Syntroleum Corporation Q2 2009 Earnings Call Transcript

Aug.10.09 | About: Syntroleum Corporation (SYNM)

Syntroleum Corporation ()

Q2 2009 Earnings Call

August 10, 2009 11:00 am ET

Executives

Karen L. Gallagher Principal Financial Officer, Senior Vice President - Finance

Edward G. Roth President, Chief Executive Officer, Director

Jeffery M. Bigger - Senior Vice President, Business Development

Ronald E. Stinebaugh - Senior Vice President, Finance & Acquisitions

Analysts

Gary Rumple - Private Investor

Dan Keane - Associated Community Brokers

Jared McDonald - Private Investor

Lloyd Krimrine - Private Investor

Bryce Dille - JMP Securities

Edward Marvin - Private Investor

Richard Smith - Private Investor

Operator

Good morning ladies and gentlemen. At this time I would like to welcome everyone to the Syntroleum Corporation’s Second Quarter Earnings Conference Call (Operator Instructions). I will now turn the call over to Ms. Karen Gallagher. Ms. Gallagher you may begin.

Karen Gallagher

Good afternoon and thank you for joining us today. Remarks for today’s call will be presented by Syntroleum’s President and Chief Executive Officer, Gary Roth; followed by Jeff Bigger, Senior Vice President of Business Development, who will provide an update on our Dynamic Fuels Geismar plant; Ron Stinebaugh, Senior Vice President of Finance and Acquisitions, who will provide an update on the Geismar plant economics and Karen Gallagher, Senior Vice President and Principal Financial Officer, who will report the financial results for the second quarter of 2009.

Before I turn the call over to Gary, I would like to remind everyone that during this call we will make certain forward-looking statements as well as use historical information. Words such as believe, estimate, expect, intend, planned, anticipate, could, or should are intended to identify forward-looking statements. Although, Syntroleum believes that expectations reflected in these forward-looking statements are reasonable, these statements involve risks and uncertainties. Future results may differ materially from those projected in these forward-looking statements. You are encouraged to refer to our SEC filings, including our most recent annual report on Form 10-K, for a full disclosure of these risks and uncertainties.

I will now turn the call over to Gary Roth for opening remarks.

Gary Roth

Thank you, Karen. Let me summarize our activities over the first half of the year. The first plant under our dynamic fuels venture with Tyson Foods continues to progress as planned. Jeff Bigger and Ron Stinebaugh will convey project details later in this call. The Dynamic Fuels plant is 54% complete and we expect to complete the construction in December of 2009. The plant remains on budget.

Our engineers and business development team have created a reoccurring revenue stream for our engineering and technical services business. Our engineers’ builder time declines for technical activities related to our Fischer-Tropsch and Bio-Synfining™ technologies. Our current utilization rate of all of our engineers is 97% compared to 44% at the beginning of the year. We expect to remain at an average utilization rate of approximately 90% for the remainder of the year and generate approximately $5.1 million in revenues from engineering, technical services, and leasing activities by year-end 2009. Based on our current backlog of prospects for 2010 we expect to continue at a high utilization rate.

Our cash cost structure is now in line with revenues from engineering and technical services and technology related activities. Our operating activities generated $12.6 million in cash for the first half of the year. The schedule with Sinopec for delivery and acceptance of documents has been completed and we have received $14 million from this contract. The CDF relocation to China has been delayed one month due to swine flu related travel restrictions which have now been eased. We still expect to complete the transfer before year-end which will result in an additional $6 million of cash proceeds.

The Sinopec team is currently on site performing detailed engineering related to the CDF relocation to China. We value Sinopec as a client and believe a solid foundation has been established and we look forward to future projects with them.

Finally, we continue to work with other clients on specific studies that fund our own internal R&D effort and expect to generate more of these contacts through out 2009 including government related initiatives.

In summary, we continue our commercialization efforts and remain focused on execution of the Dynamic Fuels program. We expect to complete the Dynamic Fuels plant and generate cash flows from this plant in 2010 utilizing our Bio-Synfining technology. We will deliver our demonstration plant to Sinopec for the use in China for continued research and development related to Syntroleum’s Fischer-Tropsch technology. We will also continue marketing our core technologies while executing on our funded joint R&D programs.

I will now turn the call over to Jeff Bigger to update you on the status of the Dynamic Fuels venture with Tyson Foods.

Jeff Bigger

Thank you, Gary. The Dynamic Fuels plant in Geismar, Louisiana is on budget and on schedule for mechanical completion by year-end and for the commencement of commissioning and start-up in early 2010. The funding status of the Geismar facility is as follows: Total project costs remain at $150 million consisting of $138 million in capital and $12 million in financing and working capital costs; of this Dynamic Fuels has received $100 million in GO Zone Bond financing and the parties have contributed $40 million in equity to the construction of the Geismar facility. The remaining $10 million will be funded in 2009, if required, and that is $5 million from each party.

Today I will update you on the technical status of the project related to three specific areas: engineering, procurement, and construction. The reference date for the update is June 30, 2009. All results will be reported as an estimated percentage of the physical work complete and percentage of the approved budget spent or committed.

Overall we have expended 175,000 man-hours on engineering, procurement, and construction as of June 30, 2009.

As related to engineering we are 81% complete and have spent 68% of the approved budget. Engineering costs represent approximately 8% of the overall project budget.

As related to procurement we are 60% complete and have spent 54% of the budget. We have all 172 of the major equipment items under contract. The majority of outstanding procurement is related to the purchase of bulk commodities. All Bio-Synfining equipment is under contract. Delivery of the major equipment items began in April and will continue through out the month of October. The main reactors were delivered to the Port of New Orleans on August 6, 2009 and are being transported to the site.

As related to construction we are 37% complete and have spent and/or committed 45% of the approved budget. The commitments include any cancellation fees.

We believe we will complete the construction and commissioning of the project within the project budget. To date we have completed site demolition, set pilings, and foundations, completed all of the tank foundations, erected 46% of the new pipe rack and refurbished existing buildings; all in preparation for receiving the major equipment.

With the major equipment deliveries progressing the focus of the construction effort will be on the final installation of equipment and installation of bulk materials such as piping, electrical cabling, and instrumentation. As of June 30, 2009 we had over 170 people on site.

Overall, as of June 30 we estimate engineering procurement and construction are 54% complete and we have spent 51% of the associated budget. As of the reporting period, approximately 5% of the EPC contingency has been committed. The project remains on schedule for year-end 2009 mechanical completion.

The facility staffing is underway with the plant manager, operations manager, and controller now on site. The employment opportunities are being posted on our dynamicfuelsllc.com website and we are receiving strong interest from applicants. Staffing will ramp up as we approach mechanical completion and advance our preparations for start-up.

I will now turn the call over to Ron Stinebaugh to update you on the economics of our Geismar projects.

Ron Stinebaugh

Thanks Jeff. For my comments on Bio-Synfining economics I am going to refer to Slides posted to our website which is www.syntroleum.com. The link is near the bottom of the home page entitled Current Investor Presentation. Please scroll to Slide 11.

Here you will see a summary table for the Geismar plant margins. We show margins in two ways: first we show the margin related to selling our renewable diesel fuel at petroleum diesel price parity or wholesale diesel posted prices plus the relevant subsidies. We show this because at a minimum we are confident we can realize margins on this basis. Secondly, we show margins based on reported soy biodiesel prices using data we obtain from a third party reporting service. Margins on this basis currently reflect a premium to diesel price parity plus subsidies. We view the range between these two figures as the potential margin range we can expect from the Geismar plant.

Now looking at the details of the Slide, in columns 1 and 2 we show the average margin since December 2006 which ranges from $0.69 to $1.36 per gallon depending on whether it is calculated on the diesel price parity basis plus subsidies, or reflects soy biodiesel pricing. Ultimately we believe that Bio-Synfining margins should revert to the mean as feedstock and prior prices are highly correlated.

Columns three and four show margins as of August 4, 2009. Current margins range from $0.50 per gallon on a diesel price parity basis to $0.80 per gallon on a soy biodiesel price basis.

Now please scroll to Slide 12. This Slide is a daily margin for the Geismar plant dating back to December 2006. Despite crude oil prices falling to as low as $30.00 per barrel in December margins have remained positive on a diesel price parity basis plus subsidy and have since rebounded significantly now that crude oil is in the $60.00 to $70.00 per barrel range; the blue line is that reference. On a soy biodiesel pricing basis, the red line, margins have remained quite healthy.

On Slide 13 we show that another factor contributing to Bio-Synfining margins has been the depressed price of diesel relative to historical norms. The price of petroleum diesel has historically averaged approximately 1.2 times that of crude oil. Petroleum diesel has averaged 1.08 times that of crude oil for the second quarter 2009.

Slide 14 shows historical feedstock pricing. The Tyson blend is the dotted red line, which compares to soybean oil, which is the blue line. At August 4th, the Tyson blend was approximately $0.21 per pound which compared to Gulf Coasts RBD soybean oil at $0.40 per pound. The spread between the Tyson Feedstock blend and soybean oil represents Bio-Synfining’s feedstock cost advantage over soy biodiesel. On August 4th the differential was $0.19 per pound or $1.43 per gallon. Since December 2006 that advantage has averaged $0.22 per pound or $1.66 per gallon.

Finally, Slide 15 shows that biodiesels continues to be priced at a premium to the underlying low sulphur diesel price and that higher quality biodiesel with superior coal flow properties are worth more than lower quality biodiesels.

We believe that renewable diesel should enjoy similar or better premium pricing because it will have the following advantages over competing biodiesel: superior coal flow properties; nearly 10% increased energy content relative to biodiesel and compatibility with existing infrastructure.

As we reported to you last quarter, Dynamic Fuels is currently exploring the feasibility of building a second plant. We also disclosed that several competing locations were under consideration and that Dynamic Fuels had applied to the US Department of Energy for Title 17 loan guarantees. On April 8 the DOE notified Dynamic Fuels that its application had been deemed responsive and that the Bio-Synfining technology was deemed to be a new or significantly improved technology defined in the statute. In July 2009, at the DOE’s request, we submitted additional site-specific information to the DOE. If Dynamic Fuels is ultimately selected by the DOE for final due diligence in negotiations it is targeting financial close mid-year 2010 with full rate operations at the end of 2012.

Now I will turn the call over to Karen.

Karen Gallagher

Thanks, Ron. We announced our results for the second quarter ended June 30, 2009 reporting a cash balance of $16 million compared to a cash balance of $10.1 million at December 31, 2008. This increase in our cash balance is primarily due to the collection of $16 million in initial payments associated with technology agreements and the collection of $2 million from continued revenues for engineering services offset by the investment of $6 million in Dynamic Fuels made on April 1st.

We generated $12.6 million in cash flow from our operating activities for the six months ended June 30, 2009 compared to $1 million in cash flow from operations from the same period last year. The current cash flows provided by operating activities mark a turning point for our company and our commercialization efforts. Our current receivable balance is $6.5 million from executed contracts.

For the six months ended June 30, 2009 the Company reported net income of $7.4 million or $0.11 per share compared to a net loss of $4.1 million, or $0.07 per share, for the same period last year. Total revenue was $21.9 million compared to $2.5 million, and operating expenses for the first six months of 2009 were $9.6 million compared to $6.7 million for the same period last year. Included in operating expense is $3 million of non-cash performance based stock compensation.

At June 30, 2009 we recorded a loss of $3.2 million from our investment in Dynamic Fuels. Expenses incurred in the first six months of 2009 include site rent, project development costs, equipment evaluation, labor expenditures for operation staff, and insurance during construction.

Operating expenditures incurred for the entity totaled approximately $2.8 million of which Syntroleum records 50%. The remaining $3.5 million is the amount associated with marking the interest rate swap to market.

When the GO Zone Bonds were issued at a floating rate of interest, a swap was put in place to protect the Company from significant increases in interest rates. The swap fixes the interest rate of the bonds at 2.19% for the first five years of the project with declining swap coverage. Dynamic capitalizes costs associated with the construction of the plant and we expect to see income from this investment in the second half of 2010 upon the start of commercial operations.

The first half of the year has proven to be very successful for Syntroleum. The generation of significant cash flows from operating activities has allowed the Company to satisfy our financial investment in Dynamic without further diluting shareholders. Should Dynamic Fuels need the last $5 million budgeted for the project it will be funded out of cash flow. The work of our staff and business development team continues to generate recurring revenues and cash flows that support the total operations of the Company. We continue to act prudently with cash expenditures and remain on budget for the year. We look forward to further execution of our current goals and business prospects through out 2009.

Thank you for your attendance today. We will now open up the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Gary Rumple, private investor.

Gary Rumple - Private Investor

Two conference calls ago you guys were speculating on what the profit per gallon would be when the plant was running full boar; on a projected profit per gallon you said it was excluding a government subsidy of $1.00 per gallon. My question is, is that $1.00 per gallon government subsidy in place and how long is it mandated by congress until they would have to revisit it?

Jeff Bigger

The $1.00 a gallon is in place currently; it runs through the end of the year. It has been proposed that it be extended for five years and that has gone to the Senate in the recent write up of the bill for these subsidies.

Gary Rumple - Private Investor

Okay and when you guys are projecting a profit per gallon have you guys used that $1.00 per gallon in it, or has that been excluding that $1.00 government subsidy, because you don’t know for certain whether it is going to be in place?

Jeff Bigger

We have included the $1.00 per gallon in our projections.

Gary Rumple - Private Investor

Okay, thank you sir.

Operator

Your next question comes from Dan Keane from Associated Community Brokers.

Dan Keane - Associated Community Brokers

I wondered if you could tell me if a decision will be made regarding your production of either jet or diesel fuel in Louisiana?

Jeff Bigger

The plan is currently set up to produce diesel fuel and we will start it up on diesel. The jet fuel is not currently certified for use in aircraft; that work is underway and we have supplied 600 gallons of renewable jet fuel for the Air Force that is undergoing their certification work right now.

Dan Keane - Associated Community Brokers

Thank you.

Operator

Your next question comes from Jared McDonald a private investor.

Jared McDonald - Private Investor

This is in regards to China. I know you have the Sinopec deal over there; is there any possibility of you coming up with a plant being built over there?

Gary Roth

That is the ultimate plan, is to move the demonstration for the facility to China; run it on coal- derived syngas. When it works, as it historically has on natural gas, we believe, then it would go to commerciality after that demonstration.

Jared McDonald - Private Investor

Is there any estimates on when that could happen, or does it depend on something else happening first?

Gary Roth

The current estimate is to relocate and run the CDF and gather data which is a two-year program and commercialization would follow.

Jared McDonald - Private Investor

Okay, thank you very much.

Operator

Your next question comes from Lloyd Krimrine a Private Investor.

Lloyd Krimrine - Private Investor

My question is what Syntroleum’s strategic vision is for five and ten years out, and are you targeting any customers?

Gary Roth

Our program goal, as we stated before, is to finish building out the Dynamic Fuels; we believe that is up to a three year, three plants in the United States; continue to develop work with Sinopec on FT technology and coal related; and then begin our small plant developments on FT technology related to biomass to liquids.

Lloyd Krimrine - Private Investor

Have you looked at partnering with any municipalities, like the city of San Francisco wants to do biofuels?

Gary Roth

To date we have not.

Lloyd Krimrine - Private Investor

Okay, thank you very much.

Operator

Your next question comes from Bryce Dille from JMP Securities.

Bryce Dille - JMP Securities

I just have one logistical question. On Slide 17 you show the pipelines throughout the US; is Geismar geographically located close to a tie in?

Jeff Bigger

There a quite a few pipelines in the area and it would require us to put a jumper in, but we can get access to the pipelines and move the stuff by pipe if it is necessary.

Bryce Dille - JMP Securities

And it would be able to support up to the three plants that you had just mentioned at that facility?

Jeff Bigger

If the other plants are built in different locations we would look at different routes to get into the pipelines or get the product to market. So, the other plants could be either co-located at Geismar or located in other locations around the country.

Bryce Dille - JMP Securities

Okay, very good thank you.

Operator

Your next question comes from Edward Marvin a private investor.

Edward Marvin - Private Investor

I am extremely naïve on this issue, but in a nutshell how does this proposed cap in trade legislation that has been passed by the House and is going to be considered by the Senate here in a few months, or next month, how does that affect the Syntroleum brand?

Jeff Bigger

The cap in trade, of course, exactly how that is going to manifest itself we are all anxious to see how that will work, but the fact that our fuels, particularly from the Bio-Synfining process use carbon that basically came from the air that was converted by a plant and then eaten by an animal and the fat was then converted; our fuels will be basically zero net contributors of greenhouse gases, so it should have a pretty attractive market for it once cap in trade becomes defined.

Edward Marvin - Private Investor

Thank you so much.

Operator

Your last question comes from Richard Smith a private investor.

Richard Smith - Private Investor

I respect to the low prices of natural gas currently and the substantial amounts of in ground inventory that are being found, are there any projects that have come to light, or do the economics of your Fischer-Tropsch process make more sense in light of this current environment? Are you aggressively, or actively, seeking those types of projects?

Gary Roth

There is a disparity now between natural gas and crude prices, but we would not expect that disparity to remain; therefore the economics of building GTL plants in the US in the long run, in our opinion, are just not commercial. So, we are not pursuing those activities.

Richard Smith - Private Investor

I see. How large would the spread have to be for you to think it worthwhile to look at that marketplace?

Gary Roth

The spread is there today. The question is do we think that disparity, or that the spread is atypical today? Normally we don’t see this big of spread, so unless there is some fundamental change that would lead us to think that these disparities would remain for a long period of time, it still doesn’t make economic sense to do GTL in the United States.

Richard Smith - Private Investor

Very good, thank you very much.

Gary Roth

Thank you for joining us today on our conference call. If you have any additional questions please contact Ron Stinebaugh at 918-764-3406. We appreciate your interest in Syntroleum. Thank you.

Operator

Ladies and gentlemen that does conclude the conference call for today. We thank you for your participation. (Operator Instructions).

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