Advanced Biofuels Leadership Conference: the analyst view

April 26, 2011 |

Piper Jaffray’s Mike Cox and Mike Ritzenthaler, and Raymond James’ Pavel Molchanov, publish notes on the progress of advanced biofuels following their meetings and presentations at the Advanced Biofuels Leadership Conference.

Cox/Ritzenthaler: Does the Path to Advanced Biofuels run Through Lipstick?

“Many nascent bio-based technologies need a near-term market to gain traction and volume sales while the technology matures. One of the more interesting takeaways from the Advanced Biofuels Leadership Conference in Washington D.C. last week was the focus on cosmetics ingredients as an appealing drop-in market for renewable hydrocarbons. Cosmetics and personal care markets offer high ASPs and low volumes to technology that is not yet mature – and drop in markets are needed to drive rapid adoption. In many cases, products that do not drop into chemicals markets can absorb decades of time and tens of millions of development dollars, even if the costs of production are as low as the management teams indicated. The question becomes: what is the market opportunity in cosmetics and how large can these biofuels developers become before ASPs are negatively impacted? We estimate the current market size for emollients and personal care surfactants used in products such as lipstick and face cream at 150 million gallons, and approximately 10-20% share as the level at which ASPs would start to see a negative impact. To put it in perspective, the entire renewable oils market could be supplied by one ‘commercial’ biorefinery roughly the size of a small ethanol plant in the U.S.

Following the conference and meetings with dozens of companies, we remain positive on shares of GEVO owing to the drop-in nature of isobutanol, a capital light expansion model, and regulatory tailwinds. We are incrementally more positive on shares of GEVO following the conference and investor meetings we held with management. The conference underscored the fact that Gevo’s addressable, drop-in end markets are significantly larger than many of their peers, many of whom are relying on relatively small volumes in cosmetics end markets to gain traction and buy time as other opportunities develop. The paints and surface coatings end market into which Gevo’s isobutanol is a natural fit is approximately 2 billion gallons, and the company has a technology that is already proven at commercial scale. Capital expense per gallon of production also favors Gevo whose capital-light model is roughly 25x cheaper than their peers. The investor meetings we held underscored management’s positive incremental progress on key milestones which include the engineering and construction of the Luverne retrofit, negotiations with key strategic partners, and progress on additional JV agreements. In the meetings, management also highlighted regulatory tailwinds that could benefit isobutanol.

Gevo, Inc. (GEVO) – Overweight / $31 Price Target. Our $31 price target is based on an EV/FY2014E revenue multiple of 1.6x. Risk factors include: Supply/demand of ethanol assets, commodity prices, material increase in global C4 supply, technology scale-up, retrofit project delays or cost over-runs.

More from Piper Jaffray.

Molchanov: Gen2 Biofuels Get Ready for Prime Time (And No, We Don`t Just Mean IPOs)

“The next-generation (Gen2) biofuel arena remains a development-stage industry. The federal Renewable Fuels Standard provides a guaranteed demand floor for cellulosic/Gen2 biofuels through 2022, but the industry’s slower-than-expected scale-up – a function of enzymatic and other technology hurdles, along with financing constraints – means that the Gen2 targets will not be fulfilled over the next few years. As capacity moves higher, the Gen2 growth curve should accelerate markedly beyond 2012, with U.S. industrywide capacity reaching an estimated 1.8 billion gallons by year-end 2014 and the RFS requiring 15 billion gallons by 2022.

“A key driver of scale-up and mainstream adoption will be collaboration between Gen2 developers and strategic partners (majors, refiners, chemical companies, airlines, and/or feedstock suppliers). Government backing, including loan guarantees and military contract opportunities, is another scale-up driver. Above and beyond the fuel market, the specialty chemicals arena offers lucrative, high-ASP opportunities for companies with limited volumes. As companies move along their commercialization roadmaps, there will be increasing opportunities for equity investors – hence the recent wave of IPOs, with more to come – albeit with substantial risks inherent in an early-stage market niche.

“Within the context of our recently increased long-term crude oil price forecast of $125/Bbl, the market backdrop for Gen2 biofuels couldn’t be better.”

More from Raymond James.

 

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