The Band Wagon

April 5, 2011 |

The Band Wagon, invented by P.T. Barnum, rolled through towns, stirring up interest in exotic circus acts and animals, in 19th and early 20th century America

Investors, first gen biofuels, oil companies join the advanced biofuels parade

“Coming out of graduate school at MIT in the late 1990s,” Biofuel Energy CEO Scott Pearce recalls, “everyone was flooding into technology companies, dot coms, and I went back into the boring energy space. I mean, there was nobody going that way in the late 90s; there wasn’t even an energy club. And when I switched a few years later into renewables, I was warned, if you go into that funny land you’re never going to be able to come back. Solar, biofuels, , they said, why would you do that with your career?”

He pauses, then describes a return to the campus a few weeks back. “When I went back there, today the biggest club on campus is there energy club. You look at the energy and passion of this generation as they put their careers into cleantech. It’s astonishing, it’s inspiring, as we begin to sort through our problems.”

What Pearce is describing, of course, is the bandwagon effect, which has brought so many into cleantech, and lately into advanced biofuels. It’s not hard to remember, just a few years back, when corn ethanol was in fashion, and investors were struggling to climb on that bandwagon, and biodiesel came along and was white hot for some time.

Now 2011 arrives. The year of Brazil. The springtime of advanced biofuels. Companies falling all over themselves to get positioned with the former, investors rallying with gusto to get into the latter.

The prime beneficiaries? Well, for now, the public companies like Amyris and Gevo that are getting enormous traction in the stock market. Gevo was up nearly nine percent in Monday NASDAQ trading, which would be utterly remarkable except that it was up 8 percent on Friday.

Let’s look at the trend. Why Amyris and Gevo are rising…which first-generation companies have spotted the trend and are pushing the hardest to move into advanced biofuels.

As Biofuel Energy’s CEO Pearce said, “in this market, we’ll look carefully at opportunities for consolidation and expanding capacity, but its hard to say what the market will bear. But, in terms of our milestones, we’re solid about the opportunities with advanced biofuels.”

Wagonmasters: How hot are Amyris and Gevo, and why?

The heat on GEVO and AMRS is obvious. Amyris is trading at $26.80, well down from its high water mark of $33.99 reached in early February, settling back down into the mid-20s after it filed it quarterlies in mid-March. But, let’s remember that the stock just came out – and barely, at $16, in September, and is up 67 percent over the past six months. It has an exotic market cap of $1.18 billion, for a company just getting out of the gate in terms of generating revenues.

The outlook? Raymond James’ Pavel Molchanov, in rating AMRS at Market Perform following its strong post-IPO surge, wrote after meetings with Amyris management, “The three central themes in the story continue to be (1) favorable access to sugar feedstock, (2) visible, high-value opportunities in chemicals, and (3) longer-term leverage to the scale-up of renewable diesel and jet fuel…Consistent with many other advanced biofuel developers – including Gevo and Solazyme, Amyris’ current sales focus is almost entirely on specialty chemicals. Amyris has identified five specific target markets in the chemicals arena, ranging from ultra-premium “niche” products (cosmetics and flavors/fragrances) to more mainstream, high-volume products (polymers/plastics, consumer chemicals and lubricants). These five verticals total an estimated $67 billion globally, with major components including synthetic rubber ($12 billion), plasticizer ($10 billion) and automotive lubricants ($6 billion).

GEVO is surging strongly, after its IPO early this year. After topping consensus earnings forecasts, the company has moved to an all time high of $23.65 yesterday, after opening on NASDAQ at $15.52 in February, up 52 percent, and now sporting a market cap of $76 million.

The outlook. Again, Raymond James’ Pavel Molchanov, who will join the Digest with an address at the Advanced Biofuels Leadership Conference later this month, writes: “While fully recognizing the inherent execution risks in an early-stage story such as this – hence our Venture Risk suitability rating – along with persistent price volatility in the corn market, we believe Gevo is well positioned to be a leader in the Gen2 biofuel space, with a unique market niche and a distinct value proposition. We reiterate our Outperform.” Molchanov set a new price target for Gevo last week of $23, which the stock has already hit. “While the 10-K provided little new information from a strategic standpoint, it reaffirmed start-up of commercial isobutanol production for 1H12,” Molchanov added in an investor note.

Back to those first generation markets

“Corn ethanol will all settle out,” says Pearce. “As with anything new, we are used to things as they are. Almost because it became the darling that it did, it came back the other way.”

“The world is searching for ‘what’s the right price’ for ethanol. But it’s less about the price, than the margin. The industry tried to stay ahead of the price run-up in 08, and fell on hard times when it came down. Now, we are staying very flat with the amount of ethanol we have sold or corn we have purchased. We don’t get
too long or short, and to the extent we can we take risk off the table. The good news? Compared to the past, the industry more disciplined than it was.”

Meanwhile, Biofuel Energy is aiming squarely at advanced biofuels as a growth strategy.

“We have been looking very hard, and watching to see who the winners are going to be, and and where we would place our resources and assets, for that bridge between corn ethanol and advanced biofuels. It was too hard to pick up a few years ago. Now, it looks as if cellulosic ethanol could be a long way off, and there are two or three things more in the forefront today that are no longer science projects.

We are looking at biobutanol. For us, there are two themes. There are the higher value markets, prior to getting to butanol, in speciality chemicals, with several potential chemicals in the mix. The other is in fuel, taking out some of the volatility associated with selling ethanol into the stream.”

Also on the Wagon: Others moving from first generation to second generation

Besides the afore-mentioned Biofuel Energy, here are some of the leading companies that are jumping on the bandwagon, and moving from first-generation to advanced biofuels.

POET

Constructing its well-known Project LIBERTY, a 20 million gallon commercial demonstration in Emmetsburg, Iowa, based on its results in converting corn stover to ethanol at its pilot plant in Scotland, South Dakota. Currently the company is moving through the loan guarantee process – and has said that a loan guarantee is essential to moving forward with the project.

Here’s a recent review from the Digest on the project, here: http://biofuelsdigest.com/bdigest/2011/02/03/iowa-grants-20m-to-poet-emmetsburg-cellulosic-ethanol-project/

Abengoa

Also constructing a commercial-scale demonstration of cellulosic ethanol, in Hugoton, Kansas – expected to be open in 2013. The company is also in the DOE Loan guarantee process, and we understand have received a term sheet, though not a conditional commitment.

Our most recent Digest updates on the Abengoa project are here and here.

Imperium Renewables

Imperium’s CEO John Plaza has confirmed that the company is seeking to develop advanced biofuels technology, including renewable jet fuel, using space at its massive 100 million gallon biodiesel complex in Grays Harbor, Washington state.

Valero

Valero, which dramatically and profitably entered the ethanol space by picking up assets on the cheap from the collapse of VeraSun Energy following the 2008 financial crisis, has been investing in a variety of advanced biofuels. It’s latest? Diamond Green Diesel, the proposed joint venture between Valero Energy Corporation and Darling International Inc.,which secured a $241 million DOE loan guarantee conditional commitment in January.  The loan guarantee will support the construction of a 137-million gallon per year renewable diesel facility in Norco, Louisiana, about 20 miles west of New Orleans.  More on that project, here.

Meanwhile, Valero has also invested in Mascoma, here, signed a massive offtake agreement with Mission NewEnergy, and invested along with Waste Management in waste-to-fuels leader Terrabon. More about that, here.

BP Biofuels

BP owns interests in two first generation projects – Vivergo, a wheat ethanol project in partnership with British Sugar and Dupont, and the Brazilian ethanol project Tropical Bioenergia. More on the latest with Vivergo, which just fired its engineeting firm, Redhall, citing “unacceptable performance”.

But BP has a large portfolio of advanced biofuels investments. Best-known is Butamax, its JV with Dupont to commercialize biobutanol. Our latest on Butamax is here. http://biofuelsdigest.com/bdigest/2011/01/17/butamax-sues-gevo-over-patent-infringment-claim/But it also signed a research agreement with Martek, acquired a 100 percent interest in Vercipia, a cellulosic ethanol venture in Florida it once owned with Verenium, and even a small investment stake in Qteros. Here was an update on BP, at the time of the most recent 50 Hottest balloting, in which the company placed 17th.

Our most comprehensive recent look at BP Biofuels was last month, when we took a peek at their massive capacity expansion in Brazil, in the context of the “exotic parade of microbes heading for the Deep South,” in “Carnival“, here.

Shell

Though Shell has been pursuing advanced biofuels since the early 2000s with its investment (along with PetroCanada) in Iogen, it has more than doubled down with a series on investments and moves, primarily related to its buildup in Brazil with the Raizen JV with Cosan. The JV aims to raise its ethanol capacity to 1.6 billion gallons by 2016, making it one of the top three ethanol producers in the world along with ADM and POET. We looked at that development, here. http://biofuelsdigest.com/bdigest/2011/02/15/cosan-shell-to-raise-ethanol-output-to-1-3b-gallons-by-2016/

Meanwhile, it has made a large series of milestone payments to Codexis lately, and we covered the opportunities and thinking in “Resistance is futile: Codexis and the chase for low-cost cellulosic sugars,” here.

Shell is also heavily invested in Virent Energy Systems, which along with Codexis graces the top ten of our “50 Hottest Companies in Bioenergy,” and we looked at Shell-Virent-Codexis, vs Total-Amyris, in the battle for Brazil, in “Do You Know the Way to San Jose (dos Campos)? Total, and its biofuels babies,” here.

ADM

If you rarely hear about ADM and ethanol, its by design, the company hardly wants to mention it, preferring to stay as clear away from “food vs fuel” as it possibly can. “We don’t like to talk about ethanol,” an ADM official told a Digest contributor recently.” But ADM is heavily involved in advanced technologies with its DOE-funded project, to produce ethanol and ethyl acrylate, a compound used to make a variety of materials, and also recover minerals and salts from the biomass that can then be returned to the soil. That won one of the 19 DOE Integrated Biorefinery grants, and we highlighted it here.

Plus, the company is investing in sustainable palm production in Brazil, here.

Green Plains Renewable Energy

One of the most intriguing of all first-gen to advanced transitional efforts is the collaboration between Green Plains Renewable Energy and BioProcess Algae in Shenandoah, Iowa.

In February, we reported that BioProcess Algae commenced phase two operation of commercial-scale bioreactors, sited at a Green Plains corn ethanol plant. The company said that, if it can produce algae at the rate of 200 tons per acre per year, it will be able to produce 5.8 million gallons of biodiesel per ethanol facility installation, with a goal of 10 projects completed in Iowa by 2015.

The common ground between first-generation and advanced biofuels

Here in Digestville, the Digesterati have been saying for some time that advanced biofuels will be built on the backbone of first-generation refineries. We even wrote a ten-part series on this topic last fall, here, “the Bioebergy Project of the Future,” here. http://biofuelsdigest.com/bdigest/2010/10/05/the-biorefinery-project-of-the-future-part-x-of-10-bringing-it-all-together/

“I remember two years ago at an investment conference, there were some advanced technologies CEOs, and I was the corn ethanol guy,” Biofuel Energy’s Scott Pearce recalls. “Everyone was saying ‘we are not using food for fuel’ and ‘we are different, we are better’. That was then. Now, I think its getting clear to these guys who are trying to raise real money, I who don’t just need 20-30 million to build a pilot, but need hundreds of millions for commercial scale plants., that if [first generation doesn’t] succeed, there’s no hope for advanced biofuels. For one, the co-locate opportunity, the $30-$40 million in storage, utilities and so on already invested. And investor confidence. Those factors will drive us to unify. And you’re beginning to hear disparate voices coming together.”

The Jumbo on the Bandwagon: The role of oil and gas

No circus is complete without its bandwagon, or its star elephant. The elephant in the room in any discussion of the expansion of advanced biofuels is – to what extent will oil & gas interests put their balance sheets to work in building a bridge between first and second generation biofuels?

“I think its the big question,” says Pearce. “It’s the thing that has to come together. They have tremendous experience in what was done over the past 80 years. With their healthy balance sheets and ability to encourage 3rd party investment,  we need to find common ground, and I think it can be found. Valero is winning already. The paths we create will help make these great ideas and great technologies become more of reality.”

With Valero, BP and Shell, we have some indications of strengthening interest in jumping on the bandwagon, but it proceeds at a slow pace. But Petrobras is warming up to the task as well, Total is now invested in Amyris, Gevo and Agilyx. PetroVietnam, Sinopec and Indian Oil all are undertaking investigations. Chevron is invested in Catchlight Energy, LS9 and Solazyme.

The key: watch Brazil. Advanced biofuels, in so far as oil & gas companies are concerned, will develop – if not exclusively there, robustly so. With BP, Shell-Cosan (Raizen) and Total controlling a lot of downstream distribution, and with ethanol already established as the market-leading fuel, there are a lot of reasons why, when “it happens” (the commercialization of advanced biofuels) it will happen in Brazil.

Band-leaders: The role of governments.

No bandwagon in complete without its band-leader. The US government has been, generally, the most agressive in developing and deploying advanced biofuels, though the EU, Canada, Brazil and others have played a role.

President Obama recently came out swinging for advanced biofuels, setting a  US goal of cutting US oil imports one-third by 2025; outlining both targets, support for advanced biofuels, renewables, fossil fuel production in his Blueprint for a Secure Energy Future. We covered it here. http://biofuelsdigest.com/bdigest/2011/03/31/obama-comes-out-swinging-for-advanced-biofuels/

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