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Syntroleum Corporation (NASDAQ:SYNM)

Q2 2011 Earnings Call

August 9, 2011 11:00 am ET

Executives

Karen L. Gallagher – Senior Vice President and Principal Financial Officer

Edward Gary Roth – President and Chief Executive Officer

Jeffery M. Bigger – Senior Vice President, Business Development

Ronald E. Stinebaugh – Senior Vice President, Finance and Acquisitions

Analysts

Anthony Chen – Alc Capital Management, LLC

David Ciruli – JMP Securities

Michael Prouting – 10K Capital

Operator

Good morning, and welcome to the Syntroleum Second Quarter 2011 Conference Call. All participants will be in listen-only mode. (Operator Instructions) After today’s presentation there will be an opportunity to ask questions. (Operator Instructions) Please note, this event is being recorded.

I’d now like to turn the conference over to Karen Gallagher. Please go ahead.

Karen L. Gallagher

Good morning, 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 Karen Gallagher, Senior Vice President and Principal Financial Officer, who will report the financial results for the six months ended June 30, 2011.

Before we begin our remarks, 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 believe 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.

Now, I’ll turn the call over to Gary Roth for opening remarks.

Edward Gary Roth

Thank you, Karen. I am pleased to report that we achieved record production of 5.4 million gallons of renewable products at our Geismar Plant during the month of July. July figures imply 65 million gallons annual production. The Geismar Plant was designed to produce 75 million gallons per year. We have now produced over 19.3 million gallons of products through the end of July.

We continue to expand, stay improved in both reliability and production. In May, June and July our production was 3.1 million, 3.6 million, and 5.4 million gallons respectively. Since we began plant start up and commissioning last October, we have focused our efforts on reaching design capacity. During commissioning, we modified plant equipment to improve reliability, which is reflected in our 87% uptime July numbers.

Let us review the performance for the last 10 months. We will focus on three items, feedstock cost, revenues and operating expense.

For the prior 10 months, our average feedstock cost have been $3.68 a gallon and our blended revenue was $4.98 per gallon resulting in a gross margin of $1.30. This compares to weighted average soy based bio diesel gross margin of $0.76 per gallon for the same time period.

Our average operating expense was $2.96 per gallon, which equates to the net loss of $1.66 per gallon through June. The $2.96 per gallon occurred during our commissioning and start-up period when we averaged 25% of design and capacity. Based on preliminary cost in July, we believe our original operating expense of $0.50 to $0.55 per gallon is attainable. This is especially true given our budget originally included $0.19 per gallon of hydrogen cost. Due to improved plant performance and favorable natural gas costs, we achieved $0.14 per gallon hydrogen cost in July.

In summary, we’ve averaged $1.30 per gallon gross margin and with the project operating expense of $0.55 per gallon; dynamic fuels would have achieved a cash margin of $0.75 per gallon or $56 million a year at design capacity. There remains considerable revenue upside.

Our diesel price doing commissioning and start-up averaged $5.55 per gallon. During the same period the average full value of renewable diesel, which is calculated the sum of ULSD diesel price plus RIN plus a dollar subsidy was $6.01 per gallon. As we continue to improve plant reliability, we would expect to close the differential between our current sales price and full value of renewable diesel.

During the 10 months of operation, our non-diesel price component of production averaged $1.68 a gallon versus a petroleum equivalent of $2.03. This discount again was primarily due to commissioning volatilities.

Finally, we expect to receive 1.5 advanced bio-fuel or D5 RINs per gallon for our renewable naphtha. Advanced bio-fuel RINs has averaged $0.61 per RIN for the first six months of this year and currently trade at $0.84 per gallon. We have applied the EPA for advanced bio-fuel naphtha RINs and expect approval in the fourth quarter. If we had received full market value for our products and naphtha RINs during the prior 10 months, our average revenue per gallon would have been $5.48 versus $4.98 or an improvement of $0.50.

The fundamentals of the renewable diesel market remain strong. Renewable Fuel Standard or RFS was created by Congress in 2007 to stimulate the adoption of renewable fuels in the United States. In 2010, EPA adopted the second generation of RFS know as RFS2, which was implemented in July 2010. Since its introduction, RFS2 remains the primary tool to create bio-fuels demand in the U.S.

Last year EPA set domestic base diesel volumes at 800 million gallons for 2011, and on June 28 of this year EPA formally recommended the RFS2 mandate for biomass based diesel at 1 billion gallons for 2012 and 1.3 billion gallons for 2013. EPA typically sets it final rule making in November.

There are two products that can satisfy the biomass based diesel RFS2 mandate, biodiesel and renewable diesel. Our renewable diesel enjoys significant competitive advantages. First it is a true drop in fuel that is certified to ASTM D-975 standard, the same standard as petroleum diesel. As such there are no infrastructure requirements to blend renewable diesel and therefore it can be shift on any pipeline. Further the cold flow properties of our renewable diesel are not feedstock dependant. We can make renewable diesel with cold flow properties ranging from semi grade diesel to audit grade diesel and jet fuel.

Lastly, our renewable diesel has virtually the same energy content as petroleum diesel as such renewable diesel receives 1.7 RINs per gallon compared to 1.5 RINs per gallon of bio diesel. Because of renewable diesel superior properties we have realized more revenue per gallon compared to soy based biodiesel.

For the prior 10 months, our diesel revenue per gallon averaged 5.55 compared to 5.22 for soy based biodiesel. Dynamic Fuels currently has contractual arrangements for 100% of the plant renewable diesel production. Such contractual arrangements have provided Dynamic Fuels assurance for reliable off-take during the start-up and commissioning phase at the Geismar Plant. We sell our non-diesel products on a spot basis.

RFS2 has been implemented by creating a traded compliance commodity known as a renewable identification number or RIN. Each obligated party match purchased sufficient RINs to satisfy its annual biomass-based diesel quota. RINs are meant to be a market pricing mechanism to stimulate production to meet RFS2 demands.

Since the beginning of the year RIN prices have increased from $0.74 to $1.40 currently. For the second quarter RINs averaged $1.32. U.S. bio diesel production was $297 million gallons for the first five months of 2011 compared to $311 million gallons produced for all of 2010. We believe that demand for RINs and correspondingly biomass-based diesel exceeds supply and therefore RIN prices must remain at current levels or increase further in order to stimulate the production required to meet RFS2 mandates.

Renewable diesel price consist of two components, the first is the underlying petroleum diesel price, and the second is a regulatory premium that enables producers to compete with petroleum diesel. This regulatory premium currently consist of the dollar subsidy and new RIN values. For renewable diesel, RIN values equate to 1.7 times the RIN price. Given the U.S. budget debate, we are frequently asked the status of the dollar subsidy. Should the dollar not be renewed, we believe the regulatory premium required would remain the same and therefore RIN values would increase.

On June 30, Dynamic Fuels made aviation history on its supplied fuel to KLM Royal Dutch Airlines to fly the first commercial flight from Amsterdam to Paris using renewable jet fuel. Our fuel was part of extensive jet fuel testing and certification were conducted by the Air force research laboratory, Rolls-Royce Group and Cessna Aircraft Company. In addition to meeting rigorous technical specification, Dynamic Fuels’ jet fuel met KLM sustainability requirements including reduction in CO2 emissions and minimum negative impact on biodiversity and food supply.

In July, I had the pleasure of seeing our former Catoosa Demonstration Facility producing in China, the Sinopec/Syntroleum Demonstration Facility also know SDF is located in Zhenhai, China. The SDF is an 80 barrel day facility utilizing the Syntroleum FT technology for the conversion of syngas produced from coal, asphalt, and petroleum coke into synthetic petrochemical feedstocks.

Our agreement state Sinopec must run the plant for six months now continuously. Sinopec is now on the long-term testing phase. Sinopec has stated based on the results of this run, they intend to build a commercial scale cold liquids plant. The production from a commercial scale CTL plant will provide validation of our technology from the fifth largest company in the world according to the Fortune Global 500.

With the progress of Sinopec and discoveries of shale gas in U.S. we received many technical inquires on our potential domestic GTL plant. It is reported there is over 1,600 trillion cubic feet of gas reserves in North America. To put that in perspective 1 TCF of gas is approximately 100 million barrels of GTL fuel. The economics of GTL are compelling. With natural gas cost of $4 to $5 per 1000 cubic feet and a conversion ratio of 10 units of natural gas per barrel of product, we see an equivalent refining feedstock cost of $40 to $50 per barrel. This compares favorably to long run expected petroleum product prices. Because we are an independent FT technology provider, we see numerous GTL opportunities and are in a position to revaluate and high-grade those project on which we devote our resources. We are in active discussion with gas suppliers, off-takers, project developers and project financiers.

One final note on technology, for the first six months of 2011, we were granted two patents by the U.S. Patent Office and given notice of allowance on the third patent. We were granted one patent in China and one in Australia as well as we filed three patent applications in the first half of 2011.

I will now turn the call over to Karen.

Karen L. Gallagher

Thank you, Gary. For the first six months ended June 30, 2011, the company reported an operating loss of $1.8 million resulting from total revenues of $2 million and operating expenses of $3.8 million. Our revenues relate to engineering services provided to Dynamic Fuels and other customers for process design and research support. We also recorded revenues for royalties from the Dynamic Fuels commercial production, which began in November.

The total net loss for the six-months ended June 30, 2011 was $9.4 million, $6.9 million of this loss related to Dynamic Fuels operations for their six-months ended March 31, 2011. The loss reflected in our income statement represents the loss incurred for Dynamic from October 1, 2010 to March 31, 2011.

Our 10-Q filing includes Dynamic financials for their six-months ended March 31, 2011 in the foot notes to our financial statements. We do not consolidate Dynamic Fuels, instead we report using the equity method of accounting. Income on losses under the equity method are reported below operating income as income or loss in equity of Dynamic Fuels.

For generally accepted accounting principles, we are not able to report gross revenues associated from Dynamic Fuels because the entity is not consolidated. We will only report our share as a total net income or net loss.

As reported in our 10-Q, Dynamic Fuels had revenues of $28.1 million and operating expenses of $41.8 million resulting in a net loss of $13.7 million for the six-months ended March 31, of which we report 50% in our central and financials. During this time period, 5.7 million gallons of renewable fuels were sold and 6.5 million gallons were produced.

Our limited production levels during the start-up and commissioning period resulted in losses at Dynamic Fuels. As we have discussed with you throughout this call, we are achieving better reliability on our equipment and reducing costs associated with operating activity.

In July, we expect revenues of $28.1 million on sales of 5.3 million gallon for an average sales price of $5.26 per gallon. Therefore, we anticipate Dynamic Fuels to significantly improve its profitability in their quarter ended September 30, 2011.

On July 6, we raised $23.6 million net of operating expenses from the sale of 15.9 million shares of common stock. The use of proceeds is to fund working capital requirements of Dynamic Fuels and project development capital for potential GTL plant. At the time of the offering, we expected that approximately $7 million to $10 million would be required for additional working capital for Dynamic Fuels and the balance would be used for general corporate purposes and if prudent project development costs for a gas to liquids plant. Our current cash balance is approximately $29.3 million.

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

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from John Smith, Private Investor.

Unidentified Analyst

If I heard you right, you said that you expect Sinopec to build a commercial facility for your GTL ventures, can you please repeat, does Syntroleum enjoy any royalties from that venture?

Edward Gary Roth

Yes, we did say that. And if certain improvements in technology are incorporated into the plant, we have a small royalty interest in the plant.

Operator

Your next question comes from Joe Stanian, Private Investor.

Unidentified Analyst

Good morning, gentlemen. My question is the improved compressor runtime is pretty encouraging, but the 1,600 hour runtime you’ve listed is approximately 67 days. How many does the compressor normally run during production day and has the compressor been down for repairs or any maintenance during the past 90 day?

Edward Gary Roth

The compressor runs 24 hours a day, that’s roughly 8,000 hours a year. As of today, we are right at 1,900 hours. We would expect to achieve 4,000 hours as a commercial runtime and we have had no downtime caused by the compressor itself in the last 90 days.

Operator

Your next question comes from Tony Chen at Alc Capital.

Anthony Chen – Alc Capital Management, LLC

Good morning, Gary, Karen.

Edward Gary Roth

Good morning.

Anthony Chen – Alc Capital Management, LLC

Thanks for your detailed operating update this morning and congratulations on your July production, it sounds pretty good. Just some housekeeping questions here, first, in your July production there, are you still converting about 7.4 pounds of that into a gallon of renewable fuel?

Edward Gary Roth

We would estimate 7.6.

Operator

Your next question comes from [Azel Burn], Private Investor.

Unidentified Analyst

Hi, guys. Congratulations on getting that enormous plant up and running. That was a terrific a bit of technological expertise there. Congratulations.

Edward Gary Roth

Thank you very much.

Unidentified Analyst

I had read in an article that Sky Energy was paying up to three times market prices for biofuels and the military is paying up to $35 per gallon for biofuels. If these two articles are speaking about your fuel, can you tell us, if you’re collecting a premium for your product and how much it is? Also winter is coming on and you have said, arctic grade diesel had your best margins, do you expect to be making more arctic grade diesel or just regular diesel or jet fuel? Thank you.

Edward Gary Roth

Okay. Number of questions, on Sky Energy, we do enjoy our premium to diesel and those premiums are linked to volume. So we typically need a large volume order and the Sky Energy sale was coupled with other orders.

Military we have sold at premium prices for research volumes. We have not sold for premium prices for commercial volumes. The third question is related to arctic diesel, arctic diesel, the premiums are function of what we get paid in an arctic diesel environment and the yield losses associated with the producing of more naphtha. So we’re investigating those markets especially to the north of us, but we have seen no consistent premium with arctic diesel.

Operator

The next question comes from Thomas Victor, Private Investor.

Unidentified Analyst

Thank you for taking my call and the opportunity to speak with both of you. Has someone who has bought Syntroleum for the long-term, I have been burned by the packed illusion, and the share pricing coupled with the right offering. And I feel that many of our shareholders felt that the price per share would have organically moved upward on better PR.

My questions to you are, is there any assurance for long-term investors, the dilution will be kept at a minimum and that become common please. And also how can you improve investor relations confidence and company transparency, what can be done to provide greater market ability of Syntroleum’s technology and the Dynamic Fuel’s venture.

Lastly, is there a date set for the grand opening of Dynamic Fuels? Thank you for your time and your consideration.

Edward Gary Roth

Okay. So currently we have $29.6 million cash on the balance sheet. As of today, we have no plans for further dilution, but of course we can’t guarantee that based on market conditions. As for better PR, you’ve noticed during this period we’ve had Sky Energy press releases and we’re beginning to develop marketing campaign as the unit reaches commercial and steady state productions, so its difficult to get long-term placements of contracts when you are in commissioning and start up phase, so we believe there will be more opportunities in the future as we will level up production.

As far as the grand opening, we expect to have a grand opening some time in the near future, we’ve been through the commissioning and startup phase, which unfortunately took us longer than we anticipated, but the grand opening is currently being planned.

Operator

The next question comes from Jack Dean, Private Investor.

Unidentified Analyst

Good morning, Gary and Karen. I was wondering if you have had enough production to where you’ve been able to trigger the Louisiana State biodiesel mandate and if you could maybe comment on where you think the biodiesel in Canada market would be with their mandate starting in 2012. And just one other thing, are you pipeline certified now for all of the products that you are producing? Thank you.

Edward Gary Roth

Okay. So we have three questions, the Louisiana mandate, Jeff I will hand that one to you, please. So Jeff’s not there. We have not...

Operator

One moment.

Edward Gary Roth

Got him on.

Operator

Just a moment. Okay, go ahead.

Jeffery M. Bigger

Sorry, I’m down in the plant. So the Louisiana mandate we have sufficient volume to begin to trigger that mandate. However the State of Louisiana is already meeting the mandated volumes with the amount of ethanol is being blended in the State. So at this point, we don’t think, we are going to cause a major trigger. Thank you.

Edward Gary Roth

The second one is on the Canadian markets. We’ve investigated the Canadian markets pretty diligently now. We have the logistics train and logistics cost laid out and we are working on the customer base in Canada especially for winter production. And as associated with the pipeline certification, I will turn that over to Ron.

Ronald E. Stinebaugh

Yes. This is Ron Stinebaugh. At the beginning of this year the colonial pipeline issued a tariff for renewable diesel on the line, as most people in the industry are aware. Colonial is the bellwether pipeline system. And so renewable diesel is available for shipment on Colonial, and other pipelines typically follow what Colonial does.

Operator

The next question comes from Tom Davis, Private Investor.

Unidentified Analyst

Good morning. One question, when Chesapeake went with Sundrop, they cited start up cost being a major reason for their decision. However, when it comes to production, do you think that Syntroleum Technology is still more efficient that the other technologies?

Edward Gary Roth

The Chesapeake with Sundrop was a function of syngas production cost, not Fischer-Tropsch production cost. So where we can comment is that syngas has been around for a number of years, number of decades in the U.S. And conventional syngas production is the largest single cost in a gas to liquids plant. So the Chesapeake work was to reduce syngas production cost. I don’t know how long that’s going to take and we’re unable to comment on.

Operator

Next question comes from Gary Rempel, Private Investor.

Unidentified Analyst

Yeah, I’ve been investing since 1984 and I just have to say, I’ve never been more disappointed in a management of a corporation in my life. A cigar store Indian gives out more information than you folks do to the shareholders. When you installed a plant in Sinopec years ago, you said, it was going to be done before – forecast will be done before the end of the year. At the end of March the following years, you finally reported that the deal wasn’t in fact consummated, in December of the previous year. I do not know what is your motivation to hold back corporate news and we in fact are part owners and give it a three to six months lag on stop, I just don’t know what the paradigm is that you think this is going to be a successful corporate model going forward?

Edward Gary Roth

Well, on the Sinopec, we reported as we signed agreements and those agreements were in fact reported on 10-Qs for you to read. We’ve reported the start up of the Sinopec plant. Sinopec was unfortunately delayed but that’s not within our control, but the plant is up and running. As reported the Dynamic Fuels we now have 10 months of operations under our belt. We reported operating expense, revenue, production, win values. If you have other things that you’d like us to report, we would ask that you send an email to Ron Stinebaugh for those details and we will be happy to report them to you. And we thank you for your concern.

Operator

Our next question comes from Charles Nelson, Private Investor.

Unidentified Analyst

Good morning, gentlemen. Thank you so much for working as hard as you have on getting this plant (inaudible) I think it includes some footings, you’re doing. I have one question, how many gallons of jet fuel you sold to European market and do you plan on putting the piece of equipment at the Geismar Plant to produce jet fuel rather than shipping at some place else and have them turned into jet fuels. Thank you.

Edward Gary Roth

Thank you for you question Charles. To the European market we shipped 15,667 gallons. We are working to develop the jet fuel market both domestically and internationally, and I think the goal for us would be if we can develop sufficient clients from sufficient off takes then we would be prepared to install the capital at the plant. But we need to have that capital installation backed by off take agreements and off take contracts.

Operator

The next question comes from [John Art], Kaufmann Fund.

Unidentified Analyst

Yes, thank you. Can you talk about what your plans in terms of making progress in both the utilization of the existing plant and de-bottlenecking. How far could you think you can take production in a realistic timeframe?

Edward Gary Roth

Right now we continue to work on improving the existing plan. As we announced we demonstrated about 120% of design capacity through the reactors, so that’s about 6,000 barrels a day. Where we are today as we are in the deengineering of the de-bottlenecking operations. Those areas have identified pre-treatment of feedstock is an area we would have to improve upon or increase capacity. There is one or two cooling elements during the summer, and one of the things we’re finding out this summer is where we have cooling limitations in the plant. We would expect no major pieces of equipment meaning reactors or compressors or pumps to have to be purchased to de-bottleneck the plant. We would anticipate that that engineering would be done this year or first quarter of next year and following implementation sometimes in 2012 of course consistent with approval and acceptance by our partner Tyson.

Operator

The next question comes from Julie Kim, Private Investor.

Unidentified Analyst

Thank you. Since you diluted the stock, what are you doing with the money and will you doing the GTL, how much are you going to need to do it? And if there is a dilution in the next stock after hours, will be open to the investors this time?

Edward Gary Roth

The first question is what are we doing with the money, we’ve announced that we think we need $7 million to $10 million in working capital at Dynamic Fuels, which we (inaudible). The second question (inaudible) as we mentioned in GTL, we get to see a lot of project as an independent GTL provider, some of those are from natural gas producers, some of those are from natural gas transporters and some of them are from potential off-takers.

So we are reviewing those various projects as a technology provider, which gives us an opportunity to view those projects, we think that will go forward. Things that can be permitted, things that have indexed off-take agreement, where off-take of diesel jet fuelers are index to natural gas. So that’s the phase we’re in right now of project developments. We’re also reviewing ourselves is certain state rights, so what are the tax obligations, what are the best states, in which one we’d build a plant.

So we have very sufficient project development capital to work on a GTL, given that we have a prudent set of economics in the business. How much capital that would take, it would depend on the size of the project and what our interest would be in the project if any versus just being a technology provider and license owner to the plant.

Operator

The next question comes from David Ciruli at JMP Securities.

David Ciruli – JMP Securities

Hey, good morning, guys. Just a follow-up a little bit on Jonathan’s question from earlier. So, you guys have in July, I think you said you were at 5.4 million barrels, which gets us to about 65 million gallons per year. I know you had said you’re targeting 75 million, is it de-bottlenecking, it’s going to get you from 65 million to 75 million or is that to get to annual production rates that are higher than that. And then kind of following up on that, is 5.4 million is per month, is that kind of where you think you’re at for a steady state here until the beginning of next year. Can you just kind of expand a little bit on that? Thanks.

Edward Gary Roth

Thank you, the nameplate capacity of the plant is 75 million gallons a year, so we ran at 87% of design in July. We continue to expect to improve that to 100% reliability as we continue to finish working out the bugs in the plant. It’s still a relatively new facility. The de-bottlenecking we would expect that engineering to occur and we would expect somewhere in the 10% to 20% expansion based on de-bottlenecking. One of the things we need to do is run this summer, as we are doing where we look at the actual temperatures, ambient air temperatures, cooling water temperatures, things of that nature.

So we know where those chinks are in the system that allows us to de-bottleneck. The reactors we’ve already shown improvement performance at about 20% above design. So we continue to drive to better production and targets where I said 87% last month, we hope to do better this month as we continue to improve equipment reliability and then work on de-bottlenecking somewhere between a 10% and 20% capacity increase to be expected with the de-bottlenecking of the plant.

Operator

The next question comes from Michael Prouting at 10K Capital.

Michael Prouting – 10K Capital

Good morning guys, congratulations on your operational achievements and thanks for taking my question. I had a couple of questions, I’m not sure if I should get them in all upfront or if I can ask a follow-up. How would you prefer me to handle that?

Edward Gary Roth

Whatsoever convenient for you sir, Michael.

Michael Prouting – 10K Capital

I’m just concerned given the number of questioners on the call that there a couple of things I wanted to cover. So firstly, on operational side, I don’t recall if you clarify this or not, but have you received the certification or is Dynamic Fuels received the certification, it requires to sell jet fuel into the commercial market at this plant.

Edward Gary Roth

We don’t need certification ASTM has certified the fuel and so it’s a public certification, you meet the specification you can sell.

Operator

Our next question comes from John Anderson, Private Investor.

Unidentified Analyst

Yeah, I want to thank you for all your efforts and for this detailed update. I did have kind of a follow-up on the very first question with Sinopec, you indicated that there would be some royalties from the Demo plant given certain conditions, but I was more interested in what the royalties would be on a full production plant, if Sinopec decided to build it, and do you envision the business model being the royalties you’ll get from that plant or are you looking to sell engineering technical service in the assistance of building that plant?

Edward Gary Roth

First of all, if there is a misunderstanding we get no royalties from the running of the [STS]. What we do get is all the data, and that’s a significant amount of data. There is a small royalty component associated with plants in China, but you would not expect that to be a major revenue generator for Sinopec, for us from Sinopec and primarily we’ll be selling our engineering services into the plant as well as catalyst if they would elect to buy it from us.

Unidentified Analyst

Okay. Is that kind of the business model you’re going to use going forward, engineering services or do you kind of think you will be doing more Tyson type ventures?

Edward Gary Roth

The Sinopec was a unique transaction and that they had to pay to move the plant, relocate it to China and they are paying all the operating cost to run the plant and gather the data. In Catoosa, that cost is over $2 million a month, so that’s a fairly expensive operation for them in China. So we think that was a unique model.

In the future we would expect to have Dynamic Fuel type plant, for the development on our Biofuel technology or Bio-Synfining technology. And on the GTL side, since it’s an evolving market, we just need to watch and see, of course these are very large projects and we’re very small company. So it’s just going to depend on what are the best economics whether that economics is purely a licenser engineering model or that model is a participatory model in the project.

Operator

The next question comes from Jim Burgen, Private Investor.

Unidentified Analyst

Good morning, guys. Congratulations on what’s you’ve done in the past. And it sounds like great news for the future. I just hope we can keep the pace and life long enough to get to the future. And with that, I’ve got two questions, short questions, are you moving from some of the higher grade feedstocks down into the lower grade feedstocks, so you can cut the price going forward. And also is Dynamic Fuels now cash flow positive or is it still trying to keep the patient alive a little bit? Thanks.

Edward Gary Roth

Kind of two questions, first on feedstock. We’ve obviously had difficulties in our commissioning start-up, little more troublesome than we thought and because we’ve been up and down, we have not been able to optimize feedstock deliveries. Our partner Tyson has done a fantastic job of keeping us supplied and dealing with the disruptions when we could and could and cannot take feedstocks. So typically we have used beef tallow, some yellow grease, some soya oil to supplement our requirements.

We are now working through the re-certification of a number of yellow grease suppliers, and we are moving away from beef tallow, we’ve moved completely away from technical tallow to inedible beef tallow and we are moving out of beef tallow now to yellow grease because we are more reliable off take with the yellow grease. So the answer to your question is yes, we’re moving in that direction and we’ll report a feedstocks late next quarter compared to this quarter.

The second question was cash flow positive, we’re right on the verge. In July, we got the revenues booked, we need to finish up the accounting on the cost side, we’re doing a very good job this last month in reducing our cost and get to standard operating conditions. We can report hydrogen cost at about $0.14 a gallon. We have budgeted about $0.19, so we are favorable there due to reduced consumption of hydrogen and also due to lower natural gas price than budgeted.

Operator

Our next question comes from (inaudible).

Unidentified Analyst

Good morning, gentlemen. A couple of questions, one is in terms of the exchange listing and the penalties for going below a dollar, is there anything you can tell us in terms of how strategically you’re going to handle that if that’s an issue. And second overall, why did you choose not to come to existing shareholders for this capital raise, just sort of diluting everyone?

Edward Gary Roth

I’ll give that question to Ron to speak to.

Ronald E. Stinebaugh

On the exchange listing, if you recall with Syntroleum we dealt with this issue number of years ago, there are number of ways within the rules of NASDAQ to deal with it, they give you time periods, they give you and there are several tools we should deal with it, obviously, we would hope that our share price remains above the dollars, so that we don’t have to deal with it, but we’re confident we can deal with it, if the need arises.

In terms of the offering, the offering was to institutional investors and that was the method of delivery that we chose. There are offerings where you can make a broader offering to retail investors but given the circumstances of our ways, we chose the institutional route.

Operator

Our next question comes from Mike Walker, Private Investor.

Unidentified Analyst

Yes, good morning gentlemen, how are you all today?

Edward Gary Roth

Good morning.

Unidentified Analyst

Good morning. In regards to stock offering, how was the price determined and did the offering bring in the amount of money to satisfy the needs of the company for your projections?

Edward Gary Roth

Ron, you want to answer that?

Ronald E. Stinebaugh

Yes, offering prices are typically determined by the book that the underwriter builds and we had obviously demand for $25 million of offering and that’s what we did at the pricing that was offered by the institutional investors.

Unidentified Analyst

Institutional funds.

Ronald E. Stinebaugh

We also believe that we have adequate capital as Gary mentioned earlier based on that raise for our current business operations, so.

Unidentified Analyst

Thank you.

Operator

Our next question comes [John Art] at Kaufman Fund. Mr. Art? Our next question comes from David Ciruli at JMP Securities.

David Ciruli – JMP Securities

Hi, just wanted to follow-up, you had talked about a GTL plant, can you talk about as you get capacity up on Geismar, what the opportunity might be for a second facility similar to Geismar? And what potentially timing could be on that. And then, get back to one other think I want to ask on the de-bottlenecking. You had mentioned that you were going to be putting that, hopefully putting those engineering changes in place sometime at the beginning of next year. So do you think that if that occurs that should be done by mid 2012, what’s the timing on that again? Thanks, guys.

Edward Gary Roth

With the timing, we continue engineering this year on a debottlenecking of course we are focusing on getting reliability up, we debottleneck by looking at the engineering this summer. We will engineer it in the first quarter and work with our partner Tyson on whether or not we want to make those investments, we would expect that to occur throughout 2012.

As far as the second Geismar plant, typically expansions are done based on the debottleneck design. And so we would expect expansions to be looked at the same time as we will be looking at the debottlenecking. We think Geismar continues to be an excellent site for a second plant, economics in this business remain fairly strong. So that would be our basic plan.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Karen Gallagher for any closing remarks.

Karen L. Gallagher

Thank you again for your attendance today. If you have any further questions, please feel free to contact Amanda Burns at mburns@syntroleum.com. Thank you.

Operator

This conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.

Edward Gary Roth

Thank you, everyone.

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