Karen Gallagher – SVP and Principal Financial Officer
Gary Roth – President and CEO
Jeff Bigger – SVP, Business Development
Ron Stinebaugh – SVP, Finance & Acquisitions
Jerry Rumples [ph]
Chuck Pillar [ph]
Robert Kusiva [ph] – Black Sea Partners
Richard Kaulback [ph]
Steve Sparrow [ph]
Eric Burzwai [ph] – Eric Burzwai GDS [ph]
Syntroleum Corporation (SYNM) Q3 2009 Earnings Call Transcript November 5, 2009 3:00 PM ET
Good afternoon, ladies and gentlemen, and welcome to the Syntroleum Corporation third quarter earnings call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to Ms. Karen Gallagher. Ms. Gallagher, you may begin.
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 Acquisition, who will provide an update on the Geismar Plant’s economics; and Karen Gallagher, Senior vice President and Principal Financial Officer, who will report the financial results for the third 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, plan, 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 full disclosure of these risks and uncertainties.
I will now turn over the call over to Gary Roth for opening remarks.
Thank you, Karen. Let me summarize our activities over nine months of this year. The first Plant in 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 76% complete. We expect to have 10 of the 23 plant systems turned all over to the operations staff for commissioning by the end of the year. The start of schedule is in line with our expectations, and we expect the plant to be producing at full capacity by the end of the second quarter 2010. The plant remains on budget.
Our engineers and business development team have created a re-occurring revenue stream for our engineering and technical services business. Our engineers’ builder time declines for technical activities related to our technology. Our current engineering utilization rate is 83%. We expect our average utilization rate to be approximately 85% for the reminder of the year, generating approximately $5.1 million in technical services revenue for 2009. Based on our current backlog and prospects for 2010, we expect to continue at a high utilization rate.
Operating activities generate $11.8 million in cash flow for nine months of this year. We have executed on the Sinopec contract and received $14 million for this contract as of September 30, 2009. CDF relocation to China is still expected to be completed by year-end. The Sinopec team is currently on site, dismantling the CDF.
With the investment by Fletcher International of $4 million gross, the company has a cash balance of $ 21.2 million as of November 1, 2009. Finally, we continue to work on specific studies that fund our own internal R&D effort and expect to generate more of those contracts throughout 2010.
In summary, we continue our commercialization effort and remain focused on execution of the Dynamic Fuels program from which we expect to generate cash flows in 2010. Sinopec will relocate the CDF to China for continued research and development related Syntroleum’s Fischer-Tropsch technology.
I will now turn the call over to Jeff Bigger to update you on the status of our Dynamic Fuels venture with Tyson Foods.
Thank you, Gary. The Dynamic Fuels Plant in Geismar, Louisiana is on budget and on schedule for a commencement of commissioning and startup in early 2010. The funding status of the Geismar facility is as follows: Total project cost remained at $ 150 million, consisting of $138 million in capital and $12 million in financing and working capital costs.
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 September 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 356,000 man hours on the project. As related to engineering, we are 96% complete and have spent 89% of the approved budget. Engineering costs represent approximately 11% of the overall project budget. As related to procurement, we are 81% complete and have spent 69% of the budget. We have purchased all 178 of the major equipment items and 176 have been delivered. Remaining procurement is related to the purchase of bulk commodities. The completion of all major equipment deliveries will occur in November.
As related to construction, we are 68% complete and have spent or committed 77% of the approved budget. Primary effort areas are piping, structural steel, concrete work, electrical and control systems, fireproofing, and we had over 320 people on site. Overall, as of September 30, 2009, we estimate engineering, procurement and construction are 76% complete and we have spent 75% of the associated budget. We have committed 50% of the EPC contingency. We believe we will complete the engineering, procurement and construction of the project within the project budget.
The mechanical completion for the plant is a process. As we complete each individual system, we turn it over to the operations staff for commissioning. The first system is projected to be mechanically complete in November. We expect to have completed 10 of the systems and turned over to the operations staff by the end of 2009. The remaining systems will be mechanically complete and turned over to the operations staff in January 2010. This completion schedule is still in line with our original expectations of full rate operations by the end of the second quarter 2010.
Plant staffing remains a high priority. Core operation Shift Supervisors have been hired as well as the Environmental Health & Safety Manager and the Lab Manager. Employment opportunities are posted on our www.dynamicfuelsllc.com Web site and we are receiving strong interest from applicants. Staffing will continue as we approach mechanical completion and advance our preparations for startup.
I will now turn the call over to Ron Stinebaugh to update you on the economics of our Geismar project.
Thanks, Jeff. For my comments on Bio-Synfining economics, I am going to refer to slides posted to our Web site which is www.syntroleum.com. The link is the near the bottom of the homepage entitled Current Industrial Presentation.
Please scroll to slide 10. Here you will see a summary table for the Geismar Plant margins. We show the 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 post 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 subsidy. 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 one and two, we show the average margins since December 2006, which ranges from $0.69 to $1.38 per gallon depending on whether it is calculated on a diesel price parity basis plus subsidies or reflect soy biodiesel pricing. Columns three and four show margins as of November 3, 2009. Current margins range from $0.87 per gallon on a diesel price parity basis to $1.11 per gallon on a soy biodiesel price basis.
Now, please scroll to slide 11. This slide is the daily margin for the Geismar plant dating back to 2006. Margins have returned to historical levels on a diesel price parity basis plus subsidies, the blue line. On a soy biodiesel pricing basis, the red line, margins continue to remain quite healthy.
On slide 12, we show the 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 from July 1 through November 3, while our Synfining margins have rebounded despite depressed diesel margins.
Finally, slide 13 shows that biodiesel continues to be priced at a premium to the underlying low sulfur diesel price and that higher quality biodiesels with superior cold 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 cold flow properties; nearly 10% increased energy content; and compatibility with existing infrastructure.
I would now like to discuss the U.S. Department of Energy’s Loan Guarantee program. The Renewable Fuels Association, wrote Secretary Chu to express its concerns about the direction of the DOE’s Loan Guarantee Program, citing systemic issues with its evaluation of emerging biofuels technologies. In that letter, which is available for you to review on its website, the RFA suggested that the DOE is applying standards for mature renewable technologies such as wind and solar to advanced biofuels technologies that are not realistic for projects tied to the commodity driven fuels industry.
Specifically, the RFA suggested that the DOE is requiring life of loan product off-take agreements, however such off-take agreements are inconsistent with the practice in the U.S. transportation fuels industry. The DOE is requiring higher levels of equity from emerging technology companies than for projects with mature technology; the DOE is requiring a BB credit rating, which according to Standard & Poor’s is higher than 63% of all U.S. corporate first time issuers since 2007; and the DOE is requiring all project applicants to reapply, rather than giving applicants the ability to address the DOE’s concerns, which requires among other additional costs, a completely new 75 to $125,000 application fee and significantly delays the projects in question.
With respect to Dynamic Fuels’ application, it has received notice from the DOE that its application was rejected on grounds substantially similar to those cited above by the RFA. The DOE listed the following additional areas of concern; firm supply and off-take agreements which effectively fix the project’s margin, contracts which are not typical of either the feedstock supply or transportation fuels markets; and a fixed price EPC contract, which is not realistic for emerging technology. In its application, Dynamic Fuels indicated that its construction strategy would be substantially similar to that being employed at its Geismar project, which is currently on budget and 76% complete.
While the DOE has invited Dynamic Fuels to reapply, Dynamic Fuels has not determined at this time whether it intends to do so. Dynamic Fuels is evaluating other avenues to finance a second plant and its near term focus is to complete the Geismar plant and bring it to full commercial operation in 2010.
Now I will turn the call over to Karen.
Thanks, Ron. We announced our results for the third quarter ended September 30, 2009, reporting a cash balance of 15.2 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 16.0 million in initial payments associated with technology agreements and collection of 4.0 million from continued revenues for engineering services offset by the investment of 6.0 million to Dynamic Fuels made on April 1.
We generated $11.8 million in cash flow from our operating activities for the nine months ended September 30, 2009 compared to using $1.7 million in cash flow for the same period last year. Our current receivable balance is 6.6 million from executed contracts. We received 3.0 million of the receivable balance in October. For the nine months ended September 30, 2009, the company reported net income of $7.1 million, or $0.10 per share, compared to a net loss of 3.3 million, or $0.05 per share, for the same period last year.
Total revenue was $26.3 million compared to 3.9 million and operating expenses for the first nine months of 2009 were 12.5 million compared to 9.5 million for the same period last year. Included in operating expense is 3.6 million in non-cash performance based stock compensation compared to 1.0 million for the same period last year. At September 30, 2009, we recorded a loss of 4.0 million from our investment in Dynamic Fuels. Expenses incurred include, site rent, project development costs, equipment evaluation, labor expenditures for our operations staff and insurance during construction.
Operating expenditures incurred for the entity totaled approximately 4.2 million, of which Syntroleum records 50%. The remaining 3.8 million is the amount associated with marking the interest rate swap to market. The swap fixes the interest rate on 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 up of commercial operations.
We continue to execute on our goals for 2009 and look forward to the completion of a successful year during hard economic times. The generation of significant cash flows from operating activities has allowed the company to satisfy our financial investment in Dynamic. 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.
Thank you for your attendance today. We will now open up the call for questions.
Thanks you. We will now begin the question-and-answer session. (Operator instructions). This time our question comes from Jerry Rumples [ph] who is a private investor.
I was wondering on that plant that you guys, the demonstration plant you are building in China and the agreement that you had with them, if they do get to build a CTL plant, would you imagine that the size or skill of the job would be bigger as far as how much oil would be produced from the core plants because it would be easier to get mass amounts [ph] to the plant to what we would have like the animal fat, one that is used at Geismar? And also what sort of royalty agreement would you have? Let's say for the plant in china, just to look at the size of your Geismar one, it is 75 million gallons a year, what kind of royalties could we expect to the bottom line to our corporation (inaudible)?
This is Gary Roth. A typical cold liquid plant in commercial scale is in the 17,000 barrel a day range. So if things go well, we would expect Sinopec to build multiples of the typical size which is again 17,000 barrels a day. And the royalties are at markets, so they would be determined at the time of contract, that is the current agreement with Sinopec.
And you say 17 barrels, 17, 000 barrels of what, a 35 or 55 gallon barrel or gallons at a barrel is a typical CTL plant?
42 gallons per barrel.
Okay. So that would be about 700,000 gallons a day? Okay. Thank you. Good job.
Thank you. Our next question comes from Chuck Pillar who is a private investor.
Good day. I have been following this for quite a while and really have to comment on the advancements that have been made. Two questions. One very quick. Curious about advanced orders, and the second, when I take a look at Geismar facility and if we take a look at Mother Nature, I'm kind of curious what disaster preparation or plans are in place so we don't have Mother Nature knocking us off-line?
I'm not sure what you mean by advanced orders, if you could explain it to us.
Orders for production, advanced orders…
So if we sold our production in Geismar in advance, is that what you're asking?
Yes, any interest out there.
I'll let Jeff answer both those questions.
Chuck, thanks for the questions. We are negotiating the offtake from the plant right now. We have very active discussions underway. We have presold at this point as we keep our options open but as we approach the completion of the plant start up, we would be locking in those contracts. And as far as Mother Nature goes, it has been perhaps the wettest October on record in Southern Louisiana this year, so there has been a lot of rainfall.
But in terms of disaster preparation, one good thing about the Geismar area is it is relatively high and during the course of the hurricanes that have been previously been through there, it has not tended to cause a lot of destruction. Of course, the plant is designed for very high winds and rains, and in the event that a storm comes, we will take the appropriate precautions such as either shutting it down and sending the staff home, or whatever is required at the time.
I appreciate it. Thank you
Thank you. Our next question comes from Robert Kusiva [ph] from Black Sea Partners [ph]. Please go ahead.
Robert Kusiva – Black Sea Partners
Yes. Congratulations on the progress gentlemen. My question is, I have several actually. You commented that the plant would be starting up with full capacity in the second quarter. When will that be that you will have some product to sell even though the plant is at full capacity?
Robert, this is Jeff Bigger. The plant after the construction is completed, it will be turned over to the operations group that will be commissioning it. And once all the systems are commissioned, we will begin bringing the plant right up. So we will have initial production either late in the first quarter or early in the second quarter, but we target that we will have full rate production by the end of the second quarter. So as soon as we complete our start up sequence and begin processing through the plant, we will begin selling that fuel.
Robert Kusiva – Black Sea Partners
Okay. Second question, has all of the revenue been generated from the sale of a plant to the Chinese? And the only obstacle yet – well, not obstacle, challenge – or not challenge, but part of the process is to collect the money, or is there still some revenue to be generated from the plant once it gets completed? Have you taken all the revenue from that facility on the books already?
This is Karen Gallagher. When I reported that we had 6 million in accounts receivable at 9/30, we received 3 million of that in October and then we have the last $3 million that we will receive once the equipment gets into China.
Robert Kusiva – Black Sea Partners
Okay. But the revenue -- I mean the sale was already recorded? Correct? It is just the receivable to be diminished?
There is only 3 million left to record as revenue. The rest of it has been recorded, that is correct.
Robert Kusiva – Black Sea Partners
Okay. And last question, with many plants, I am familiar with the process plants, with capacity is one number but expected reliability is another number. Are there challenges to be overcome so for as raw product coming into the facility being late or just the maintenance requirement of plants such as this diminishing to a certain extent the capacity of the plant on an annual basis?
Robert, this is Jeff Bigger. We took that into account in our planning in that we have incoming feed tanks that allow us to absorb some let's say interruptions or variabilities in the feed coming into the plant; of course, those last for a long time, then it will exceed our feedstock storage capacity. On the other hand, we have also dialed in our expectations for regular plant maintenance, taking the plant down for a certain number of days per year, as well as our regular turnarounds which would be scheduled on an annual or multi-annual basis. So those expectations are already built into our projections.
Robert Kusiva – Black Sea Partners
Okay, thank you very much for your responses. I appreciate it.
Thank you. Our next question comes from Richard Kaulback, a private investor.
Yes. I would like to know if there's been any discussions with the air force about producing jet fuel and will we ever see a GTL barge?
This is Gary Roth. There is always discussions about jet fuel and that is probably all I should say about it. GTL barge, we continue to have the design on the books and we are open to various clienteles and we still get calls on it. But it is not something we see in the immediate future.
Thank you. (Operator instructions). Our next question comes from Steve Sparrow who is listed as a private investor.
Yes. My question is about the inputs per plant per year like the number of pounds of chicken fat per year and how much natural gas per year is used in your figures?
Well, Steve this is Jeff Bigger. The Geismar facility is designed to consume a little bit over 550,000,000 pounds per year of feedstock, be it chicken fat or tallow or cooking grease, a combination of those materials to produce the 75,000,000 gallons a year of product. And as far as the natural gas consumption, that is really a proprietary number I would rather not discuss.
All right. That's the end of my question. Thank you.
Thank you. Our next question comes from Eric Burzwai from Eric Burzwai GDS. Please go ahead.
Eric Burzwai – Eric Burzwai GDS
Two questions. One is, the first one, can you tell us a little bit about how Fletcher – the Fletcher lawsuit was straightened out?
Okay. This is Gary Roth. It was straightened out just by good businessmen and negotiating what we both thought was equitable settlements. And we think Fletcher for their efforts as well as Syntroleum team.
Eric Burzwai – Eric Burzwai GDS
Were you happy with the results?
Nobody is ever happy with a settlement.
Eric Burzwai – Eric Burzwai GDS
Sounds good. Second question is, ConocoPhillips and Tyson had a deal for another 175,000,000 gallons of raw feedstock and that kind of went under. Will Syntroleum be able to get a hold of that 175,000,000 gallons?
This is Jeff Bigger. Tyson has committed to feedstock to the Geismar facility and any other plants that we should build together. In terms of their relationship with Conoco, really have to ask Tyson to address that question directly.
Eric Burzwai – Eric Burzwai GDS
(Operator instructions). At this time, I show no further questions. I will now hand the call back to Ms. Karen Gallagher.
Thank you for joining us today’s on today's conference call. If you have any additional questions, please call Ron Stinebaugh at 918-764-3406. We appreciate your interest in Syntroleum, and thank you.
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