Value creation, value unlocking, value add

Companies creating opportunities in feedstocks are getting lots of love from investors, and giant downstream partners like BP and Shell.

What’s up in the new upstream?

It has not escaped the attention of investors that Renewable Energy Group’s IPO resulted in a $262 million valuation for a company actively earning $2.11 per share through the sale of 200 million+ gallons of biodiesel. Conversely, Ceres recently increased the target for its IPO to a valuation above $500 million, despite being, in essence, a pre-revenue company.

What gives? The secret, it turns out, is in feedstock.

In recent months and years, more and more advanced biofuels processing technologies have made it through pilots and demonstrations of their technology and head for commercial-scale. At the same time, investors have noted that value-creation in biofuels has generally conferred an awful lot of dollars on feedstock growers, and not so much for the processing technologies and downstream marketers.

Controlling feedstock costs

For that reason, giants of the downstream like BP Biofuels, have been making control of feedstock costs, through direct grower contracting, a central feature of their business models. Meanwhile, among the monsters of the midway (i.e. the bioprocessing companies), those getting significant traction towards commercialization, are generally the ones that have spent the most time and attention locking down on feedstock.

Examples? Well, there are plenty, such as POET’s Biomass Division; technologies such as INEOS Bio, Fulcrum and Enerkem that have secured long term, zero-cost MSW supply contracts; companies like LanzaTech and Joule that utilize and have secured long-term supply of low cost, industrial off-gases such as carbon monoxide or carbon dioxide; or companies like Mascoma and ZeaChem that have establish long-term relations with forest biomass companies like JM Longyear and Greenwood Resources.

Over the past five years, there have been a raft of celebrated bankruptcies and shutdowns in the bioenergy sector – restructuring at Pacific Ethanol, Aventine Renewables, and VeraSun, as well as (at one time) the  shut-down of huge percentage of global biodiesel capacity. Many of the companies and plants have revived and re-opened, but consider this: just one generation after the days of FarmAid, hardly a grower (of first generation feedstocks) has not enjoyed pretty good times, throughout the past five years.

Limits there are, as is widely understood, on the availability of first-generation feedstocks. In some cases, there is pricing pressure, too, as in the case of maize or soybeans. In other cases, there is regulatory pressure, such as the EPA’s ruling that palm oil biodiesel has insufficiently low greenhouse gas emissions to qualify as an advanced biofuel. So, advanced biofuels feedstocks have premium value in the New Upstream, where the targets are in the billions of gallons rather than the millions.

Value creation, value unlocking, value add

In the Digest’s Feedstock Framework, we see three types of companies.

First, those that are chasing value creation – turning low-performing feedstocks into economic rock stars through yield intensification, often through hybridization and unlocking favorable traits that are hidden in the genome.

Second, companies involved in value unlocking. That is, taking next-gen feedstocks already available at scale – generally, residues, and finding processing or extractive technologies that tease out valuable material streams out of what, previously, was thought of as waste, fit only for dispersal and disposal.

Third, companies involved in value adding. That is, taking existing feedstocks already available at scale, and already providing material ROI to their growers and processors, and using synthetic biology to produce higher-value products (i.e. drop-in biofuels, biobutanol, propanol, and so on).

In some cases, these are processors, some cases seed developers, some cases developers of magic bugs. But all of them are working on the right side of the value equation in bioenergy and biomaterials – which may help explain why investors are giving them so much attention as they come to the markets for capital – whether it is financial investors, or serious strategic players working in the downstream markets, such as BP Biofuels, Shell, Valero or Tesoro.

A Feedstock Framework

Below, we have parsed the major feedstocks into the buckets of “value creation”, value unlocking and value add.

Note: The companies cited are for illustrative purposes – there are, for example, tons of companies working on micro algae and agricultural residues that we did not have space to mention – and no disrespect is intended if a favorite company of yours is not included. And, yes, some of these feedstocks (e.g. algae) fit to some extent in both the sugars and oils department. But you get the general idea.