A Biofuels Inflection Point

Huge stock rallies in first-gen and next-gen biofuels last week — and tension over Ukraine with the potential for oil price spikes.

Is this a turning point in the war over energy diversification?

Trouble in the Ukraine. Bountiful harvests in the US midwest. Trouble in the Middle East. Soaring biofuels equities. Technology and financing de-risking appears, just as the risks go higher on crude oil. What does it mean?

As Douglas McIntyre observed yesterday at 24/7 Wall St., “It takes very little in terms of global political conflicts, weather, or tightened supply to press the price of crude higher…Russia supplies much of the oil and natural gas for Europe…Europe has no easy way to replace this supply…The question is how much a war between Russia and Ukraine would move oil prices higher. There is no formula to count it.”

With West Texas Intermediate trading at $102, Louisiana Light Sweet at $107 and Brent Crude already at $108 — it won’t take much tightening to the $120 “throttle point” where oil prices can tip economies into recession — after spiking petrochemical prices, airline tickets, and inflicting more pain at the pump. Any strengthening of the dollar — in a “flight to quality” would only increase the pain levels in the EU and elsewhere, who have been shielded from energy price spikes by a devaluing US currency.

Action in the equity markets

At the same time — titanic rises in biofuels equities — as the companies de-risk their technologies, repair balance sheets from the 2008-09 financial crisis and the 2012 drought, and begin to assemble economies of scale, and benefit from lower crop prices.

Here’s a chart comparing the 36 components of the Biofuels Digest Index to their 52-week highs and lows.

Bottom line, almost a third of the equities are within 10 percent of their 52-week highs, and 16 are more than 50% off their 52-week lows. Intrepid investors in a basket composed equally of AMRS, AMTX, GPRE, PEIX, REGI and SZYM would have made a fortune, and the BDI itself is up more than 30 percent since November.

Most interesting in the rally — it’s broad. First-gen ethanol producers such as GPRE, PEIX and BIOF, an advanced biofuels producer like REGI, and integrated biorefineries like SYZM and AMRS selling into the speciality chemicals as fuels markets.

Action in the debt markets

Just recently, a consortium of investment banks announced their support of the Green Bond Principles – Bank of America Merrill Lynch, Citi, Crédit Agricole Corporate and Investment Banking, JPMorgan Chase, BNP Paribas, Daiwa, Deutsche Bank, Goldman Sachs, HSBC, Mizuho Securities, Morgan Stanley, Rabobank and SEB.

These Principles were developed with guidance from issuers, investors and environmental groups and serve as voluntary guidelines on recommended process for the development and issuance of Green Bonds. They encourage transparency, disclosure and integrity in the development of the Green Bond market.

These Green Bond Principles suggest process for designating, disclosing, managing and reporting on the proceeds of a Green Bond. They are designed to provide issuers with guidance on the key components involved in launching a Green Bond, to aid investors by ensuring the availability of information necessary to evaluate the environmental impact of their Green Bond investments and to assist underwriters by moving the market towards standard disclosures which facilitate transactions.

These Principles build on first-to-market issuances by multilaterals and provide a platform for other future Green Bond issuers to direct funding to Green Projects. They are complemented by an appendix of established definitions of Green Project categories that were developed by multilaterals, non-profit and non-government organizations, and other relevant stakeholders. Read more about the Green Bond Principles here.

The four banks that served as a drafting committee for these Principles – Bank of America Merrill Lynch, Citi, Crédit Agricole Corporate and Investment Banking and JPMorgan Chase – will propose in 2014 a governance process that will allow for diverse stakeholder input into the Green Bond Principles. It is anticipated that an independent third party will be designated to serve as a secretariat whose administrative duties will include facilitating information exchange with issuers, investors, underwriters, and other stakeholders such as non-profit environmental organizations, non-government organizations, academics and other thought leaders.

Potential impact scenario #1: It all blows over.

Stock market rallies are known to fizzle, especially if the economy begins to tip over (again) with spiking oil prices. And fears over the Ukraine and other sensitive hotspots may prove to be overblown — though, in the long-term, we believe the hot spots will become only hotter.

Potential impact scenario #2: Short-term behavior changes

One short-term impact — re-opening of the IPO market, and better cost of capital for increasingly de-risked ventures.

We see four companies on the IPO bubble: Cool Planet, Genomatica, Enerkem and Elevance. The latter three tested the waters around the time of the 2011 IPO window — and found the rates and conditions unappealing. Sapphire Energy will be a candidate when they are closer to their 2018 scale-up target; also, Algenol and Renmatix.

Spin-offs of GranBio and Beta Renewables by their parents are not out of the question, either, as they seek growth capital and liquidity for early investors.

Potential impact scenario #3 — strengthening of resolve on RFS2. Investors see more “crush spread” in equity investments in biofuels.

There’s nothing like the prospect of soaring oil prices to convince lawmakers that oil companies aren’t the only stakeholders in RFS2 — if there’s anything that can trump oil lobby money, it’s consumer anger over oil prices leading into fall elections. Though oil lobbyists will attempt to frame the issue around oil export controls and the Keystone pipeline, others will point to price stability that will come from diversification of supply, meaning blender pumps and more infrastructure to enable access to lower-cost biofuels, natural gas, hydrogen and electrics.

The Bottom Line

Biofuels prices are low and heading south, and prices of the competing product (petroleum) may be spiking over the next months. It could be a great season for biofuels — and for sure, it should be a great test to see how well the industry manages in good economic weather, compared to the rough conditions experienced over the last few years.