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Syntroleum Corp. (NASDAQ:SYNM)

The Wall Street Analyst Forum

August 15, 2007 11:50 am ET

Executives

Jack Holmes - CEO

Presentation

Moderator

Okay, good afternoon ladies and gentlemen, our on-going attempt to adhere to the schedule, I would like to introduce the next company in this afternoon's program. Since I think most of you know the next presentation is followed by a luncheon in which we do not have any companies present, we don't have any sell-side analyst present. It's purely an opportunity, number two, to eat lunch and number one, to meet with the majority, probably two out of three managements, so stick around for that. So it's a good opportunity to meet with them, sort of a breakout session, a one-on-one session. So, that will be taking place in about half an hour.

I am not offended if somebody brings a lunch in here. So, if you wanted to get your lunch you could, but I would just ask you to be as quite as you can with the company presenting for the next 40 minutes here.

Syntroleum Corporation owns the Syntroleum process for converting synthesis gas drive from biomass, coal, natural gas and other carbon-based feedstocks and the bio-refining technology for converting animal fat and vegetable oil feedstocks into synthetic liquid hydro carbons. The company plans to use its technology to develop and participate in synthetic and renewable fuel projects, utilizing the company's technology in a number of global locations.

On June 25, 2007 Syntroleum and Tyson Foods announced a 50-50 venture: Dynamic Fuels LLC, to produce renewable synthetic fuels utilizing Syntroleum's biorefining technology and Tyson supplied feedstock. So, without any further introduction, I would like to introduce Jack Holmes, Chief Executive Officer of the company.

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Jack Holmes

Thank you very much. Here are the forward-looking statements which we have to say before any comment that we make. By the way welcome to anyone who is listening in on the webcast. We are happy to have them on and I am very happy and honored to be here with you today.

First question I want to pose is, why synthetic fuels? We think there are three big reasons. Long-term oil price trends are continuing to rise. Very importantly the U.S. Military is seeking security of supply and have announced, they intend to get about 50% of their fuel needs from domestic alternatives by the year 2016. That represents 1.6 billion gallons per year. Climate change is dramatically affecting public policy, both in favorable political environment and focus on renewables.

Chart four, here is a graphical depiction of the technologies that Syntroleum has developed. We are a leading synthetic fuels company with flexible, proven, Fischer-Tropsch technology, including over 160 patents and patent applications. Our technology involves basically three steps. The first is gasification, wherein hydrocarbon based products are converted into synthesis gas. We can use either natural gas, coal or biomass. Gasification very simply is incomplete combustion. It's combustion of these products with a shortage of oxygen, so you result with carbon monoxide and hydrogen.

Once this synthesis gas has been produced and cleaned up, our Fischer-Tropsch reactor doesn’t know or care where it came from, so we can use all of these feedstocks to make the Fischer-Tropsch product.

In the reactor, in the presence of a cobalt catalyst, the carbon and oxygen atoms separate from each other, two hydrogens connect on to each carbon and we actually build these long straight chained pair of molecule. In addition we make a molecule of water for each molecule which produced fuel. Now the product coming out of this reactor because a number of these are very long chain hydrocarbon molecules is largely a wax, similar of what I have here. It is like a paraffin wax, just like a candle. So it has to be further processed in order to make liquid transportation fuels. And that’s what we do in our third step here, the product upgrading or Synfining step, that’s where we hydro treat, hydro process and summarize these long molecules to make the ultimate product diesel or jet fuel.

We have been involved with U.S. Government for several years developing these products. We started in 2001 with the Department of Energy, where we were awarded the Ultra Cleaning Fuels Project. They helped us build a $60 million plant there, at Tulsa where we have been able to make this product. We delivered over 300,000 gallons of diesel to be tested in U.S. park vehicles in Alaska, and Washington DC buses.

Parallel to that we worked with the Department of Defense. Our engineers actually worked with the Air Force to help set the standards for Fischer-Tropsch synthetic jet fuel. Last fall we delivered 100,000 gallons of Fischer-Tropsch jet fuel to the air force for their highly publicized successful flying test of the B52 Bomber. And just last week, the Air Force announced that based on these test results and the fuel supplied by Syntroleum, B-52's are now certified to fly with a 50-50 mix of Fischer-Tropsch's and standard jet fuel.

As part of our Tyson joint venture, we have just signed a contract to supply a renewable jet fuel. I am going to talk a little bit about that in a minute. The renewable jet fuel that we are able to make with the animal fats is of similar or better quality to the Fischer-Tropsch's jet fuel, and we are very excited about making that opportunity available to the Air Force.

Here is a summary of our Gas to Liquids and Coal to Liquids technology. Our Gas to Liquids technology has been fully demonstrated. We've been able to stop running the plants in Tulsa, we've got all the data done. It's in the book as we say; we've got licensees, including Marathon Oil, Ivanhoe, Repsol and Anadarko. A very important project for us is an ongoing negotiation, with Sinopec, a large Chinese company. We are in negotiation with them, signed an MOU back in the first quarter to make our Fischer-Tropsch's technology available to them on an exclusive basis for use in China.

The second area that we are involved in is the Coal to Liquids business, and there the only difference is that the synthesis gas is made from gasification of coal. The one remaining piece of technology we had to demonstrate was to show that our cobalt catalyst was just as effective on syngas live from coal, as it was natural gas. We've been conducting a test with Tennessee Eastman on their existing coal gas gasification at their plant in Tennessee. That testing is complete. We are happy with the results. We'll be making announcements about that later in the year. We are currently negotiating a site licensee with several project developers for Coal to Liquids.

The big future we see in the renewable areas is cellulosic biomass. Now, you've heard quite a bit about cellulosic ethanol, and that technology has been developed and being developed and is pretty far out in the future. We can convert this same cellulosic biomass using our Fischer-Tropsch process by gasifying this biomass and converting it into ultra-clean fuels, and we can access a very large domestic supply of that material.

So, last year we had finished our work, looking at all of our Fischer-Tropsch's technology and we asked our engineers, what can we do? What can we change? What can we add to our existing technology in the renewables area? And we discovered an amazing thing. Fischer-Tropsch wax has similar chemical structure as fats, greases and vegetable oils. In other words, the wax that comes out the back from our Fischer-Tropsch Reactor and goes into our product upgrading is very, very similar chemically to animal fats, vegetable fats, triglycerides that are found in nature.

So as a result of that, we started adjusting our technology to utilize renewable feedstocks and we developed the name Biofining to go along with our new technology. We have tested over 80 different fats, greases and oils; every one of them produces the same ultra-clean synthetic fuels as we are able to produce with our Fischer-Tropsch process.

An important point I'd like to make is, this is diesel fuel made from chicken fat. Every atom of carbon in this fuel came from the atmosphere less than two years ago as carbon dioxide. It came into the food chain via photosynthesis, and then the animal feed, it was made into the animal fats, and we have now converted it into ultra-clean, renewable diesel fuel.

So once we had the technology nailed down, we had to go out and find a partner, someone to supply the feedstock and we were very fortunate to come together with Tyson, the world’s largest processor and marketer of chicken, beef and pork. Tyson had recognized for some time the value of these fats in the renewable fuels area and had actually set up a division to do exactly that. And after long discussions, negotiations and due diligence on their part, they selected us and we formed Dynamic Fuels LLC, a 50-50 venture that was announced back in June. The intention of this venture is to build multiple plants using renewable feedstock to make ultra-clean diesel and jet fuel.

Tyson has committed to supply the 25-year supply of feedstock into these plants. We are providing the technology and the operations, and jointly together we will operate and own these plants. An important fact to remember is because our technology is as unique as it is, we are not biodiesel. We can use the lower quality non-food grade fats that are on the lower cost end of the scale.

Why did Tyson chose Syntroleum technology? This is something we are very proud of, and I want to take some time to explain it to you. Our Biofining technology produces a better product. Fischer-Tropsch's quality renewable synthetic diesel and jet fuels are the same as what we can make with the Biofining. They are fully blendable with other fuels; they are 100% compatible with existing distributing infrastructure.

Our technology is flexible. Biofining is not biodiesel. Now biodiesel is important, this country needs all the alternative energy we can get, and we have no mark against the biodiesel industry and we hope they are successful. But we are using a different feedstock than they do, a much lower quality, lower cost feedstock in making a product that we think is much superior. And of course as we know the technology leads to better economics, feedstock cost and the fuel quality drive the project economics and we think there is potential for premium product pricing.

Very importantly and one of the things that Tyson was very interested in is that Biofining opens the door to future cellulosic biomass-to-liquids using Syntroleum's Fischer-Tropsch technology.

This fuel, this Biofining synthetic fuel is superior to both petroleum based and biodiesel products. The cetane is higher. Cetane in diesel is the equivalent to octane in gasoline. The cetane rating of diesel that you buy at a service station is about 45, ours is 74. We have a lower cloud point, lower freeze point, very low sulfur, less than one part per million and importantly no aromatics in our product. Because it’s renewable, this Biofining diesel reduces greenhouse gas emissions by 74% compared to petroleum based diesel.

The military testing that we were involved in shows tremendous reduction in particulate emissions for this fuel. If you burned a 100% Fischer-Tropsch or Biofined jet fuel in B52, you get a 96% reduction in particulate emissions, which is extremely important not only for environmental but also for tactical reason to the military.

Now here is a sample of economics, I am going to give you the details of the first plant in a minute, but just to walk you though, at current oil prices and current crack spreads, a gallon of diesel is roughly $2.15 wholesale and there is a government tax credit of $1 a gallon for renewables. So the revenue per gallon is going to be $3.15.

The feedstock cost at current prices today, which have gone up quite a bit in the last year, in the end delivered, is about $1.90 a gallon, that’s the equivalent of about $0.25 a pound for the feedstock. So, we expect to produce a gross margin of about $1.25 a gallon out of this plant. The operating expenses are about $0.40 a gallon, or this plant is going to produce an EBITDA of $0.85 a gallon. This will be a $75 million gallon a year plant, which I'll show you in more detail in a minute. So, the annual EBITDA for one plant is going to be $63 million, generating an internal rate of return of about 33%, a net present value at 10% of about $330 million. Syntroleum will own 50% of each plant.

This is a very interesting chart. We went and actually back cast the economics of the Biodiesel business and the Biofining business using actual raw material cost, product prices and operating expenses. As you can see, except for a short period of time between mid '05 and late '06, the Biodiesel business has not been a very good business and this even includes the $1 a gallon subsidy. Because we are able to operate with much lower feedstock cost, had we been in this business all this time, you can see we have about $1 a gallon advantage over the Biodiesel business strictly because we were able to take this very low quality animal fat and convert it into a much better quality product.

Here is a summary of what the first plant is going to look like. It will make 75 million gallons a year of synthetic fuels. We'll be able to make multi-product slates, diesel or jet, naphtha and propane. It will be a standalone new construction located in the mid-south. We expect to start construction in 2008, and have commercial operations about 2010. We will have flexible feedstock, we can use greases, fats or vegetable oils whatever is the cheapest. The investment would be about $150 million for the first plant all in, and that number includes a 30% contingency factor, since it is a first of a kind plant.

The annual cash flow at current prices is projected to be $63 million a year, which will be shared 50-50 with Tyson. I cannot overemphasize the relationship with Tyson Foods. They are the largest in the world. They would be the seventh largest trucking company alone based on their truck fleet. They have 1500 rail cars and as a 50% owner of the plant, they are incentivized to go out and find the lowest cost feedstock possible and in our current dealings and relation with them, they are continuing to do that. We think we are going to have the lowest feedstock of any renewable producer in the United States.

So, here are some of the milestones you can look for along the way on this process. The Dynamic Fuels LLC was formed in June of 2007. The initial funding of $8.5 million was put in place on the July 13. The basic engineering, process design packaging and feed for the first plant is underway now. It will be completed in the second quarter of '08. We are going to finalize our site selection in the fourth quarter of '07. That's another huge advantage that Tyson brings to the joint venture. Their relationships all over the country are very strong and we have contacted the Governors of five different states where we think we might build the first plant and are getting very positive responses from each of those states.

We expect to have project sanctioned by the second quarter of '08, break ground about mid year next year and have the construction completed by the end of 2009, coming online at the beginning of 2010.

Now we are very excited about the renewables made from animal fats and vegetable oils, but that’s just the tip of the iceberg. The big upside for this country, and it is going to make a big difference in renewable fuels as in the area of biomass. There are about 21 million tons per year of animal fats and vegetable oils produced in this country.

A study done by the U.S. Department of Energy and Department of Agriculture two years ago identified 1.3 billion tons per year of biomass available to be feedstocked for future ultra-clean renewable fuels. And this is all non-food grade products. It's tree limbs, it's chicken litter, it's municipal waste, it's corn stover, all those things that currently are not used for food, so will not impact the food marketing industry in this country.

If all of this return were turned into ultra-clean fuels, it would represent about one-third of the current U.S. refining production, and would make a huge difference in the volume of production of energy for this country.

So, here is the way we are going to go about doing this. If you remember, I told you that the same Biofining, Synfining technology can process either oils, fats and greases or Fischer-Tropsch waxes. Our game plan is to go out and build these individual Biofining plants that will give us operating profit and ongoing revenues coming as early as 2010. Once those plants are up and operating, we will then back integrate with gasification and Fischer-Tropsch to include at each site. The biomass-to-liquids conversion, using such things as corn stover, switch grass, wood chips, municipal waste, etcetera. Now, to put this in perspective, the average feedstock costs for biomass compared to the animal's fats and greases is less than one-third.

If you remember, the $1.90 a gallon feedstock price we had here for that fats, that equivalent price on gasified biomass is about $0.60 a gallon and you can see will result in much higher revenue per barrel.

We are also going to do this in a staged fashion. We are not going to go out and build huge standalone biomass-to-liquids plants, we are going to take advantage of existing infrastructure and existing product upgrading technology. A very important thing to realize is in the gasification business, the least reliable piece of equipment in a gasification project are the actual gasifiers themselves. They represent about 70% of the cost, and in every project that’s being develop, there has to be redundancy here in this part of the technology.

But what we are going to do is, we are going to build trains that have a single gasifier, and when that gasifier is running, we'll be making the Fischer-Tropsch wax, putting it into the product upgrading and making the product. In occasions of downtime, when this plant is not running, we will just run additional fats and oils, so that we keep our product slate operating full scale. And we'll have a significant cost advantage in the operation here by only having to have a single gasifier.

So, here is the growth strategy that we've developed and this is all based on renewables, and it’s all here in the United States. We think the first plant will be operational by 2010, with a pre-tax NPV of $330 million and a pre-tax rate of return of about 33%. We expect to piggyback behind that with the biomass-to-liquids plants coming a couple years later. Then we'll utilize the lower cost, widely abundant feedstock, and there will be lower risk due to staging the integration with Biofining.

We believe that we can realistically finance and build along with Tyson, three of these combination plants over the next 10 years. We will be producing between 400 million and 450 million gallons a year of ultra-clean FT quality fuel, generating between $500 million and $600 million a year of annual cash flow to the partnership of which 50% of that or 250 to 300 million would be net to Syntroleum.

So, here are the highlights. Synthetic renewable fuels will establish leadership position in renewable synthetic fuels industry through multiple plants. We will have substantial positive cash flow beginning in 2010, which will be the first time in the history of our company and something we are really looking forward too. We have Tyson Foods as a world class partner and feedstock supplier. We've got a platform to expand into synthetic fuels from the abundantly available biomass. And our ongoing efforts in Coal to Liquids and Gas to Liquids business will continue.

That's the end of my prepared comments. I'll be happy to answer any questions that anybody might have.

Question-and-Answer Session

Jack Holmes

Yes sir.

Unidentified Audience Member

[Question Inaudible].

Jack Holmes

We have taken a look at all of this. This technology is not nearly as sophisticated as our Fischer-Tropsch technology, and these are fairly small reactors. We've identified them. The single longest lead-time item in this plant is a hydrogen compressor, which has an 18-month delivery. We and Tyson plan to place that order before the end of the year. So, we are very confident of our time line.

Unidentified Audience Member

[Question Inaudible].

Jack Holmes

I am going to take those in reserve order, because my memory is not that good. First of all, 50% will be Tyson, so we will be responsible for half of that. Secondly, of the 75 million we are responsible for, those expenditures will start taking place about a year from now. We are hopeful that we can get some government credits, from some of these various state locations. Secondly, the sites where we have picked to build these plants are in existing facilities, existing terminals. We are hopeful that we can [lease tankage] for example, and those sorts of things and then we are just beginning the process now of trying to figure out the most efficient way to come up with the financing for plants. So we are in the early stages of that.

I believe your second question, the EPC contractor, we are going to be our own EPC contractor using the engineering firm out of Houston to take care of the ordering and so forth. If you hire an EPC contractor, you are going to add a year to the timeline and 25% to 30% to the cost. We are very confident and Tyson is very confident, based on their due diligence of us that we can do that.

Your first question was on permitting, these are all in attainment areas. They are all in areas where the emissions from our plant will be so low they will probably be within the existing air permits that are there. That’s why we have selectively picked out of where we are going to try to build. Yes sir.

Unidentified Audience Member

What is your burn rate and when do you expect to turn profitable?

Jack Holmes

We don’t quote burn rates. We have put out a press release where our ongoing expenses have been reduced about 40% over last year. We expect to be profitable in 2010, based on the revenue from this plant.

If there are no other questions, I want to thank you for your time and attention. I welcome you to our website and look forward to (inaudible). Thank you.

TRANSCRIPT SPONSOR

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