Gevo, Amyris, KiOR – as the Khosla Kids mature, scale, differentiate, who's on top?

| August 4, 2011

On the road from Pilot to Player, three Khosla companies have gone far and fast – but now, the differentiating points become clearer. Who’s better now?

They share Khosla Ventures in their DNA, and are next-gen companies – but there, the similarities begin to fade. KiOR – making biocrude from woody biomass. Gevo, making isobutanol and jet fuel from corn. Amyris, making Biofene and renewable diesel from sugar.

Much has been written on the technologies – fascinating they all are – but as the companies are beginning to show differentiation in their go-to market strategies, analysts and observers have had the opportunity to differentiate between the companies in strategic terms.

Over the past few weeks, several star analysts have been writing furiously, amidst a blizzard of quarterly filings and initiation of coverage, about the future of the companies. Their intent? To inform the public investor about attractive investment opportunities – a worthy goal at any time. But they also, in their conversations and writings, have formed interesting views on the technologies and strategies themselves – and thereby offer cautionary tales and encouragements to project developers, communities, researchers, and government – on how the market views the various strategies out there.

So, let’s put some definition on the sectors, and then look at what the analysts have reacted to favorably, and those elements that leave them skeptical. Woe betide any company founders who, in heading for scale, tempt powerful analysts to give negative outlooks, express skepticism, or become perplexed.

Company Feedstock Product Substitute or novel Technology Strategy
Gevo Corn Isobutanol Substitute Fermentation Conversion of existing facility, funded by GEVO
Amyris Sugar Biofene Novel molecule Fermentation JV for add-on facilities, funded by partner
KiOR Woody biomass Bio-crude Upgrade to a substitute Catalytic pyrolysis Build, own, operate

The latest on Gevo

For the second quarter, Gevo reported earnings per share of $(0.48), below the Street’s consensus of $(0.39). Revenue from corn ethanol was low, though margins were high. The big announcement – Gevo announced that it signed its first definitive commercial off-take agreement with Sasol Chemical Industries. This agreement makes Sasol Gevo’s first isobutanol customer and will utilize the majority of its isobutanol production capacity into 2013. The agreement is an index contract with favorable economics for Gevo, and includes specific timing and pricing commitments.

From Pavel Molchanov, at Raymond James: Recommendation. While fully recognizing the inherent execution risks in an early-stage story such as this, we believe Gevo is well positioned to be a leader in the Gen2 biofuel space, with a capital-efficient and highly scalable business model, rapid access to numerous chemical and fuel end markets, and a wide range of industry partners. We reiterate our Outperform rating. GEVO shares are currently trading at a 22% discount to our DCF estimate of $21.45, detailed on page 2. Given Gevo’s unique technology platform and “scarcity value” as one of the few publicly traded Gen2 companies, we believe a multiple of ~1.1x DCF is warranted, which yields our target price of $24.00.

The latest on Amyris

For the second quarter, Amyris posted earnings per share of $(0.78), below the Street consensus of $(0.61). Revenue was down for third-party ethanol sales. The big announcement – a term sheet with Total Gas & Power USA to form a joint venture to commercialize Amyris No Compromise Renewable Diesel. Under the contemplated agreement, Total would fund expanded R&D at Amyris and provide capital for the acquisition and construction of dedicated production facilities. Investment figures exceeding $1B by Total, and expansion of Amyris cane crush volume to as much as 30 million tons – enough to produce 2.4 billion gallons of conventional ethanol – have been mooted.

From Pavel Molchanov, at Raymond James:  “We remain structurally positive on Amyris’ strategic positioning in the Gen2 biofuels space. The announcement of a renewable diesel joint venture with Total (TOT/$51.63/not covered) further highlights the breadth of Amyris’ product platform and partnerships. The high degree of visibility for Amyris’ route to commercialization and its multifaceted partnership approach both provide positive differentiation. We reiterate our Outperform rating. AMRS shares are currently trading at a 13% discount to our DCF estimate of $26.45, detailed on page 2. Given Amyris’ unique technology platform and “scarcity value” as one of the few publicly traded Gen2 companies, we believe a multiple of ~1.2x DCF is warranted, which yields our target price of $31.00.

GEVO vs AMRS stock performance - Gevo in blue

From Rob Stone and James Medvedeff of Cowen & Co: “Q2 revenue and cash loss missed the Street, due to the non-core fuels distribution segment and higher expenses. However, cash burn should be much lower in H2 on a ramp in bioproducts sales and customer funded R&D. A new deal with Total to commercialize diesel should provide substantial development support and new capacity, freeing up AMRS volume for more specialty chemicals, and raising our 2014-15 estimates. We see 60% plus upside in AMRS relative to the market in 12 months. Reiterate Outperform (1).” The analysts lifted their cumulative cash earning per share for the 2011-15 period to $11.53 per share, from $9.65. They see the company growing to $2.5 billion in sales by 2015.

The latest on KiOR

Rob Stone and James Medvedeff of Cowen & Co write: “KIOR has developed a proprietary process to convert biomass into gasoline and diesel blendstocks, compatible with existing infrastructure, using abundant, non-food feedstock. It should be cost competitive, but also benefit from biofuel mandates. Customers are in place for the first commercial plant, expected on line in H2:12. Scaling from there points to huge long-run cash flow. We see 50%+ upside relative to the market in 12 months.”
Stone and Medvedeff highlight four factors in his enthusiasm about KiOR. The massive nature of the fuels market and the 36 billion gallon Renewable Fuel Standard. The company’s scale up to 10 tons per day with 500 tons per day by late 2012. The 59,000 tons per day surplus in the primary feedstock, southern yellow pine. Finally, the substantial margins, which lead Stone to model cash growth to $9 billion by 2022, and $38 billion by 2032. The analysts intiated coverage on KiOR last month with an Outperform rating.

KIOR vs GEVO stock performance - Gevo in blue

A look at Gevo, Amyris and KiOR, from Piper Jaffray

Michael Cox and Mike J. Ritzenthaler at Piper write:

Along with our initiations on KiOR (KIOR, OW/$20) and Amyris (AMRS, N/$25), and the increase in public companies in the sector, we are revisiting our thesis on the broader Industrial Biotechnology sector we first outlined over a year ago. Favorable technology development, commodity prices, and an increase in strategic investments over the past 3-5 years have converged to produce numerous public companies and a burgeoning pipeline of industrial biotechnology companies looking at the public markets as a potential next step. Our favorite ideas in the space (including GEVO – OW/$28 and KIOR) have advanced technologies with high yields, lowest possible feedstock costs, truly fungible end markets, and a capex structure that enables the company to control its growth rate…Using our methodology, we see the best opportunities for Gevo and KiOR.

On the fuel vs chemicals question, Cox and Ritzenthaler write: “While fuels markets are attractive from a volume perspective, we believe most technologies used to target this segment will struggle with margin sustainability…We are somewhat more positively disposed to the basic &intermediate chemicals segment of the industry due to the higher value output of the process.

Without naming Amyris, they question the company’s capital-light strategy: “The widely touted ‘asset-light’ business model is synonymous with slow growth and limited visibility. It is generally based on the premise that a large corporate sponsor will fund 100% of the capex and split the profits 50/50 with the technology provider. Cox and Ritzenthaler focus in on what they see as a problem with the strategy, from the industrial biotech investor point of view: “The corporate sponsors are not known for their financial nimbleness: the smaller technology provider will always want the larger firm to move more quickly in deploying capital.” Also, they warn, “if the sponsor is responsible for site selection or offtake, it is key to understand how much better the economics are for the sponsor.”

The Bottom line on the bottom line?

Enthusiasm is strong for the value in the space as the company’s commence scale-up – but some differentiation in opinion is emerging regarding the Amyris strategy – while all see the commitment from partners such as Total as a massive aid in scale-up – Piper is signaling they they are not yet convinced that the trade-off of access to capital is worth the burden of dragging a heavy corporate anchor around, in the form of slow-moving partners.

On KiOR, we see enthusiasm for the business model – more than occasionally, we hear the tut-tut from informed observers as to the viability of the process at scale. We’ll have to wait and see.

Generally, there’s broader enthusiasm for the Gevo model – which maintains the commercial freedoms of a build, own, and operate strategy – by proving capital towards conversion of existing corn ethanol facilities – they have some of the freedoms of a build, own and operate strategy without the capital intensive and time-intensive nature of the undertaking. The achilles heel in the near-term – informed observers mention the dependence on corn as a commodity feedstock.

Tomorrow, Solazyme reports

So there you have it – three companies in the advanced biofuels space – diverging opinions, much to consider. Today, Solazyme reports its Q2 earnings, and we get to look at the space all over again.

One thing is for sure – the transparency of the public market is giving us all a much better window into the souls of the various companies, their feedstocks, models and the nature of their partnerships. The road to scale may not be getting any easier, but the fog is surely lifting for those who march behind.



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