IPO Preview: Luca Technologies

| About: Luca Technologies (LUCA)

Based in Golden, Colorado, Luca Technologies (LUCA) scheduled an $102 million IPO with a market capitalization of $337 million at a price range midpoint of $12 for Friday, March 30, 2012. Managers: Citigroup (NYSE:C); Piper Jaffray (NYSE:PJC); Raymond James (NYSE:RJF).

LUCA is one of nine new IPOs scheduled for the week of March 26.

This LUCA article is based on the company's S-1 filing which can be found here, in addition to separate, independent analysis of the renewable industry by IPOdesktop.com.

LUCA uses biotechnology to create and sustainably produce natural gas.

Other renewable companies that have IPO'd in the last 18 months include Amyris (AMRS), Gevo (GEVO), KiOR (KIOR), Solazyme (SZYM) and Renewable Energy Group (REGI).

Shell agreement
LUCA uses biotechnology to create and sustainably produce natural gas. On December 16, 2011, Luca entered into a Development and Commercialization Agreement with a division of Royal Dutch Shell plc (RDS.B), Shell International Exploration and Production Inc. (Shell). LUCA and Shell will work together to advance an understanding of the mechanisms of microbial coal conversion to methane and to develop optimal strategies to propagate nutrient-bearing water within coal formations.

In addition, LUCA will own all intellectual property that is jointly developed during the collaboration, but LUCA will grant Shell a royalty free license for such intellectual property for use in microbial conversion of coal to methane.

However, the supply of natural gas exceeds demand and the price of natural gas has dropped.
"Inventory glut, the big problem for bulls" Reuters, March 22, 2012…read more.

The natural gas glut is attributed to shale fracking…read more.

LUCA is long way from proving it has a profitable market opportunity, especially with the current natural gas glut.

Based on price-to-book ratios, LUCA is priced within range of other renewable companies that have IPOs in the last several years. Nevertheless, we would pass on the LUCA IPO.

LUCA uses biotechnology to create and sustainably produce natural gas.

LUCA's proprietary technology stimulates native micro-organisms that reside in subsurface hydrocarbon deposits, such as coal, oil, and organic-rich shales, to accelerate the bioconversion of such resources into methane, the principal component of natural gas, which LUCA produces and sells using existing infrastructure.

LUCA believes that its business represents a transformative and disruptive innovation in natural gas creation and production, integrating sophisticated biotechnology with the traditional natural gas business.

LUCA has performed extensive lab and field testing over the past eight years, including the deployment of over 500 field level applications of its technology, which LUCA believes proved the efficacy of its technology to economically and

  • sustainably create new methane gas from wells treated with LUCA's technology;
  • demonstrate that additional value can be created from using existing natural gas wells and pipeline infrastructure, potentially extending the economic lives of thousands of wells;
  • confirm that water should be conserved and re-used whenever feasible, as it is integral to the biogenic creation of new methane gas; and
  • demonstrate through extensive testing that the technology is safe to the public and the environment.

Paraphrased from S-1, page 1

LUCA's Restoration Process, a proprietary bioconversion technology, accelerates and enhances the naturally occurring methanogenic process of native anaerobic microbial communities by circulating a mixture of water and nutrients into reservoirs using existing oil and natural gas wells.

Anaerobic microbes have lived in subsurface coal, oil and shale deposits for millions of years, feeding on organic matter to create natural gas. This complex microbial gas creation process is susceptible to interruption by various biological and other conditions, including traditional coalbed methane development, whereby drilling and extraction dewaters the coal formations, inhibiting microbial activity and disrupting natural gas creation.

LUCA's initial focus is to use its Restoration Process to convert coal into methane by restoring subsurface habitats to enhance the creation and production of natural gas.

Recent developments
On December 16, 2011, LUCA entered into a Development and Commercialization Agreement with Shell International Exploration and Production Inc., or Shell, whereby LICA and Shell will work together to advance an understanding of the mechanisms of microbial coal conversion to methane and to develop optimal strategies to propagate nutrient-bearing water within coal formations.

The current agreement governs the first phase of what is proposed to be a multi-year program, under which Shell will provide both personnel and financial support. During this first phase, each party will retain all commercial rights to respective current intellectual property, but will grant the other royalty free licenses for any intellectual property developed independently during the collaboration for use in microbial conversion of coal to methane.

In addition, LUCA will own all intellectual property that is jointly developed during the collaboration, but LUCA will grant Shell a royalty free license for such intellectual property for use in microbial conversion of coal to methane.

Natural gas created from LUCA's Restoration Process has a distinct advantage over many renewable energy sources, including biofuels, in that it can be sold directly into existing markets using existing infrastructure.

Biogenic, domestically-produced natural gas is an accessible and more environmentally friendly energy alternative, which is expected to play an increasing role in advancing both environmental and energy policy goals in the United States.

There has been growing concern over CO2 and other emissions that are especially prevalent from burning coal and fuel oil. According to the EIA, methane is the cleanest burning fossil fuel, with approximately 117 lbs. of CO2 produced per 1 million Btu equivalent of natural gas, compared to 160 lbs. of CO2 for fuel oil and 200 lbs. for coal.

LUCA's technology offers the potential to expand domestic energy production, while minimizing the need to expand the footprint of the oil and natural gas industry's producing areas. According to the EIA, demand for natural gas in the United States and globally is projected to grow at annual growth rates of 0.5% and 1.9% through 2035, respectively.
The EIA has identified several factors that could accelerate growth in demand for natural gas in the coming years, including potentially faster acceptance of compressed natural gas, or CNG, vehicles, recent policy changes in China promoting the production, import and use of natural gas, and a more restricted outlook for nuclear power in the wake of the Fukushima nuclear power plant disaster in Japan.

The EPA regards natural gas as the cleanest burning transportation fossil fuel commercially available today. The EIA estimated that in 2010 there were 100,000 natural gas vehicles operating on American roads, and more than 11 million natural gas vehicles worldwide. The current US administration has endorsed incentives for trucks powered by natural gas. Additionally, the EPA has issued stricter requirements on emissions from US power plants. When implemented, such requirements could push power companies to replace coal-fired plants with gas-burning ones, which would further increase domestic natural gas consumption.

LUCA has 20 issued US and foreign patents, three foreign patent applications that are currently allowed and awaiting issuance, and 36 pending US and foreign patent applications.

LUCA views traditional E&P(exploration & production) companies, other biogenic gas creation companies and alternative clean energy companies as its main competitors.

Traditional Exploration &Production competition
Although LUCA's methane is similar to natural gas from other sources, LUCA believes that its process differentiates it from traditional E&P companies.

LUCA's natural gas is created and produced in real-time in a sustainable manner, rather than extracted in a rapidly depleting manner from stored and finite resources.

LUCA believes the economics of its Restoration Process are more favorable than that of traditional E&P companies. LUCA's ability to reuse existing wells and infrastructure substantially reduces capital investments, and provides significant competitive cost advantage relative to shale and traditional E&P companies.

Biogenic gas creation competition
LUCA is aware of other companies developing and/or planning to commercialize bioconversion technology that is similar to or potentially overlaps with LUCA's technology portfolio. These companies include Ciris Energy, Synthetic Genomics, or SGI, and Next Fuel.

Ciris is a privately owned company based in Centennial, Colorado. Ciris' patents suggest they use a bioconversion process that involves injecting both chemicals and nutrients down coalbed methane wells. The chemicals serve to solubilize a fraction of the coal and nutrients stimulate microbes to produce methane. LUCA understands that Ciris has had limited application of its technology in the field.

SGI is a privately owned company based in La Jolla, California which conducts a broad range of research on next generation fuels and chemicals, hydrocarbon recovery and conversion, and agricultural products. In June 2007, BP invested in SGI and established a multi-year, research and development collaboration joint venture focused on microbial-enhanced solutions to increase hydrocarbon recovery. LUCA believes that SGI may not be restricting their process to use of native, and/or genetically unmodified micro-organisms as LUCA has done.

Next Fuel is a public company (OTCQB: NXFI) with a coal to gas process. LUCA understands that Next Fuel's process re-introduces amendments that have been designed and tested to the wide range of microorganisms that exist in seams of coal and other carbonaceous deposits. Next Fuel's proprietary amendments consist of constituents with depolymerizing and structure-altering functions to "condition" coal for the follow-up pathways for gas production. Because of the use of coal depolymerizing and structure-altering chemicals, LUCA believe Next Fuel's process may be suited for underground environments different from those available to LUCA Restoration Process.

Alternative clean energy competition
Production of electricity is one of the primary uses of natural gas. Several clean technologies are used to produce electricity including wind, solar, hydro, geothermal, and nuclear power. Although these technologies produce only a minor percentage of all electricity, several are experiencing fast growth rates. In addition, many national and local governments are promoting and subsidizing the use of one or more of these technologies. As a result, LICA views these alternatives as competitors to the Restoration Process.

While natural gas-fired technologies compete for a share of the clean energy market with alternative clean technologies, they can also be used to complement those that produce power intermittently like wind and solar. Intermittent sources generally require backup capacity. In many markets, gas-fired power plants are increasingly used to balance demand loads.

Natural gas can also be used as a low CO2 transportation fuel for CNG vehicles. As a result, LUCA's Restoration Process competes with a range of biofuel technologies that produce alcohols, bio-gasoline, bio-diesel, and bio-jet fuel.

LUCA expects to net $93 million from its IPO at the price range mid-point of $12. IPO funds are allocated as follows:
. $34 million; acquisitions of natural gas properties (wells and infrastructure)
. $41 million; Application of LUCA's Restoration Process to such properties
. $18 million; Research and development, working capital and other general corporate

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. LUCA is the focus ticker