President signed into law an act that encouraged exploration and research of advanced biofuels and renewable fuel sources, and Republican lawmakers negotiated provisions to benefit US fuel producers, the market responded.  In 2011, Solazyme, a company that manufactures algal-based chemicals and biofuels, had an IPO, and successfully supplied domestically-produced algal fuel to the US Navy.  This fulfilled the vision of the 2007 EISA act.

Additionally, Condoleeza Rice, former Secretary of State under the Bush administration, joined the board of directors of biofuels maker KiOR, whose technology creates biocrude oil from wood.  KiOR has active partnership agreements with Chevron and Weyerhauser.

In my opinion, Mr. Gingrich is exhibiting an astonishing level of recklessness in making vocal, anti-biofuel statements as part of his campaign strategy.  He’s also missing a tremendous opportunity to display some of the visionary leadership GOP lawmakers have provided in the space in the past.

But Gingrich is not alone.  Mitt Romney recently stated:

In a Fox News interview shortly before Obama spoke, Mitt Romney said Obama should “absolutely” be held responsible for high gasoline prices because “he has not pursued policies that convince the world that America is going to become energy secure, energy independent.”  Source: http://news.bostonherald.com/news/us_politics/view/20120315president_obama_defends_energy_record/srvc=home&position=recent

Romney too, missed an opportunity to profile the GOP’s visionary leadership, even though he used the exact wording of the Republican-passed EISA bill in his statement.

Despite what some GOP political contenders would have their followers believe, the biofuels sector has:

• Successfully fueled commercial aviation flights with algae-based jet fuel (Continental, Alaska Airlines)
• Fueled commercial shipping voyages with algae-based fuel (Maersk)
• Fueled US Navy vessels, enabling one to break a sea speed record in 2011
• Demonstrated successful conversion of woody biomass into crude oil, with a former Republican Secretary of State on the Board of Directors
• Engaged in mutually beneficial partnerships with “oil guard” and “big oil” firms like Shell, BP, Chevron, Valero, DuPont

It is arguable that none of this could have happened without the support of the GOP and the passing of the 2007 EISA act by President George W. Bush.

GOP politicians should be cognizant of their own party’s historical contributions to a rapidly emerging source of domestic energy, rather than recklessly trying to score political points at the risk of hurting business investment and performance in a nascent industry.  Oil from algae is not a futuristic dream, is has happened, with positive business results.  Hundreds of thousands are working directly in the industry, now.  Some of these individuals are providing cutting-edge research, some are financial analysts, some are construction workers involved with constructing pilot and commercial facilities for publically traded companies like KiOR and Solazyme.   These are the US workers and investors that Gingrich is harming with public statements aimed at marginalizing the biofuels industry.  To them, and to many of us, livelihoods shouldn’t be put at risk to gain short-lived political points.   The GOP has an opportunity to recognize their contributions to the industry, and that some major contributors to GOP campaigns are already actively partnering with biofuels companies.  A stance that hurts those partnerships doesn’t seem beneficial to any Republican, whether they are conservative or moderate.  I hope Mr. Gingrich changes his tone.

FutureFuel’s Impressive 2011 Financial Results

FutureFuel, a manufacturer of specialty chemicals and biofuels (primarily biodiesel) announced their 2011 financial results via SEC filing on March 15, 2012.  On all income measures, FutureFuel improved over 2010, which reflects a positive trend that started in 2009.  It appears that management is doing an effective job controlling costs while scaling growth, as evidenced by substantial increase in revenues with an improving gross margin, operating margin and net margin.  FutureFuel appears to be growing efficiently.

FutureFuel’s share price is experiencing nice upward momentum on March 15th, (+3.5%-5.5%).  Groundbreaking Energy continues to like this stock, based in part on its strong management and positive balance sheet and revenue trends.  Even though performance YTD is ranging around -6%, and underperforming our BioIndex, we believe that more solid results like the Q4 2011 results just revealed, are forthcoming in the quarters to come.