Wildcatters: The new IPO fever…Who's Next?

August 17, 2010 |

After several years in which no biofuels IPOs were launched (or were withdrawn), suddenly there were four. The $78 million IPO for Codexis, which was completed this spring. The $100 million IPO for Amyris which was announced early in the summer, Now a $200 million offering from PetroAlgae and a $150 million registration for Gevo.

Overall, $528 million, or not far off the amount pumped into the advanced biofuels market last year through the Recovery Act with a $564 million group of DOE grants, a few of which have received funds by now.

There has been, unsurprisingly, a ton of chatter about the sector, which escalated significantly last week with the PetroAlgae and Gevo announcements. It’s not unhelped by Aventine’s acquisition of an ethanol plant (and one acquired by Gevo, too), plus the $52 million Series D financing round completed by Solazyme. In all, it was a heady week.

What’s up?

Rob Day from Greentech Media comments on Gevo: “This is in many ways a venture capital / project finance fundraising.  Not your classic IPO liquidity event… Is that a bad thing?  Not necessarily, there’s plenty of examples of companies that appropriately tapped into the public markets to finance energy projects, even for more unproven plays like wildcatting.”

Investors have become increasingly accustomed to “the big IPO story”: some key customers, disruptive but now proven technologies, revenues in the $50-$100 million range, nearing or at profitability, and seasoned venture management. Ironically, these are companies for whom there are a wide variety of financing options for growth. The IPO is generally a liquidity event, providing lucrative exits for early investors.

But like the railroads of the 19th century, the public markets have traditionally operated as a capital source that is tapped after private and government assistance is exhausted.

Biofuels companies: more like biopharma, biotech, or above ground oil exploration?

The biofuels companies coming forward are early-to-middle stage: their shared goal is expansion capital, and though they are seen by many as a value-add play for agriculture, or as a technology play, these are best understood as above-ground oil fields, and as a proxy for oil exploration. The difference: the risk for these ventures is less in the geology than in the biology. It is not a question of finding and extracting reserves, as much as growing and extracting them.

Oil reserves? Oil Exploration? That’s how oil companies see biofuels ventures, as a hedge against future depletion of reserves, or a depletion in economic returns from new exploration, or a hedge against the trend of new reserves being sequestered for development by national oil companies.

The proxies for biofuels companies are so often seen in biotech and biopharma, but might better be understood in terms of companies such as Brigham Exploration (BEXP), Kodiak Oil (KOG), Samson Oil & Gas (SSN), Magnum Hunter (MHR), Transocean (RIG), Cenovus (CVE), which have found a traditional home on the New York and American stock exchanges rather than the happy halls of NASDAQ. The metrics of those industries: land and sea assets, proved reserves, and production cost, are comparable to the land, yield and cost assets of a biofuels company.

Who’s Next?

Our top ten considerations among biofuels companies for future IPOs:

1. Solazyme. Already secured investment from Keating Capital, which expressly invests in companies within 18 months of an IPO event. Gaining revenues from military contracts. Has a raft of strategic partners that will prove attractive.

2. LS9. If Amyris goes well, LS9 might well follow at a suitable interval. Their demonstration facility in Florida is easily expandable to 11 Mgy, which would supply them with a revenue stream. Also has attractive strategic partners in the likes of Procter & Gamble. Has a magic bug that, like Amyris’, converts sugar to diesel – though based on e.coli rather than yeast and may have a wider range of near-term molecules – and thereby a story in chemicals – that it can produce.

3. Sapphire Energy.If Solazyme goes, and goes well, Sapphire could follow. They have a big capital raise for their vertically integrated company that intends to be an owner-operator of more than 1 billion gallons in capacity by 2025. The company has scant revenue, and is building out its demonstration plant, but when its operations in New Mexicom are complete, there may be reasons to turn to the public markets for more dollars.

4. REG. The Renewable Energy Group wanted to IPO a few years back, but withdrew. Since then, its been consolidating biodiesel assets at “popular prices”, and has a distribution arm. If biodiesel gets its story back with the US mandate taking hold, REG will likely need fresh equity to balance off any increasing debt and fund its expansion. Not for the near-term, but keep an eye out.

5. Virent. This bioforming technology also converts sugar to diesel, and if Amyris goes well, that’s a sign for this company. Depends on the attitude of investors like Shell and Honda. Shell may feel a little disappointed in the lack of enthusiasm for Codexis from investors. But the company has vowed not to pour money into biofuels “wantonly or unadvisedly” as the wedding vows go, and expansion capital will have to come from somewhere.

6. Iogen. Another Shell baby, and the company is now organizing its expansion from its long-running pilot to a 23 Mgy facility in Saskatoon. After that, where will growth capital come from? Iogen is a major strategic customer for Codexis, and moving this unit forward also leverages Shell’s investment in CDXS. In a couple of years, they might feel the urgency to expand, while using other people’s money to do so.

7. Enerkem. Enerkem has figured out the capitalization through its 10 Mgy demonstration projects in Edmonton and Mississippi. After that, it gets speculative, but this is a company that intends to grow, and may find the public markets as tempting as the public sector investment it has rolled up so far.

8. Lanzatech. A sleeper, just now expanding into China, where it can deploy its steel gas-to-ethanol technology in a country that has a lot of steel, many reasons to use ethanol, and not to many good options among food crops. There’s no reason to suppose it might well find financing among the Asian exchanges.

9. Coskata. A company that needs a financing path from its demonstration projects to commercial scale – its been offered private financing at what it termed unacceptable valuations for the company, so unless those turn around, it may look to public markets for expansion capital. Has a great story with strategic partners like GM.

10 (tie). Imperium. A long-shot. Imperium went for an IPO a few years back, then withdrew. Is developing advanced biofuels technologies that can be deployed at its 100 Mgy gen 1.5 facility in Washington state. If these efforts, aimed at producing drop-in renewable jet fuel and diesel, prove successful, there will be a lot of hungry aviation buyers available, and good reasons to raise money in the public markets based on aviation fleet or ground transportation fleet contracts.

10 (tie). Joule Unlimited. A long-shot because the company is at such an early-stage. But it has a big, big story. A microbial technology that generates fuel directly from sunlight and CO2.  Savvy management. On the fast-track. Strong DOE support. Its economics are highly advantaged compared to conventional fuels. A muncher of the dread CO2, but using non-productive land with high yields.

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