Renewable fuel scales up, hits bumps
Feb. 17, 2012, 3:39 a.m. EST
New renewable fuel ventures draw investors, face choppy markets
By Steve Gelsi, MarketWatch
NEW YORK (MarketWatch) — While a fresh crop of renewable-fuel ventures has attracted billions in financial backing from eager investors, the daunting task of moving from the laboratory to profitable commercial production still poses a major hurdle for many of them.
To see the challenges faced by emerging players in the world of renewable fuels, look no further than Amyris Inc., a supplier of enhanced yeast used to help make sugar-based biofuel.
The company, which went public in 2010, lost about a quarter of its market capitalization on Feb. 10 after it warned it no longer expects to see a positive cash flow this year and will instead seek additional financing.
Amyris AMRS +0.98% ran into “execution risk” as it moved to industrial-level production, and its stock needed time to “get out of its penalty box,” Raymond James analysts said at the time.
While many newer ventures are springing up in 2012 with financial backing from institutional investors, private-equity firms, and large corporations, market conditions remain choppy for the latest generation of renewable-fuel producers attempting to scale up business.
In another setback for fresh biofuel deals, Renewable Energy Group Inc. REGI +0.84% debuted at $10 a share on Jan. 19, only to see its stock fall to as low as $8.56 a share since then. Shares in the Ames, Iowa, maker of biodiesel from animal fat have since risen to $9.45, but still remain below their initial public offering price.
And plans by Thousand Oaks, Calif.-based Ceres Inc. to go public hit a snag last week when underwriters postponed its debut.
Ceres, which makes sweet sorghum used in Brazilian sugar-to-ethanol plants, had cut its estimated price range to $16-$17 a share from its earlier projection of $21-$23 a share. For now, the Ceres IPO had been placed on “day-to-day” status, with no firm launch date.
Taking account of the relatively weak showing of Renewable Energy Group and Ceres, analyst John Fitzgibbon of IPOScoop.com said investors want more of a sure thing.
“It’s a buyer’s market for these stocks,” he said. “They’re great in theory, but their profits aren’t there yet.”
Drawing strategic support While day traders and IPO investors may have beaten up some players of late, few dispute the long-term trends lending strength to renewable-fuel ventures.
Higher crude-oil prices of $100 a barrel and up, plus uncertainty surrounding crude supplies from Iran, are supporting demand for alternative sources for cars, trucks and other uses.
“With ... tension in the Middle East, domestic fuel production is a national and economic security issue,” said George Boyajian, vice president of business development for privately held Primus Green Energy.
Wood pellets about one inch long provide the raw feedstock for Primus Green Energy to refine renewable gasoline.
The Hillsborough, N.J., company, which makes renewable gasoline from wood pellets, raised $40 million over the past four years from its key investor, IC Green Energy Ltd, which is a unit of Israel Corp. Ltd. IRLCF +1.72% IL:ILCO -1.81%
Now seeking to raise $40 million to $100 million to scale up its production with a new plant, Boyajian said the company is drawing strong investment interest from oil and chemical companies. He said the prospective investors are “household names” from the ranks of corporate America, but he declined to be more specific until the deals are closed.
By placing facilities near plywood plants or wood chipping operations, Primus Green Energy can produce a drop-in substitute for gasoline at a cost equivalent to $60 a barrel for crude — quite economical, considering that retail prices at the pump are now hovering above $3.50 a gallon.
Another factor favoring emerging-energy players is the federal Renewable Fuels Standard, a powerful rule enforced by the Environmental Protection Agency that requires a greater percentage of U.S. fuel to come from sources other than crude oil.
While the U.S. renewable fuel requirements have been pared back in the wake of the 2008-2009 financial crisis, the Washington continues to encourage the new crop of biofuel ventures.
“The Renewable Fuels Standard guarantees a market for these fuels,” said Mac Statton, an engineer for the U.S. Energy Information Administration who tracks the biofuel sector. “Also, $100-a-barrel oil makes biofuel more cost-competitive.”
Still, the federal standards have run into opposition from the American Fuel & Petrochemical Manufacturers, a trade group representing gasoline makers and other chemical and fuel refiners.
The group “opposes the mandated use of alternative fuels and supports the sensible and workable integration of alternative fuels into the marketplace based on market principles,” it said on its website. “Mandates distort markets and result in stifled competition and innovation.”
Established players invest While some industry trade groups seek to put the brakes on market mandates for renewable fuels, some of the biggest players in the refining business are still setting aside hundreds of millions of dollars for new ventures.
Today, the three largest corn-based ethanol players are all big companies: Archer Daniels Midland ADM +0.70% , Valero Energy Corp. VLO +0.24% and privately held Poet LLC — all with relatively deep pockets to develop new types of renewable fuels.
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Valero raised eyebrows back in 2009 when the traditional, independent oil refiner became a leading corn-based ethanol player by purchasing assets from bankrupt biofuel player VeraSun for $477 million.
The investment paid off in Valero’s latest quarter, with operating profit at its ethanol unit more than doubling to $181 million from $70 million.
Now Valero is setting its sights on several other renewable-fuel ventures including:
- Darling International DAR +0.51% drew financing from Valero for a joint venture project to produce up to 137 million gallons per year of renewable diesel near Valero’s St. Charles refinery in Norco, La. The plant will convert animal fats and used cooking oil into diesel fuel. A price tag for the project, which is expected to start up by the end of the year, was not disclosed.
- With backing from Valero, Lebanon, N.H.-based Macoma Corp. plans to build a commercial-scale plant in Kinross, Mich. to convert hardwood pulpwood to up to 20 million gallons a year of ethanol. Valero financed most of the estimated $232 million cost for the plant, along with $80 million in funding from the Department of Energy. Mascoma has also filed plans to raise up to $100 million in an IPO.
- ZeaChem Inc., a privately held biofuel company that has drawn an investment from Valero, recently won a conditional commitment for a $232 million loan to build its first commercial-scale biofinery to turn wood and biomass into fuel. The Lakewood, Colo., company said it was selected for a potential loan guarantee under the U.S. Department of Agriculture’s Biorefinery Assistance Program.
Meanwhile, Poet LLC, the Souix Falls, S.D., ethanol producer, has rolled out plans of its own to scale up renewable fuel production.
Poet has teamed up with Dutch conglomerate Royal DSM to spend $250 million on new refineries that use corn cobs, stalks and other agricultural waste to make ethanol.
Poet CEO Jeff Broin said the project won’t use a $105 million loan guarantee it won from the Department of Energy, since it’s getting the investment from Royal DSM.
Poet’s move comes after solar-panel maker Solyndra went bankrupt last year, leaving U.S. taxpayers on the hook for a $535 million federal loan guarantee.
Broin said Poet-DSM Advanced Biofuels plans to hire up to 50 employees, for now.
“It has the potential to create another competitor that can help keep oil prices in check and create American jobs,” Broin said.
So while renewable fuels continue to draw big investment dollars, don’t expect any huge pops in the IPO market after a mini saturation of green-themed deals, including Gevo Inc. GEVO +0.30% , KiOR Inc. KIOR +0.65% , Codexis CDXS +1.08% , Renewable Energy Group and Amyris, according to Scott Sweet of IPO Boutique.
“ ‘Green’ companies that have recently debuted have struggled,” Sweet said. “These types of deals are not playing well.”
Steve Gelsi is a reporter for MarketWatch in New York.
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