Interview with Syntroleum VP Ron Stinebaugh

| About: Syntroleum Corporation (SYNM)

The Wall Street Transcript recently interviewed Ron Stinebaugh, Senior Vice President of Finance and Acquisitions at Syntroleum Corporation (NASDAQ:SYNM). Key excerpts follow:

TWST: Please begin with a brief historical sketch of the company and a picture of the things you are doing now.

Mr. Stinebaugh: Syntroleum Corporation was formed in 1984 and is located in Tulsa, Oklahoma. We have 22 employees, the majority of whom are engineers. Syntroleum is a second-generation and third-generation fuels company. We have several technologies, which I'll describe in a minute, that transform various renewable and non-renewable feedstocks into the synthetic diesel and jet fuel. Our jet fuel is military grade. The US military set the initial synthetic jet fuel standard and certified the B-52 for synthetic fuel using product made in the Syntroleum facility located in Catoosa, Oklahoma. The US military is in an active program to certify synthetic jet fuel across the military aviation fleet.

So I'll give you just a brief description of our technologies. We are a technology development company founded in 1984 and we are now in the process of commercializing some of that technology. We have three technologies. The technologies were founded around what's called Fischer-Tropsch technology, which was discovered in Germany in the 1920s. We can take essentially any carbon feedstock such as biomass, coal, natural gas or petroleum coke and turn it into synthesis gas, which we then convert into synthetic crude oil using the Fischer-Tropsch catalytic process. We then take the synthetic crude and refine it in a proprietary refining process into synthetic diesel and jet fuel. The refining technology, which we call Synfining™, is a technology we developed to specifically handle the synthetic crude that we make.

About two years ago, we formed a separate business built around our refining technology where we take animal fats and waste greases and turns them into the same synthetic fuels that we can make from coal or natural gas. This technology, which we call Bio-Synfining™, is an adaptation of the Synfining technology we previously developed. We took that technology, approached Tyson Foods and formed a 50%/50% joint venture called Dynamic Fuels in which Tyson supplies the non-food grade renewable feedstocks, and we use our technology to upgrade them into synthetic fuels. We are constructing a 5,000 barrel per day second-generation renewable fuels plant in Geismar, Louisiana. That plant is under construction and is set to begin production in 2010.

TWST: What are the advantages of your way of doing things?

Mr. Stinebaugh: Let me focus on the joint venture with Dynamic Fuels and Tyson because that's really our near-term focus. With our Bio-Synfining technology, we process low quality, renewable feedstocks and chemically transform them into a superior synthetic fuel that is not biodiesel. A significant misperception is that we make biodiesel with this process but we don't. And the advantages of our fuel are that it is an ASTM D-975 diesel fuel. It can go into any of the petroleum infrastructure that we have around the country, which biodiesel cannot, and can be burned 100% in a diesel engine, which, again, biodiesel cannot. The properties of the fuel are such that it is very high cetane, 75-80 cetane, which is analogous to octane in gasoline, versus perhaps 45-50 in our current petroleum diesel pool. It makes the engines run much better, just like high octane does in gasoline. Our fuel has virtually no sulfur and it has no aromatics so when it burns, you don't create the soot typically produced by diesel trucks when the engines run. You don't see that because it burns much more cleanly. So it's a very high quality fuel that we are able to make from renewable sources. The fuel can also be used as heating oil.

TWST: Are there any other companies attempting a similar thing?

Mr. Stinebaugh: There are a couple of other companies out there that are doing what we're doing now with Tyson and Dynamic Fuels, but none are building a plant in the US and none have qualified synthetic jet fuel with the US military. Our plant with Tyson will be the very first plant in the United States that's capable of making fuels like this. Our key advantage is the lockup of low cost feedstock with Tyson, one of the largest producers of this feedstock in the world. So we do think we have a significant advantage over others in this space.

TWST: Would you go into further detail about the strategy you will be employing over the next two to three years?

Mr. Stinebaugh: Before I go into strategy, let me mention a significant differentiator for us in terms of our technology. Our technology and the reason why Tyson and we are aligned is that our technology is designed to handle non-edible, low quality feedstocks, which typically cannot be used easily in the biodiesel process and makes very poor biodiesel. So our competitive advantage is that we can take yellow grease, beef fat, chicken fat, brown grease, a number of these things are land-farmed and usually go down the drain, and make the same high-quality fuels regardless of feedstocks. So our business model is to go after the low quality feedstocks and therefore make a much higher margin than a company that's unable to remove the contaminants and impurities in these feedstocks. Identification and removal of contaminants is a core competence of ours, which derives from our heritage in the Fischer-Tropsch industry where identification of contaminants, particularly poisons to our catalysts, is very important.

TWST: Please describe your strategic plan for the next few years.

Mr. Stinebaugh: Our strategic plan for the next few years is focused on building out our Dynamic Fuels venture with Tyson here in the US. We have one plant under construction; we'd like to see several more develop over the next handful of years so that we have two or three plants running in the US. We also are interested in placing one or two of these plants internationally. Second, we continue to work on deploying our technology suite to customers around the globe like we have announced with Sinopec. Thirdly, I mentioned to you that our heritage is in the Fischer-Tropsch business; we're looking to develop plants around that technology. The lead times and the capital involved in building those plants is significantly greater than for the Bio-Synfining technology that we're employing with Dynamic Fuels. For instance, I don't think I mentioned the capital costs — the capital costs at our Geismar plant, the total project costs including financing and working capital, is about $150 million for that plant of which half is to our account. A large Fischer-Tropsch scale plant is between 4 and 10 times this cost, depending on size, location and feedstock. And so down the road, as we're an ongoing cash flowing company, we believe we will have greater financial wherewithal to then focus more capital on facilities that our core technology entails.

TWST: What would you reasonably expect the company to look like in about three to four years?

Mr. Stinebaugh: Three to four years from now we hope to have at least a couple of our Bio-Synfining plants up and running via the Dynamic Fuels JV where we would hopefully have cash flowing significantly that will provide us a base to expand our business into additional avenues, which could include development of our Fischer-Tropsch business. It also could include making acquisitions of what we view as complementary, alternative fuels technologies.