A World Awash in Biofuels

|
 |  Includes: AMRS, BP, CDXS, GEVO, KIOR, RDS.A, TVIA, XOM
by: Brett Korsgaard

It is clear to most reasonable observers and analysts of the biofuel industry that the below list of companies are on to something exciting. With $3.1 trillion spent on conventional oils on an annual basis and the twin pressures mounting from both the rise in price of oil on one hand and the desire of most governments to reduce carbon footprints of industry on the other, there can be no argument that there is ample opportunity for this nascent industry. The potential applications from these compounds are almost limitless: from augmenting traditional petroleum derived products like jet fuel and diesel fuel, to specialty chemicals and other consumer product applications. We are well beyond the theoretical stage of applications as these companies have a growing roster of customers across keep adding up: companies such as Whole foods (NASDAQ:WFM), Federal Express (NYSE:FDX) and Exxon Mobil (NYSE:XOM), are purchasing products derived from biofuel makers.

Emerging Players in Biofuels


Company
Industry Niche Market Cap Strategic Investors
Amyris (NASDAQ:AMRS)
Integrated renewable products $1.1B Kleiner Perkins, Total
Codexis (NASDAQ:CDXS)
Biocatalysts for pharmaceuticals & biofuels $315M Raizen (JV Shell/Cosan)
KiOR (NASDAQ:KIOR)
Non-food biomass to renewable fuel $1.5B Khosla Ventures
Gevo (NASDAQ:GEVO)
Renewable chemicals & biofuels $448M Khosla Ventures
Sapphire Energy Development of algae based biofuels Private

Monsanto

Solazyme (SZYM) Production of renewable oil $1.36B Braemar Energy
Synthetic Genomics Genomic driven energy and chemical solutions Private

Exxon Mobile

Click to enlarge

We are still in early innings, however, and there is a high degree of opacity in trying to gauge the true nature and impact of products derived from biofuels. Biofuels are loosely defined as a type of fuel which is in some way derived from biomass. The term covers solid biomass, liquid fuels and various biogases. Advanced (or second generation) biofuels are so called because they derived from some form of sustainable feedstock. There are different approaches coalescing around cellulosic ethanol (Kior), Cane Sugar (Amyris) or algae (Solazyme, Synthetic Genomics, Sapphire Energy,). Expect a host of viable offerings from this constellation of different feedstocks. The feasibility of specific feedstock derived product may wax and wane depending on the fluctuating input costs of these commodities but there is probably room for many current (and future unexpected entrants) in this playing field. The latest data indicates that only 2.7% of the world's transport fuel was derived from biofuels (for full year 2010). Especially for second generation advanced biofuels there is ample room for growth and this piece of the pie will only go up from here. Most analysts agree that for biofuel makers to truly hit the big leagues, they need to produce reliably and at scale. This is indeed the $100 billion question. Who can get to scale fast enough and produce a product that can compete on price with traditional fossil fuels?

There is enough confidence on Wall Street to reward many of these companies with $1 billion and over market caps based on the promise and potential of their respective concepts. As of yet, none on this list have truly proven their concepts at scale and with the attendant revenue expansion that would arrive when theory meets practice you could expect greater investor interest from here.Gevo , Amyris, KiOR, Solazyme and Codexis all were able to greet the public markets with relative confidence and most of these companies are trading near or above offering prices. But the pressure is on to get bigger faster and at least demonstrate a path toward profitability before questions of viability set in. Such companies enjoy the benefit of the doubt for now, and the good news is that there is a ready market for products derived from biofuels. Even better news comes in the form of so many potential beneficiaries lined up to applause the creation of a viable, profitable biofuels industry.

Many Advocates for Emerging Biofuels


Government Reliance on Fossil Fuels, Climate change, Reduction in costs for fed agencies
Consumers Less expensive alternatives, Sustainably sourced fuels
Airlines Create alternatives to high priced fuels, Sustainability
Consumer Products Lower input costs and more sustainably derived products
Specialty Chemicals Lower input costs and more sustainably derived products
Click to enlarge

For those who might expect big oil to take the lead in the development of bioufuels please take a closer look at some of the biggest backers of these concepts - none other than big oil itself. Amyris and Gevo have strategic investments from Total (NYSE:TOT) and Codexis from Royal Dutch Shell (NYSE:RDS.A). Exxon Mobil, currently the world’s most valuable company, has also waded into the industry with a big bet on biofuels. As reported from Bloomberg: “Exxon Mobil plans to steer $600 million to a partnership with Synthetic Genomics, a California company that is experimenting with a type of algae that produces an oily substance good for burning. BP Plc (NYSE:BP) is conducting research into biobutanol, a fuel processed with the same bacteria used for making cordite, an explosive once used in firearms.”

If the above partnerships are not equal in name they are more so in stature than one might think. The oil majors probably want to hedge their bets by making strategic tie-ups and investments on the creative front of the biofuel industry. And this is for good reason because if breakthroughs are made and producers can manufacture a viable product at scale and below the price of traditional fossil fuels, that is a true game changer. A shift in subsidies from producers of fossil fuels to these new frontiers might be a helpful bridge until they can produce at scale. The only party that really loses in such a scenario are the status quo: oil majors, their shareholders and those politically connected to these interests. Of course any prediction of the demise of fossil fuels is unfounded - demand from emerging markets will see to that. Still, it is better for the majors to be participants in the quest for alternatives to fossil fuels lest the train leave the station without them.

We’ve seen these departures in so many industries, and now finally with the price of oil at sustained highs, venture capital and government making billion dollar investments and some of the greatest minds in science gravitating to pure research in this domain, the equation may finally shift in favor of the innovators. Such research might easily get lost in the shuffle of some research lab at the majors. As a capitalist, one has to pose the rhetorical question, “why would the oil industry create a competitor to the world’s most profitable business unless they had to?” But the biofuel makers understand the opportunity, are laser focused and present a compelling challenge and a potentially much more lucrative payout for the best talent in the business. It is clearly not a one way street, however. The biofuel makers need the majors - note the “offtake” agreements that backs the truly heavy investment in infrastructure for refining at scale, distribution and supply chain management. Expect this trend of collaboration and future tie-ups to continue.

There is yet another powerful ally in the quest for the evolution of advanced biofuels as the airlines too are complicit in the plan to bring biofuels to scale. A new standard was approved last month, fuel processed from organic waste or non-food materials, such as algae or wood chips, may comprise as much as 50% of the total fuel burned to power passenger flights, ATA spokesman Steve Lott and a Boeing (NYSE:BA) official told Bloomberg. “The real winners of this type of regulatory breakthrough will be technology companies involved in the production of aviation biofuels. The biotech-biofuels business models of Amyris, Codexis, Gevo Inc. and Solazyme Inc. are all making claims to these types of new markets,” said Harry Boyle, an analyst at Bloomberg New Energy Finance in London.

The airline industry's interest is obvious: rising fuel prices have decimated profits for this industry and expect them to counter by being fully engaged as a participant in furthering the development and adoption of biofuels. Of course climate change advocates are also clamoring for aircraft manufacturers and airlines to find more sustainably sourced fuels.

It would be hard to discount the social, economic and strategic benefit (imagine a U.S. less reliant on foreign oil) that could be attained by meaningful breakthroughs in biofuels. Are we at the threshold of something great and momentous? Only time will tell. But evolution in the creation of advanced biofuels will probably be punctuated by fits and starts. At least at this juncture it is safe to say the movement didn’t launch for lack of trying. The stars have lined up in the form of high energy prices, venture capital investment and the desire of government and industry to assist where it can. Let’s hope this is the watershed moment most of us have been waiting for.

Disclosure: I am long AMRS, CDXS.