Solazyme launches drilling fluid product, Encapso, and embarks on $150M debt/equity raise

March 26, 2014 |

drilling-foam

Enters oil & gas drilling market with world’s first encapsulated lubricant.

Solazyme: “Targeted delivery technology provides improved performance and sustainability.”

In California, Solazyme announced its entry into the oil and gas drilling fluids additive market. Building upon its proprietary platform of high performance, sustainable Tailored oils, Solazyme has introduced Encapso, the world’s first encapsulated biodegradable lubricant for drilling fluids designed to deliver high-grade  lubricant precisely at the point of friction where and when needed most.

At the same time, the company announced its intent to offer $100M in aggregate principal notes due in 2019 and 5M shares of common stock. SZYM will also grant the underwriters a 30-day option to purchase up to $15M in notes and 750k shares of common stock.

“We expect the deal to be completed by the end of the week,” said RW Baird analysts Ben Kallo and Tyler Frank. “Although initially dilutive, it should provide sufficient capital to ramp production at its facilities and fund further R&D.” The analysts put a $18 price target in SZYM shares, which closed on March 25 at $13.09.

The drilling fluids markets

The global market for drilling fluids was valued at $7.2 billion in 2011 and is expected to reach $12.31 billion by 2018, according to a report released last summer by Transparency Market Research.

The rise in unconventionals and the growth in deep-sea exploration have driven up revenues for drilling fluids in recent months. One factor that has limited the use of conventional oilbased fluids (as opposed to water-based fluids) have been environmental and sustainability concerns associated with conventional oils.

According to Solazyme, Encapso’s efficacy has been demonstrated both in the lab and in the field in over a dozen commercial wells in a number of basins including the Williston Basin, Denver-Julesburg, and the Permian Basin.  Encapso increases drilling speed and control, and protects valuable equipment.

The majority of work so far has been done in horizontal wells, helping demonstrate Encapso’s strong performance capabilities when it comes to “building the curve”—or the point where an unconventional well transitions from vertical to horizontal. This is often when drilling engineers find the most difficulty managing drilling friction.  Improving the speed and efficiency of drilling translates directly to cost savings for well operators.

“The demand for energy continues to grow but new sources of fossil fuels are more difficult than ever to recover. As long as the oil and gas industry continues to extract fossil fuels, we at Solazyme view it as an imperative that it is done in a more sustainable way to protect the environment for generations to come,” said Solazyme CEO Jonathan Wolfson. “The drilling industry needs new high-performance and sustainable technologies to meet rising energy demand and increased drilling.  Encapso’s unique targeted lubricant delivery system helps reduce the costs for the oil and gas exploration and production industry and provides improved drilling performance.”

Reaction from the customers

“After adding Encapso to the system we saw a rate of increase in our rate of penetration from two feet per hour to 40 feet per hour.  Encapso is a game changer because you’re reducing your torque, reducing your drag, and reducing your coefficients of friction all at the same time,” said Philip Johnson, a senior drilling engineer who worked with Encapso on behalf of a major exploration and production company. “No other product on the market does that.”

”Our observation of the product is that it has consistently added value,” said David Cunningham, Regional Manager at Anchor Drilling Fluids, USA. “The biggest impact has come when we’ve seen increases in rate of penetration and reductions in torque.”

“When I learned that this lubricant was encapsulated and therefore would deliver a drilling lubricant in a more targeted way, I saw the tremendous potential benefits,” said Tony Rea, President of Arc Fluids.  “I introduced Encapso to a few customers and worked with them on several wells that they were drilling. In all cases, we witnessed marked improvements in directional control.”

The Analysts on Encapso

“Entering into the oil and gas drilling fluids additive market provides SZYM another end market for its products,” write Ben Kallo and Tyler Frank at RW Baird. “This will be important as the company ramps production at its Clinton and Moema facilities. We believe SZYM should be able to secure offtake agreements for the Encapso product line after successfully testing the product in the Williston Basin, Denver-Julesburg, and the Permian Basin and receiving positive feedback from Anchor Drilling Fluids and Arc Fluids.”

The Bottom Line

Another market for Solazyme — and a large one — and one in which high-performance and high-sustainability are known factors for driving revenues. If the company gets real traction in this field, its planned capacity will have to be revised northwards. Towards which its pending cap raise will materially contribute.

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