Seeking Alpha
Research analyst, CFA, portfolio strategy, gold
Profile| Send Message|
( followers)  

Back on February 14th, 2013 I wrote an article titled "Early Signs Mixed for Biodiesel." In it I made a forecast of the Q4 and 2012 earnings of Syntroleum (NASDAQ:SYNM).

Q4 2012 earnings are already pretty much known. SYNM reports their earnings from their Dynamic Fuels plant (a 50/50joint venture with Tyson (NYSE:TSN)) on a three month lag. If you go back and read their Q3 2012 conference call transcript you can pretty much figure out their Q4 2012 earnings. Right now I'm showing it losing $3.7 million from its Dynamic Fuels holding and $800 k for overhead at SYNM, for a total loss of about $4.5 million for Q4 2012. That loss should wipe out all the gains made for 2012, so SYNM should report break even earnings for 2012. That information is already known to the markets.

SYNM just released earnings for Q4 and 2012. Putting things together is bit confusing because SYNM reports its earnings as well as the results of Dynamic Fuels, its joint venture with Tyson, and they need to be combined to get the final number.

My estimate was for SYNM to show a loss of $800k for overhead; SYNM reported "an operating loss of $797 thousand." Off by $3k, so good so far.

My estimate was for Dynamic Fuels to show a loss of about $3.7 million for Q4. SYNM reports "we reported a loss from Dynamic Fuels of $4.3 million." Off by $600k, but with all the shut-downs and extra-ordinary costs, that isn't that bad. Dynamic Fuels has been having a very difficult time getting its plant to run consistently, and has been incurring expenses higher than would be predicted and are very hard to estimate.

My estimate was for the Q4 loss to wipe out all the gain for 2012, resulting in a break-even year for SYNM. SYNM reported "Syntroleum's net loss was... $1.1 million or $0.01 per share...for the year ended December 31, 2012." Off by $1.1 million for the year, not bad considering the difficult year SYNM and biofuels had in general. One thing to note, however, is that a substantial part of SYNM's earnings came from "revenues relate to recognition of deferred license income." Without those revenues, SYNM would have showed a much larger loss. On the flip side, the retroactive tax credit passed at the end of the year, and it doesn't look like SYNM applied any of the tax credit to 2012. More information on this can be found on my instablog.

As I mentioned above, however, forecasting earnings for SYNM isn't very difficult because the company reports results of the Dynamic Fuels plant on a 3 month lag. Almost everything an analyst needed to create a forecast was known over 3 months ago as I demonstrated in the original article. Shares of SYNM traded lower by over 10% in after-hours on the release, but because this outcome should have already been known by the market, I would doubt that the stock will hold that loss through the open on Monday. In my opinion the market got pretty much the earnings report that it should have been expecting.

Because SYNM reports on Dynamic Fuels with a 3 month lag, in my opinion, the actual earnings report isn't the critical information reported. What is important is what is said in the conference call about the production during the current quarter, the margins during the current quarter and any progress on various projects like debottle-necking the plant, the "phase change material," a gas-to-liquid plant, feedstock processing equipment, and other.

SYNM has a conference call planned for Monday March 18, 2013. Key issues to listen for are as follows:

1) In the currently released 10-k, it states that: "The plant was placed in stand-by mode after completion of a maintenance turnaround in December, 2012, primarily because of economic conditions. Although economic conditions have improved in 2013, the plant remains in stand-by mode as the Company and Tyson have not yet agreed upon the economic conditions required for plant start-up." It will be interesting to see how this is explained because the economic conditions at least to me have improved dramatically. More about it can be read in this instablog posting.

2) SYNM has been in an ongoing legal battle with a foreign competitor Neste. How this issue is progressing will likely be discussed, and may have an impact on the stock price. If you are interested in more information on this issue I have an instablog posting covering it as well.

3) SYNM has been in discussions to build a gas-to-liquid plant, and recently sold a demonstration unit to Sasol. Any progress here may help the stock.

4) The "blender's Tax Credit" passed at the end of last year. The final amount, how it will be accounted for and what it will be used for are all points of interest.

5) SYNM has an insulating product called "phase change material." It is a pretty interesting concept and uses an endo/exotermic reaction in insulation which uses the same physics principle that orange farmers use when they spray oranges in advance of a freeze. Any progress on this issue may be beneficial to the stock.

6) Dynamic Fuels recently installed new feedstock processing units and has plans to replace a recycle pump later this year. How the new equipment and details on the recycle pump and any related shut-down may be important.

7) The company is facing a delisting because it is trading below $1.00. The company has a planned reverse split to address this issue if time runs out. Discussion of this issue may also be important to the stock price.

I could go on, but the above list covers many if not most of the key issues that investors should be listening for in the upcoming conference call.

In conclusion, SYNM reported earnings that are very close what the market should have been expecting. The stock is trading down in after-hours on the release, but I doubt that loss will be held through the open on Monday. In my opinion the important news isn't the release of the earnings, much of that was already known 3 months ago. What is important is what management will say about the key items listed above in this article. Investors will know by watching the stock price if the market is getting the answers that it is hoping for or not. I plan to do a follow-up article after the conference call to review the results so be sure to check back for updates.

Disclaimer: Opinions expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisor capacity. This is not an investment research report. The author's opinions expressed herein address only select aspects of potential investment in securities of the companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies' SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author's best judgment as of the date of publication, and are subject to change without notice.

Source: Syntroleum Reports Small Loss For 2012, But Plant Update Is Most Important