Fueling Up a New Long-Term Play

 | Apr 04, 2012 | 12:30 PM EDT  | Comments
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I am in Washington D.C. attending Biofuels Digest's Advanced Biofuels Leadership Conference (ABLC), which is the premier event for private and public companies in the nascent biofuel industry to strut their stuff. The conference is timely, as the industry is starting to mature with many names going public and starting the final ramp to commercial production.

Under the Renewable Revolution header, I plan to follow and highlight this group on a regular basis because there is a sufficient amount of interesting activity that I believe this group could be to this decade what Silicon Valley was to the 1990s. When a few companies pursue an idea it is interesting; when dozens and dozens are pursuing a business, you know that an industry is being formed.

The key driver is biotech. For three decades, genetic engineering and biotech have been associated with drug development. There have been some real break-through companies such as Amgen (AMGN), but the challenge is extremely difficult, and the battlefield is littered with defunct companies. In contrast, applying the same principles to yeast, bacteria and algae to produce fuels and specialty chemicals is a much more manageable challenge, and is beginning to yield results.

Recently, public companies including Solazyme (SZYM) or KiOR (KIOR) have been able to modify the metabolic pathways of organisms to produce useful chemicals at reasonable costs. There is a seemingly endless pipeline of companies pursuing some variation on this theme. The common theme is they are using low cost, renewable feed stocks that are typically related to sugar (corn, sorghum, sugar cane), cellulosics such as wood and switch grass) or oils (from vegetables, or used cooking grease). As opposed to petroleum-related feedstock, these products have less price volatility and we have, in theory, infinite supply. LanzaTech (which is privately held) stands out as a company that is using carbon monoxide as a feedstock, thus enabling it to process the waste streams from steel mills, for example.

The second common theme is the use of modified organisms. Some are gene spliced, some are created by "directed evolution" (i.e., breeding, so to speak), and some are found in nature. The organisms can be E. coli bacteria, algae or yeast. All have metabolisms that convert sugars or the other feedstocks into useful carbon-based chemicals, such as fuels or other valuable specialty chemicals. The algae players mostly use ponds, but Solazyme has created algae that will produce target oils in standard fermenting vats, in the dark. The yeast and bacteria players use standard fermenting technologies. Many have innovated on separation technologies, as doing that efficiently is key to scaling production.

Nearly all of the industry is in the scaling-up stage; thus, they are raising the final tranches of capital to get to commercial production. Some are fully in production, such as first-generation ethanol producer Green Plains Renewable Energy (GPRE) and biodiesel leader Renewable Energy Group (REGI). KiOR and isobutanol play Gevo (GEVO) are finishing up commercial scale plants and should be in meaningful revenue shortly. In any case, you will see a parade of biofuel names going public in the next few months. Waste-to-fuel play Enerkem is supposed to be pricing this week, and comp Fulcrum Bioenergy should show up in the next few months. Feedstock player Ceres (CERE) got out the door last month.

Most of these names have been struggling to get deals done, mostly because the performance of the first wave of biofuel names has been spotty. For example, Codexis CDXS and Amyris (AMRS) are struggling with scaling-up issues and management turnover. In addition, the lack of revenue and profit -- since these are development-stage names -- does not help when you are competing with Facebook and Zynga (ZNGA) for the IPO buyers' dollars.

To help guide you through the opportunities and risks inherent in this exciting emerging industry, I plan to regularly write about this group. When you see this much activity, you know something is going on, and opportunity is knocking.

This is a long-term strategy. Most of the names will not be in full-scale production until 2015, so there is no rush. You should be laying your groundwork of knowledge now, however, to be ready to invest when valuations make sense and inflection points are imminent.

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