Is it just coincidence that KiOR’s stock is down sharply as Aemetis has been on a tear?
Just a lucky break for ethanol based on attractive “crush spreads”? Or something important about the strategy and how it has played out?
The Digest looks at the companies and the results.
On a clear morning last October at ABLCNext in San Francisco, two companies joined us on stage to discuss their technologies, and their pathway to commercialization.
They had a lot in common.
Both companies produce advanced biofuels for the American domestic market. Both utilize advanced technologies deployed at commercial-scale in the past 24 months. Both are publicly-traded stocks. Both were founded in 2006-07, after the Energy Policy Act of 2005, but before the Energy Independence and Security Act was signed in December 2007.
Both at one time numbered Vinod Khosla among their shareholders (one also had Bill Gates, while the other had Sir Richard Branson). Both have intelligent, highly-educated, passionate and driven people.
Just this week, one of those companies, KiOR, announced a $347 million annual loss and related a series of challenges in their technology and financing that led it to declare “substantial doubts about our ability to continue as a going concern.”
The other, Aemetis, announced record quarterly and annual gross profit, record operating income and adjusted EBITDA (including $54.2 million in Q4 revenues and $11.3 million in gross profit), and 54 million gallons of production.
What made the difference?
In our 10-part series The Bioenergy Project of the Future, published in late 2010, our interviews led us to conclude that the winning strategy was likely to be about using, as Aemetis CEO Eric McAfee once outlined it to The Digest, “first generation assets and positive cash flow as a basis to adopt advanced fuel and chemical technology, lowering risk while building an operations team, revenues and cash flow.”
Since then, there have been an big number of new advanced biofuels technologies coming to scale: INEOS Bio, KiOR, Beta Renewables, Amyris, Aemetis, BioProcess Algae, Dynamic Fuels, Neste Oil, Diamond Green Diesel and Gevo to name a few — with POET, Abengoa, GranBio, Raizen, and DuPont ready to join the list in upcoming months. REG has been producing advanced biofuels at scale all along, and has expanded remarkably.
None have followed the Bioenergy Project of the Future playbook exactly — and some of them have bypassed the script altogether and chosen a different strategy as a path to commercial success, and we’ve wished them all well, as we always do here in Digestville.
But at this juncture, they are worth repeating, the first five steps.
Five steps to success from the Bioenergy project of the Future
Step number one: Buy an existing ethanol or biodiesel plant, or equivalent. Why? We learned that projects “not only have to demonstrate technological prowess in bioprocessing, we have to demonstrate financial and management acumen to all our stakeholders – the community, policymakers, lenders, and customers. As well as to begin to establish that eco-system of relationships in our community that will serve us later on, when we add-on riskier and more advanced second-generation features.”
Step number two: a graduated series of bolt-ons, beginning with the collection of cellulosic (or residue-based, that is to say, lower-cost, non-food) biomass. First, we have to demonstrate that we can build a sustainable ecosystem around the harvest and delivery of biomass.
Step number three: Add renewable chemicals. We heard that “If we have learned anything from the stories of hot companies like Amyris, Gevo, Solazyme, or Cobalt Technologies, as well as exciting pure-plays like Genomatica, Heliae, Verdezyne, Segetis, Elevance, or Rivertop Renewables, it is the importance of producing chemicals or other bio-based materials first to generate revenues, before taking the company further down the cost curve and up in scale in order to make competitively-priced renewable fuels.”
Step number four: Add renewable fuels. No longer are we producing advanced biofuels “because we can”, as a demonstration of technology. We are demonstrating the power of our network of relationships in the community, and the power of our growing balance sheet. Now that capacity expands and we begin to saturate some of the market we developed in high-value organic acids, we turn to the fuel market with a capacity expansion effort.
Step number five: add algae. “Monetize the CO2,” we heard. By adding technologies that will help create renewable fuels from the CO2 we are producing as a byproduct, adding economic strength as well as reducing our carbon footprint.
Looking at Aemetis’ run of success
The strategy of the company has generally been clear for years – which is generally summarized in Step One of the “five steps to success”: buy an existing ethanol or biodiesel plant (or, own one already), and begin to aggressively bolt-on technologies that improve the financials of the business.
We’ve seen a number of companies go that route. Amyris, Gevo, Raizen, POET, Green Plains, and REG among them, in addition to Aemetis. Some investors may feel that the “Add ingredients slowly and stir” part was to an extent overlooked at Amyris, KiOR, and Gevo — certainly, the pressure to keep up a very high pace towards commercialization is something that all VC-backed firms feel.
Virtually all ethanol plants have been bolting on and improving. Water efficiency, energy efficiency, corn oil extraction, and so on. Some more boldly than others. Diversification of feedstock has been a hallmark of REG’s successful strategy in biodiesel — but we hear less about it in the ethanol business.
“Our fourth quarter 2013 results reflect a year of record financial performance and significant progress for Aemetis,” said McAfee in a statement accompanying the results. “During 2013, we diversified our feedstock. After retrofitting and restarting our plant in May 2013, we processed about 84 million pounds (42,000 tons) of grain sorghum; became the first US ethanol plant approved by the EPA to produce lower-carbon, higher-value Advanced Biofuels (and to receive D5 RINs) using sorghum/biogas/CHP; and upgraded our India plant by constructing and commissioning a biodiesel distillation unit. These efforts translated into record levels of revenue from our India operations, and company-wide records for operating income and Adjusted EBITDA,” he added.
The company certainly benefited from the relatively high “crush” spread between energy and feedstock prices — but also, Aemetis put itself in a position to earn D5 RINs and utilize diversified feedstock. As Jack Nicklaus once observed, “If I played well and prepared myself properly, then all I had to do was control myself and put myself in a position to win.”
But we’re struck by the way that the Aemetis run adhered to the playbook based on all those interviews with industry back in 2010. Buy an ethanol plant. Add cellulosic feedstock. Think fuels, but also think chemicals and other high-value and high-demand markets (such as jet fuel). Think about monetizing CO2 via algae. Those were ideas that were — four years ago, everywhere, on everyone’s mind.
It is reminiscent of something else right out of the Jack Nicklaus playbook: “Don’t be too proud to take lessons. I’m not.”
The steps to success: who employs what, and how
In the case of step two, most companies skipped it — either working with traditional feedstocks or counting on other companies to successfully shepherd the aggregation of biomass. Gevo and Amyris have continued to work with traditional corn and cane as feedstocks. Valero partnered with Darling. But others have developed aggregation systems and direct relationships with growers: KiOR, Beta Renewables, POET, DuPont and Abengoa among them. Raizen and GranBio are working with bagasse, already aggregated at ethanol plants in Brazil. Most of them will tell you they learned a lot from the process.
In the case of step three and step four, the decision to produce chemicals first and fuels later has been a choice embraced only by a few, primarily Gevo and Amyris amongst those who have reached scale. Solazyme will join them when their plant opens in Brazil. Most — like Dynamic Fuels, Neste Oil, REG, POET, DuPont and Abengoa — have opted for the fuels market. In part that is because of the role of RINs in the marketplace, the renewable fuels credits that add value to the fuels side (and are valueless for chemical off-takers). That’s part of the design of the Renewable Fuels Standard — not only to incentivize obligated parties to buy advanced alternative fuels, but to ensure that producers have a financial incentive in the nearer-term to make $3 fuels when there are $5 chemicals to be made.
In the case of step five, the decision to embrace algae as a pathway to monetizing the CO2 that vents from a first-generation ethanol plant — well, Green Plains is well advanced down that pathway in its BioProcessAlgae JV.
Why companies struggle
As I outlined in a private note to readers two months ago, why sector executives tell The Digest is that “it comes down to knowledge, and how you use it, adding that “if you have real dialogue by the real leaders about the real issues, the best technologies and companies will be able to gain the knowledge and competitive edge they need. And I believe…that no company can succeed without industry-leading knowledge in every aspect of its operations.”
But we’ll add one more factor we hear about. Time. It’s very tempting, in the digital age, to want new manufacturing technologies to proceed to scale and commercial success in very short time frames — to meet corporate hurdle rates or expected rates of return from investment in venture funds. It’s a competitive market for capital, after all, and companies with elevated risks require the potential for elevated returns in order to attract capital at all.
The Bottom Line
Let’s keep the results of one quarter or year in perspective — in the months ahead, the technology of KiOR is expected by its owners to reach steady-state operations and its fortunes would then revive in the financing markets.
And, the economics of sorghum and biogas, or the RIN values for advanced biofuels, may not prove as attractive in the coming months as they have in the past several, for Aemetis.
But in 2010, when we spoke to executives about the Bioenergy Project of the Future, we did hear a drumbeat of interest in the model based on building “first generation assets and positive cash flow as a basis to adopt advanced fuel and chemical technology, lowering risk while building an operations team, revenues and cash flow.”
It’s been a long-run for Aemetis and KiOR, both — and their stories are still in incomplete form.
But it’s clear enough to us here in Digestville that there’s not much we’re seeing now that we didn’t hear about back in 2010. As Socrates once remarked of The Republic, the ideal city-state, “it exists in the heavens, like a constellation, as a pattern for those able to see it. And seeing, they can found a Republic in themselves.”
More background on the story from the Digest
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