Peyton Pace: As a soap opera bubbles over KiOR’s speed-to-profits, revenues and production triple

November 12, 2013 |

Kior_Hot50_Image_24Slow pace, low yields have depressed KiOR’s share prices, but tripled production and revenue has recently delighted the markets.

What’s up with the cellulosic biofuels leader? Good news, bad news?

If you have ever spent any time reading up on ion thrusters — a next-gen engine technology that NASA recently employed on the Dawn spacecraft — you might chuckle when you think of the plight of poor KiOR.

The good news about ion thrusters is that they can ultimately achieve speeds of 200,000 miles per hour, ten times that of the Space Shuttle. The bad news is that the Dawn took four days to accelerate from zero to 60 miles per hour.

Yep, zero to 60 in four days. Not exactly the Tesla of outer space. And that’s the story, as it happens, with KiOR.

It’s got everything going for it except pace.

Consider the background. You have one of the first next generation advanced biofuels plants at commercial scale. The woody biomass feedstock promises a way around the food vs fuel conundrum and promises new economic opportunity to the timber-rich US Southeast. The fuels costs are expected to be competitive with fuels made from fossil crude oil. Plus, the drop-in, renewable fuels offer a complete solution to the problem of blend walls and automotive infrastructure.

Not to mention, a celebrated cleantech investor in Vinod Khosla — recently augmented by Bill Gates — and the equity package for a second commercial plant all sewn up.

But the whole enterprise — well, it’s been a slow and steady tortoise, hasn’t it? How soon will it perform at capacity? For answers to your questions, let’s look at the progress in Q3.

The Tale of the Tape

In the third quarter, KiOR used 10,373 tons of wood chip feedstock, well short of the 45,000 tons the plant would consume at full capacity. Overall plant utilization was 23 percent. Reflective of 41% uptime and running at 50-60% capacity. (For even more detail, Lindsay Leveen explores KiOR’s data in more depth, here.)

Production of 323,841 gallons of fuel was reported, a substantial gain over last quarter, when production was 75,000 gallons.

Overall yield was 31 gallons of cellulosic fuel per ton of feedstock, if we simply divide the fuel production into feedstock use — what we don’t know is how much bio-oil is being produced that was not upgraded to fuel. The process is supposed to yield, in this generation of the technology, north of 70 gallons of bio-oil per ton of feedstock. Suggesting that either yields are way short of optimal, or there’s a lake of 400,000 gallons of bio-oil awaiting upgrade — or, possibly, not suitable for upgrade.

The company is reporting 167,087 gallons of cellulosic fuel production in October — a gain of 50 percent over the average for Q3, and more than double the output for Q2.

Caveat catalystor: Those input costs

The company reported that “we saw a $2.3 million net increase in cost of goods sold relating primarily to feedstock and catalyst costs, along, to a lesser extent, with utilities, maintenance and other costs related to the ramp-up.”

In the general context of a $43 million quarterly loss and a development-stage company, we didn’t see much attention to this number in the analyst community. But, taken against a production jump of 248,000 gallons of fuels — well, it is easy to divide one number into the other and get a “feedstock and catalyst” cost jump of $9.27 per gallon. Again, we think there might be a lake of bio-oil out there. But it is a metric to watch.

Analyst reaction

Overall, analysts were bullish and share prices are up. Why? Analysts are applauding the increase in revenues and fuel production, noting the emphasis on increasing throughout from 50-60% towards 100%, and willing to wait for yield optimization to occur in 2014.

In other words, “we’ll bear the unsuitable oils or excess char for now — show us that you can shove in the woodchips.”

Pavel Molchanov at Raymond James writes:

“The first shipment from the Columbus plant in 1Q was a major milestone for KiOR and the cellulosic biofuel industry as a whole. The plant’s ramp-up since then, albeit slow, provides additional validation.

“Revenue up 3x in 3Q13: The key metric, of course, remains revenue which jumped 3x sequentially (after also tripling in 2Q) to $720,000. Production at Columbus reached 324,000 gallons, a similarly healthy ramp from 2Q, with October the best production month yet at 167,000 gallons. We continue to project that full nameplate utilization will be reached in the second half of 2014.

“Debt financing on deck: The equity round is therefore completed, putting to rest the market’s fears of more near-term dilution. The final step before construction can begin on the next production plant (Columbus II) is a high-yield debt raise, which we think will be in the range of $100-200 million. We see better than 50/50 odds of wrapping up the debt raise by year-end.

Piper Jaffray’s Mike Ritzenthaler adds:

“We maintain our Overweight rating and $5 target on shares of KIOR following the company’s 3Q13 print that included EPS of ($0.40) on $720k in revenue, both of which were in-line with management’s previous comments.

“Operations is currently focused on increasing feed rates (approximately 50-60% of nameplate in October) and is not yet optimizing yield (which partially explains why total production in October was ~15-16% of nameplate). We look forward to optimization through 2014 when the earnings power of the facility will become far more apparent.

“Columbus ramping as expected and on-stream improvements highlight the quarter. In 3Q13, KiOR shipped ~245k gallons of blendstock, at ASPs discounted to wholesale as (temporarily) expected. Management expects the discount to continue through 2013 as the facility ramps. On the call, management reiterated their target of >1 million gallons in 2013. Considering the uptime of the Columbus plant recently, we believe this production target is very achievable.”

The bottom line

Glacier, tortoise, ion thruster. Take your pick from the basket of analogies. But think in terms of tripled revenues, tripled production. Yield will have to come — and we doubt if anyone thought it would take this long, in the KiOR boardroom.

As long as investors stay with the company as it makes its Slow March to Energy Freedom — we expect great things out of KiOR in 2014 when yields come under the microscope.

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