Spotlight on Biodiesel

When looking to invest in the alternative energy investment market, it's easy to focus on a company like Archer Daniels, or news that an oil giant like BP is pledging $500 million to universities in the U.S. for alternative fuel research.

After all, these are the bigger names with a longer, proven track record. Specifically, ethanol has become a focal point in this area and companies like Pacific Ethanol (PEIX), VeraSun Energy (VSE) and Aventine Renewable (AVR) have found themselves in the spotlight. But if you look a little closer, there is a category which should receive more investor attention for the long-term - biodiesel.

If you watched the State of the Union address, you might have noticed President Bush mention that we should be exploring ethanol as well as "everything from wood chips, to grasses, to agricultural wastes" for fuel production. Now, by no means am I using President Bush as an investment adviser, but I want to focus on the latter.

In the long-term, biodiesel should become a profitable business as it offers domestic independence, recyclable properties, and a lower cost transition from our current system. Biodiesel is a technology which can be used on existing diesel engines (with little to no adjustments) and would be relatively inexpensive to install at existing gas stations.

Soy is the most prevalent feedstock, while other sources such as recycled grease and even algae have gained notoriety. The future of this may lie in algae, as chronicled in this study, which outlines how we could effectively produce enough biodiesel via algae to supply our transportation needs. It also illustrates the capability of U.S. to have complete independence in this business. Alas, in the end, it won't come to down to just one solution but rather the most efficient combination of products to supply our energy needs as well as decrease environmental impact.

Finally, let's look at some companies that will offer a suitable entrance into this market. One company that has received some attention as of late is Nova Biosource Fuels (NVBF.OB), a company which synthesizes and distributes renewable fuels. They have the capability to work with 25 different feedstocks, from vegetable oil to recycled grease. Recently, they have landed a large financing deal to fund the installation of new production plants. In regards to their financials, they were founded Dec. 1st, 2005, so there is little to compare current performance to. They aren't financially strong and incurred a loss of .38 cents a share in the last year. The stock trades in low volume (avg. 54,000 shares a day for the last 100 days), currently sits at $3.75 and could be an attractive growth story over the next year, as their increased capacity helps them get into the black.

Another company on the biofuels radar is NewGen Technologies (NWGN.OB). They are a small company focused on feedstock and biodiesel production, with a subsidiary, ReFuel America, which purchases traditional petroleum and blends it into an enhanced biodiesel mixture. Financial information is hard to come by, and the most recent statement I could find was from March 2006. In January, they acquired Appalachian Oil Company, a company with operations in spread through the South and the ability to provide ReFuel with more consistent supplies. Despite the recent growth, I would be wary of this company as financial data is hard to come by and their business model leaves them susceptible if oil prices rise (in an industry that should benefit from rising oil prices).

The last company I want to look at is D1 Oils, which is a British biodiesel manufacturer. Run by Lord Oxburgh, former chief of Shell (RDS.A), they are establishing themselves as a presence in the market. They have 110,00 hectares of Jatropha, which is capable of producing 1600 liters of oil per hectare, and also produces useful byproducts. They are expanding through acquisition and are anticipating capacity to be at 320,000 tons by the end of 2007 and 420,000 tons in 08.

Their interim 2006 statements reported a loss of 15.17 pence per share and they have had significant expenses in establishing the previously mentioned 110,000 hectares (the land is located in India, South Africa and SE Asia). The stock currently trades in London, under the ticker DOO for 139p. We've seen that the European markets and governments have been quicker to embrace environmentally friendly products and legislation, which should benefit D1. Currently, they've borne the expenses of being a first mover but expect meaningful production to be in full swing by 08.

If you invest in a biodiesel producer today, one word will sum up your experience -volatility. We've seen it with ethanol and solar producers as the alternative energy stocks get their sea legs. In the next couple years, ethanol might prove to be a better short-term investment than biodiesel. Corn is the current focal point for that industry, but watch for news about switch grass production, where studies have shown that it is much more efficient to produce than corn and has better environmental impact.

Biodiesel will find its way to the forefront though, as it has been projected to find widespread acceptance in 5-10 years. Federal incentives for U.S. biodiesel producers expire in '08 and we should see what sort of backing the companies will get from legislation and adjust our forecasts for full-scale usage accordingly. In the meantime, don't be lured by charts which show stock growth of 2000%, but rather, find a company with a strong business model, incorporating production flexibility in the number of feedstocks they are able to use and strategic growth through smart acquisitions.