I Think I Love You, So What Am I So Afraid Of?: Inside the stock plunge of Origin Materials

Late last week, following the Q2 earnings announce, the stock price for Origin Materials dropped by 66 per cent in a day, and you might think the company announced it had a) announced bankruptcy, b) abandoned its core technology or c) revealed misdeeds by management that could lead to prison and ruin — none of that happened. What happened is that a very promising company and technology that had earlier this year a valuation north of $1 billion announced that its future capex is higher than originally expected and has led to roll-out delays, and that the product mix of the company is the future would be different, and The first is bad news, the second was bad, the last was pretty good.

Markets dislike delay, and they don’t much like pivots, and now the company has a market cap that is $40 million lower than its cash on hand, which is one way that markets tell companies that they place a value of zero on a business plan that, when the plant was supposed to be open in mid-2025 instead of 2028, was valued at more than $800 million before the company’s Origin 1 demonstration of technology was even completed. Investors are strange creatures, they behave like jilted lovers. Looks to us here in Digestville as a tremendous buying opportunity — what a bargain ORGN has become.

About those billion-dollar valuations

Now, you would be hard-pressed to find Digest column praising the market for assigning a billion-dollar valuation to an unproven technology, ever — some of this gyration we assign to the nature of the company’s emergence as a public company quite a couple of years before the ideal timing for an IPO. We understand the problem as everyone does — markets were flush with SPAC cash a few years back (boy, that fad faded more quickly than fidget spinners), the valuations were good, the cash was needed by bioeconomy companies preparing to scale, early-stage investors were enthusiastic about a public window.

To SPAC or not to SPAC, that is the question. Whether it was nobler in the mind to suffer the slings and arrows born of outrageous investor expectations, or to take arms against a sea of future troubles and by ignoring SPAC money, end them, yet in that end perhaps to live in dread of that undiscover’d country called cash poverty from whose bourn no company returns, puzzles the will and makes us rather bear those ills SPACs have than fly to others we know not of. 

I think that’s how Hamlet put it in the original draft of the play. Maybe not. 

True Value (in) Hardware

In any case, once we  had the beauteous Origin Materials and its CMF technology, now we this ORGN, which has been sent to the stocks where for some time it will be pelted by investors with tomatoes and filth as they seek in punishment to transfer the pain of their grief — grief that their illusions have died, that industrial bioeconomy is not a walk in the park, that escaping climate change now that it has its fangs upon us and within it will be no simple act of slipping off the hook.  ORGN will have the destiny of Origin Materials again, Origin is changing things of low-value into high value and has interesting prospects, but it will not, as seems to have been the expectation, there will be no fishes and loaves, walking across water, no raising Lazarus from the dead, healing lepers, giving mobility to the paralyzed, dissipating storms, or restoring sight to the blind. ORGN will be just Origin. 

Meanwhile, Origin 1, the world’s first commercial-scale plant to produce Origin’s intermediates – CMF, HTC, and oils and extractives – has initiated start-up, and there are some good opportunities now to make FDCA plastics. The company explains:

“We are updating the product slate at our second commercial plant, Origin 2, to focus on the production of FDCA, for which we have seen much greater demand than anticipated, as we indicated in February. While we initially expected Origin 2 to primarily focus on para-xylene (‘pX’) production for bio-PET, we have made significant progress in FDCA product development and commercialization and we now plan to bring FDCA forward to Origin 2, rather than at our third planned commercial plant, Origin 3.”

And, there’s a tasty opportunity in fuels — the land of flavorful and filling carbon credits for technologies that have negative carbon intensities, such as Origin. Of that opportunity, the company noted:

Partnership with Proman, a global leader in natural gas-derived products and one of the world’s largest producers of methanol, centered on low-carbon biofuel production utilizing Origin’s technology platform and Proman’s worldwide fuels capabilities and expertise. As part of the partnership, Proman and Origin Materials signed an agreement to explore the production and global distribution of low-carbon biofuels.

Proman’s Chief Executive David Cassidy commented, “Origin, I Think I Love You“. I’m sorry, wrong David Cassidy, my bad. He actually said, “Certified lower-carbon fuels and feedstocks will play a vital role in enabling the transition to a more sustainable world. From the production of the materials and packaging that we all use every day, to the fuels that power our global supply chains and transport these products around the world, biofuels have huge potential to drive down emissions. That’s why we are delighted to be partnering with Origin Materials, who shares our commitment to innovation and our belief in methanol’s potential to enable more sustainable manufacturing. By combining Proman’s production expertise and extensive distribution network with Origin’s patented technology platform, we will explore new ways to create the building blocks for reduced environmental impact across our everyday lives.”

The other highlights of the quarter?

• Partnership with Sustainea Bioglycols, a joint venture between Braskem (NYSE: BAK) and Sojitz Corporation, centered on advanced bio-based materials produced using Origin’s technology platform and Sustainea’s bio-based glycol products and market expertise. As part of the partnership, Sustainea signed two multi-year capacity reservation agreements to purchase renewable chemicals from Origin Materials, including bio-based PTA and bio-based FDCA.

• Partnership with Terphane, a global leader in specialty PET polyester films (“BOPET”), to produce sustainable, high-performance bio-polymer films. As part of the partnership, Terphane signed a multi-year capacity reservation agreement to purchase the advanced bio-polymer PEF for use in film applications, including food and beverage packaging and high-value industrial applications.

• Origin Materials and Husky Achieve Commercialization Milestone for Advanced Packaging. Recyclable PET polymer incorporating FDCA was successfully processed into preforms using Husky’s commercial-scale injection molding equipment and subsequently bottles. Origin’s novel hybrid polymer “PET/F” is expected to deliver enhanced performance compared with traditional PET and have up to 100% bio content.

• Origin Materials Creates Sustainable PET Bottle Caps, Enabling “All PET Mono-Material” Bottle and Cap Solutions, a Breakthrough in Recycling and Circularity. Origin’s patent-pending PET caps and tamper-resistant closures can be cost-competitively produced using recycled PET or bio-based PET. This “mono-material” makes “100% recycled PET” possible from cap to bottle and improves recyclability, because it is all one material, without the need for recyclers to separate caps from bottles. PET offers better oxygen and CO2 barrier than HDPE and PP, common cap materials.

The Dread Delay

Investors are probably pissed off at ORGN about the delays and cost-ballooning of Origin 2, and the company clearly bungled its communications and presumably its forecasting, on this one. Yes, costs rise, and in times on inflation and over-extended supply-chains, they rise even faster. The company signaled this even back last spring. But there’s sugar-coating an announce that the path to scale at Origin 2 is going to take almost three years longer and cost almost $600 million extra. It sounds more like a public infrastructure project than a feisty industrial company — so, a visit to the woodshed was always in the cards for the management team, investors were going to whack some fannies on this one, no doubt about it.

Here’s the new guidance.

Timing. “We expect …[to] reduce project risk as we move forward on the path to profitability, with Phase 1 start-up projected for late 2026 to 2027 and Phase 2 start-up projected for 2028. We remain confident in our ability to execute as we operate Origin 1, scale and develop our technology platform, and pursue our global licensing strategy.” 

Cost. The capital budget for Phase 1 of Origin 2 is expected to be up to $400 million while the capital budget for Phase 2 is projected to be up to $1.2 billion. This compares to the original $1.07 billion aggregate capital budget estimate originally provided in February 2021. The Company is exploring multiple opportunities to finance Origin 2 including a combination of existing cash, previously indicated traditional project financing, federal and state government programs, licensing agreements, and strategic partnerships. 

And there’s a bullet. “The Company expects capital expenditure of up to $50 million for 2024, with the majority of Origin 2 capital spend to occur following the project’s final investment decision (“FID”) in 2025.” Ouch. Final Investment Decision in 2025? Probably everyone thought the final investment decision had essentially be taken for Origin 2. After all, Origin 1 does not support the company, and until this announce the market was expecting Origin 2 to be completed in mid-2025. That’s a construction start in 2024, for sure.

And, a second bullet. The company relates that “Origin 2 production will focus primarily on FDCA, rather than pX for bio-PET as planned in early 2021. Apart from potential Origin 2 production, Origin plans to supply bio-pX to customers primarily through collaborations with strategic partners. Origin has been in active discussions with multiple strategic partners interested in licensing or co-developing low carbon bio-pX plants using Origin’s technology, both in the U.S. and across the globe, most of which are large, well-capitalized industrial producers of petro-PTA, PET, and other downstream products.” Discussions, ouch. I could not tell you how much of the $10 billion in offtake commitments that Origin relates to bio-PET or the underlying paraxylene. But, it ain’t zero, and there’s every good reason for those partners to place a call to Anellotech headquarters, which has not pivoted away from bio-PX.

Financing help may be on the way

OK, we’ve passed all the bad news for Origin in this column, you can breathe again. But let us turn to finance. 

It does become even more relevant, given the financing timelines and amounts, that the Louisiana State Bond Commission unanimously passed a resolution granting its final approval of the issuance of up to $1.5 billion of tax-exempt bonds to support construction and commissioning of Origin 2. This amount is inclusive of and builds on the strong foundation of the previously announced expected $400 million in Private Activity Bond (“PAB”) volume cap allocation. Bank of America has been engaged by Origin to underwrite the bonds and market them to investors. We continue to believe the debt financing of Origin 2 could be achieved using entirely tax-exempt bonds.

The company may be pardoned for not relying entirely on that belief. They report that they continue “to work with leading financial institutions on other forms of traditional private financing and federal loan programs, including through the United States Department of Agriculture and Department of Energy, and to pursue other local, state, and federal incentives programs to optimize the financing of Origin 2. These include certain 2021 Infrastructure Investment and Jobs Act and 2022 Inflation Reduction Act provisions, including the Department of Energy’s Advanced Industrial Facilities Deployment Program, or AIFD, and the Section 48C Advanced Manufacturing Tax Credit.”

Well, that’s a wide net. In short, Origin is looking for money under every federal and state rock in the financing landscape. Maybe under the muffins and coffee cups too. And, the net gets wider. The company relates that via the “ongoing global technology licensing effort and an active governmental affairs team, the Company anticipates strategic partnerships as well as state and federal incentives programs will play a meaningful role in the financing of Origin 2.”

Waaaal, we’ll see about that.

Reaction from the Markets

The most astute financial analyst in this space over the years has been Pavel Molchanov, and he commented that the “Stock Is Facing a Painful Reset After a Sudden Pivot to Different Products and Higher CapEx.”

And a Painful Reset they got. Molchanov wrote:

Bio-based plastics are an important means of decarbonizing the chemical industry, and the addressable market is practically limitless. But the lesson of history is that scaling up production is easier said than done: the operational hurdles are substantial. Origin is one of many emerging players pursuing this opportunity, and we have always underscored that caution is warranted until the technology platform can be successfully validated. And now, the abrupt pivot into the biofuel market is jarring for investors who had been accustomed to looking at Origin as a specialty biomaterials story.

Here is the real news: everything vis-a-vis Origin 2 is changing – products, timetable, costs. The Origin 2 project is where management unveiled some truly transformative changes… The capital cost is estimated at $400 million for phase one and $1.2 billion for phase two – which compares to the original budget of $1.1 billion for the entire project. Given all of these changes, it is unsurprising that the financing package has yet to be finalized, but tax-exempt bonds (Louisiana has approved up to $1.5 billion) will likely play a key role. As far as how to model all of this, we must acknowledge that it is purely a guesstimate – the company is not providing much detail. 

That’s probably as thoughtful and positive a review as ORGN is going to get  this year — and it’s not hugely positive.

Lessons for the Future

I think it’s something to reflect on for Origin, to think deeply about how they communicate themselves to the marketplace. As Pavel says, it is a story stock, but the story we tell is to some extent one of our choosing. Yes, times change, plans evolve. We note that there’s been a lot more clarity on the timeline than there is on the financing path. Yet, the one has so much impact on the other. Maybe Origin gets too cute over in  a department that too many early-stage companies appear to invest heavily in staffing : The Department of Selective Certainty.

I don’t much care for Selective Certainty much. I’ve seen a lot of it.

Take for instance, the carbon-negative nature of the materials that Origin Materials makes. It’s an aspect of the company that gets a lot of attention, and that the company does a lot to foster.

The finer detail behind that claim reads as follows:

“All co-products of Origin’s process have a negative carbon footprint (i.e. environmental benefit) when considering a cradle-to-gate boundary (which means that the assessment does not cover the end-of life of the coproducts and the potential emissions in the atmosphere of the (biogenic) carbon dioxide if coproducts are incinerated).“

A friend writes: “If you assume the PEF they make from CMF will “never go away” (to CO2) then off course it is carbon negative.  Even fossil gasoline will have a nice low carbon footprint if you don’t count the end-of-life CO2 production.

Another friend leapt in to defend Origin at this point. “End of life” for a polymer is DRAMATICALLY different from that of a combustion fuel. In particular, polymer life cycles are longer than the time scale upon which we need to solve the climate problem. Since this is biomass-derived, carbon in a PET bottle is at least as “sequestered” as that in a growing tree.

The first one replies, “Origin’s honest for saying that the consideration is cradle to gate – that was said quite clearly.  My objection is using the “cradle to gate” consideration (rather than cradle to grave or cradle to cradle) to say something is “carbon negative”.  If Origin had said “renewable and carbon neutral”, I would applaud.  But saying the product is “carbon negative” because of where the end point of LCA consideration is placed (i.e. essentially at the point where the consumer picks up the bottle) is not a useful thing to say, and sets a bad example.”

Both my friends have a point. Polymers are, for sure, much better than fuels when it comes to carbon intensity. I might add, Biofuels are WAY better than fossil fuels. You might find, however, that the carbon-negativity line is drawn in a way that sounds better, in the end, than it is. Is Origin fully disclosing where it draws the line? Absolutely. But, do investors always read and take on board the finer points of the fine print? Uh. no.

Message matters, especially for a story stock, especially one that has to navigate five years on the Waters of Expectations, where the Derivative Dragons are always there to short and distort. If I could wave my biowand and bend companies to my will, I would have them disclose differently, I believe that some of our most promising companies are insufficiently loathe to dampen enthusiasm. Origin is far from the naughtiest offender in this respect , but this reset gives an opportunity to wag the finger at the problem of froth. 

The Bottom Line

Earlier, to keep the column light, I referred to the title of The Partridge Family’s monster 1969 hit, I Think I Love You. If you’ve been a reader of this column for any length of time, you’ve probably been waiting for the other shoe to drop. Why I am singing that 1969 song to Origin?

Well, perhaps because, in some ways, Tony Romeo’s underrated lyric sums up the state of play for me. 

I don’t know what I’m up against
I don’t know what it’s all about
I got so much to think about
Hey! I think I love you, so what am I so afraid of?
I’m afraid that I’m not sure of a love there is no cure for.