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Syntroleum Corporation (NASDAQ:SYNM)

Q1 2012 Earnings Call

May 3, 2012 11:00 AM ET

Executives

Karen Power – SVP and Principal Financial Officer

Gary Roth – President and CEO

Analysts

Shawn Severson – JMP Securities

Robert Wagner

Tony Chen – AMC

Michael Prouting – 10K Capital

Chris Kovacs – Robert Baird

Nick Biase – Voltage Capital

Operator

Good morning and welcome to the Syntroleum First Quarter 2012 Earnings Conference Call. All participants will be in listen-only mode. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Karen Power, Senior Vice President and Principal Financial Officer. Please go ahead.

Karen Power

Good morning and thank you for joining us today. Remarks for today’s call will be presented by Karen Power, Senior Vice President, Principal Financial Officer, who will report the financial results for the quarter ended March 31, 2012, followed by Syntroleum’s President and Chief Executive Officer, Gary Roth.

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 believes 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.

For the quarter ended March 31, 2012, the company reported an operating loss of $786,000 resulting from total revenues of $1.25 million and operating expenses of $2.4 million. The total net loss for the quarter ended was $1.9 million, $830,000 of this loss relates to Dynamic Fuels operations for the three months ended December 31, 2011. We do not consolidate Dynamic Fuels instead we report using the equity method of accounting. Income or losses under the equity method are reported below operating income as income or loss and equity of Dynamic Fuels. For Generally Accepted Accounting Principles we do not report gross revenues associated from Dynamic Fuels because the entity is not consolidated. We will only report our share of the total net income or loss.

As reported in our 10Q, Dynamic Fuels had revenues of $53.6 million, operating expenses and general and administrative expenses of $55.3 million and other expense of $450,000 resulting in a net loss of $2.1 million for the three months ended December 31, 2011 of which we reported 50% in our financials.

During this time period, 8.9 million gallons of renewable fuels were sold and 9.2 million gallons were produced. As of March 31, 2012, Syntroleum’s cash balance was $21.5 million, an additional investments in Dynamic Fuels of $3 million was made in April 2012. Now, I will turn the call over to Gary Roth.

Gary Roth

Thank you, Karen. For the three months ended March 31, 2012, Dynamic Fuels had a net operating loss of $0.02 per gallon and a positive cash margin of $0.11 per gallon at a run rate of 47% of design capacity. Our Mansfield off take agreement, which became effective January 1, 2012 allowed us to receive better product pricing.

In the fourth quarter of 2011, diesel product delivery cost and discounts averaged $0.80 a gallon versus $0.14 per gallon for the first quarter of 2012 resulting in a increase of $0.66 per gallon on average for 2012 diesel sales. This prices specifically exclude approximately a 121,000 gallons of military marine grade diesel sales and the quarter end in March 31, 2012. The same period dynamic deals average net back diesel prices of $5.50 per gallon compared to focus Gulf Coast SME price of $4.84 per gallon and opus full RIN value of $5.64 a gallon.

We define full RIN value as U.S. Gulf Coast ULSD price plus 1.7 times RIN price. RIN price since the beginning of 2012 have averaged a $1.45 and are currently at $1.41. 26% of our sales were fleet sales in the first quarter of 2012 compared to zero in 2011.

We expect to have fleet sale contracts totaling approximately $1.6 million per month by July 1. All of our diesel product is contracted. Dynamic Fuels average blended revenue per gallon in the quarter ended March 31, 2012 was $5.23 compared to $4.87 in the quarter ended December 31, 2011.

Excluding military and jet fuel sales that blended average revenue per gallon was $4.81 in March 31, 2012 compared to $4.69 per gallon on December 31, 2011. The quarter ended March 31, 2012 included shipments to the navy of 163,000 gallons in marine diesel and jet fuel to Port Orchard or Washington. The remaining shipments of 287,000 gallons of jet fuel and marine diesel will be completed at early May. We expect to recognize revenues and collect cash from these remains shipments in the current quarter. Our weighted average fleet stock price for the three months ended March 31 was $0.51 per pound compared to $0.50 per pound for the three months ended December 31, 2011 for $3.93 per gallon compared to $3.83 per gallon for the same period.

The overall prices have increased 4.6% from Q4 2011 to Q1 2012 compared to Dynamic Fuel increase of 2% inclusive of algae oil being stock procured as required for the Navy fuel production. The average price for the feedstock without algae oil purchase for the military run was $0.48 a pan.

Of the 36.5 million of feedstock purchase for the first three months of 2012 approximately 15% were supplied from (inaudible) facilities compared to 45% in the previous quarter. The plant was taken down for plant maintenance on March 27, 2012. The plant conducted a change-out of the catalyst and garbage within each of the two hydro training reactors. The catalyst in the hydroisomerization reactor was not changed out. In addition to the catalyst change out, 8000 hour maintenance was performed in the hydrogen compressor. The process train heat exchanges were upgraded and performance upgrades were made to the fall of the recycle pumps.

Major plant inspections were also performed, which revealed no premature wear or major process equipment. We expect the maintenance performed on the mechanical equipment will continue to increase reliability. The plant was restarted on April 16th and produced at approximately design rates after achieving steady state operations. The procurement and installation of upgraded pretreatment equipment is progressing. One unit has been installed and final tie-ins in commissioning our proceeding, two additional units have been procured and scheduled for delivery in September with installation of commission to follow in October.

On March 22nd, Dynamic Fuels hydrogen supplier, Praxair unilaterally delayed the turnaround by approximately one month from late March to late April. Alaska delayed their turnaround to adequately supply the region of hydrogen market as result of supply disruptions with plant hydrogen – with hydrogen plants in the region.

Because of Praxair late notice, it was not possible for Dynamic Fuels to offer its turnaround schedule. At the time, Praxair notified Dynamic Fuels of the delay, Praxair to show Dynamic Fuels it would had adequate supply of hydrogen with the Dynamic Fuels restart. A piping interconnect was installed by Praxair with air products permission to provide the ultimate hydrogen supply.

On April 26th, we were notified by Praxair that one, Dynamic Fuels will not have hydrogen beginning April 28 and we took a control of plant shutdown beginning on April 27th. Two, Praxair had been instructed by Air Products to remove the newly installed interconnect and three, that Dynamic Fuels will not have hydrogen for up to four weeks while Praxair executed its turnaround.

We were informed by Praxair on May 2nd that hydrogen limits supply would return on May 22nd at 5 P.M. We have taken mitigating steps to reduce cost and has no take or pay obligations as a result of this unplanned shutdown. Given the current pricing disparities between natural gas and liquid hydrocarbons, gas to liquid economics continue to remain robust. As a result we have been approached by five different prospective GTL developers ranging from (inaudible) project developers to Fortune 500 companies and they’re currently performing screening engineering on three of these projects.

Sinopec continues to operate the SDF, demonstrates Syntroleum’s FT technology. Later this month we are meeting with Sinopec in China to review the technical results of the SDF. We expect to confirm the reported results provided to us by Sinopec which we understand have been excellent and are consistent with those observed by Syntroleum, when running the Catoosa demonstration facility in the United States. Sinopec has been operating the SDF since June of 2010. Thank for your attendance today. We will now open the call for questions.

Question-and-Answer Session

Operator

We will now begin the question-and-answer session. (Operator Instructions) The first question comes from Shawn Severson of JMP Securities. Please go ahead.

Shawn Severson – JMP Securities

Thank you. Good morning. Garry could you talk a little bit about the, I guess, the opportunity maybe I guess the plan being down the extra month to accelerate any of the peak treatment installation, I mean there is anything else you could, is it going to shorten the timeframe to getting that into production or it really doesn’t change it at all?

Gary Roth

It will marginally reduce the costs as we can, we were running full assets to get that needed in place. The needle is set, tie-ins are made. We’re in commissioning and final times commissioning now. Things we do take, we take vacations, reduce training, remove overtime, those are the things we would do, but there’s not a whole lot we can do to reduce our cost. We do have no take or pay obligations in the plan and we do not have any deliveries that are guaranteed that could put us into financial difficulties.

Shawn Severson – JMP Securities

When a contract is violated like this, like the Praxair on the supply agreement, what’s the usual process? I mean is it generally legal recourse for something like this or what’s the typical scenario, how something like this plays out?

Gary Roth

Yeah, right now our focus is working with Praxair. They are very good about calling us and telling us the status. We had a call yesterday with them. They told us they found no major issues. They’ve given written notice of being up on the 22nd. We of course will reserve our rights, but our focus now is to do everything we can to help them come back up and the legal remedies will sort themselves out later.

Shawn Severson – JMP Securities

Okay. And then on the GTL prospects, can you talk a little bit about what do you mean by screening engineering? I mean what’s the – what is that and what does that fit into maybe a timeframe they were to develop a plan?

Gary Roth

Screening engineering typically has a site, so we have we have three people who do have sites. There are various parts in the United States. So in that process, we look at what is – what our utilities, what our infrastructures, what are the general cost in the region, how do we make interconnects, what are the supply and off take requirements, what are the general product specifications, Gulf Coast diesel versus Midwest diesel versus (inaudible) diesel into the North and then from those people are defining their the economics of the projects before going off into feed.

Shawn Severson – JMP Securities

And so if somebody were to move ahead with the project -what’s, I still thought you might do years of study for something like this or you taking three months, six months time frames where you could have all the data you need to or they would need to make a decision?

Gary Roth

Our studies easily take one to three months. Engineering would be another year, year and half once the decision has been made to go forward. One of our studies is essentially done and the client is in its decision process. The others are just beginning.

Shawn Severson – JMP Securities

Okay, great. Thanks (inaudible).

Gary Roth

Thanks.

Operator

The next question comes from Nick (inaudible). Please go ahead.

Unidentified Analyst

Yes, hi gentlemen. Quick question on the $8 million to be paid Alkon constructors. Just wanted to get a little color and $3 million while on April 1, but I guess we want to understand what happened there?

Gary Roth

There was a dispute between Dynamic Fuels and Alkon on the EPC contract in the plant it’s been through it’s dispute resolution processes decision was made by the managements of Tyson and Syntroleum to settle the disputes and then there was an allocation of the dispute between Tyson and Syntroleum.

Unidentified Analyst

And if it just $3 million out $8 million total, does that mean that the entire amount has been paid though?

Karen Power

That’s correct sir.

Unidentified Analyst

Okay and one follow up it also, Tyson raised questions about whether organic fuels responsible for certain amounts build, can you also give sort of color on that?

Karen Power

These are related to engineering services and also related to start up and commissioning engineering services in the plan.

Unidentified Analyst

And you said there were not material amounts, is that correct?

Karen Power

Therefore engineering services essentially man ours building.

Unidentified Analyst

Okay, terrific, thank you.

Karen Power

Thank you.

Operator

The next question comes from the Robert Wagner. Please go ahead.

Robert Wagner

Hi, I was wondering if you could comment on the possibility of Natzler or rents, and also do you have a exact number for the production of April?

Karen Power

Okay, on Natzler the renters, there are two requirements. Part 79 and part 80. Part 79 is EPA for the registration of the fuel. We submitted all the documents. We’ve done the testing required on the engines; and we’ve been through one round of view with EPA and supplied supplemental data. If it’s tracking kind of goes like it did or is the diesel 100% registration, we would suspect another six to eight weeks before we get our approval. The second part is what’s call the part 80, which is the pathway of the message that you use. The feedstock and our processes do they meet the requirements for Iran and we’ve been through the part 80 and we’re finished. So, we’re waiting on the part 79 approval now from EPA.

Robert Wagner

Okay.

Karen Power

We did about $2.8 million into the tank in the month of April.

Robert Wagner

All right, thank you very much.

Operator

The next question comes from Tony Chen of AMC. Please go ahead.

Tony Chen – AMC

Hi, Gary, hi guys.

Gary Roth

Good morning.

Tony Chen – AMC

Discussion on your CapEx there for the pre-treatment. Can you give us ballpark number of what do you expect the cost to be?

Karen Power

This total first campaigns are around $3.5 million, installed.

Tony Chen – AMC

Then the other plants are upcoming CapEx?

Karen Power

We always evaluate CapEx, we evaluate the replacement of the (inaudible) and recycle pumps. Compressor look great in the turn around, so we don’t see anything associated with that. The balance of equipment of the plant look very good during turn around. Couple of things we would look at was – we have excessive flair. We can use that in internal boiler, so there are couple of what I call economic enhancing improvements and those are the main things that we are looking at.

Tony Chen – AMC

Is there any place to build a pipeline to take your product out of the plant?

Gary Roth

We have looked at a couple of three pipeline, but the best economic – the best margins are direct sales from the plant truck rack to local customers, and when we talk about fleet sales those are the best sales and right now we see about 1.6 million gallons to those sales among and we’ve just really gotten started and to identify the fleet customers. We have some additional barge and marine customers that looked like that could add another 2 million gallons of mud. So that being the case it’s really not economic to put it in the pipeline we get better net backs delivering to our fleet customers.

Tony Chen – AMC

Okay, I understand that thanks. And you have sort of management change at the plants, I guess Don (inaudible) along with the company and still focus it I do think?

Gary Roth

Don shows to seek out the opportunities. Tim has taken over the plant management, great experience from EOP. We are happy that gons are great cheerleader for the team down there and he is working hard to keep improving operations every day.

Tony Chen – AMC

Is there – can you provide some background as to the next to Tim that written down here?

Gary Roth

Yeah, Tim is a background with EOP hydro processing unit, refining units. He also worked for Nalco. So, he has got great plant chemical hydro processing experience and we really welcome him on to the team.

Tony Chen – AMC

Okay, great. Thanks. And just last question if you – your non-feedstock operating, so was it a $1.32 per gallon this last quarter. Can you breakdown a little bit of that, what part of that is say fixed cost or would it be variable to scale up the plant production?

Karen Power

Our variable is about 40, the balance is fixed. We do about $2.1 million in cash, fixed cost amount about $400,000 in depreciation. Hydrogen runs, it’s our big third party cost, it runs about $0.14 to $0.15 a gallon and that varies with natural gas price. The rest is general operating expense within the play.

Tony Chen – AMC

It’s about $0.40, the variable part?

Karen Power

Yeah, $0.40 of variable.

Tony Chen – AMC

All right. Thank you. That’s all.

Karen Power

Thank you.

Operator

(Operator Instructions). The next question comes from Michael Prouting of 10K Capital. Please go ahead.

Michael Prouting – 10K Capital

Yeah, good morning guys. A couple of questions. Firstly on the GTL. Do you see any prospect to a possibility of an upfront cash payment as part of GTL licensing deal or what have we?

Gary Roth

Yeah, it is a – it’s common for us to get a payment at execution of licensing.

Michael Prouting – 10K Capital

Okay. And then I guess my other question is how do you feel about the adequacy of cash levels that JV level end at the central line level? Thanks.

Karen Power

We go to the cash and of course these are unaudited, but we have that $5.9 million cash in dynamic. We got about $6.8 these are in million – $6.8 million of invoice out. And we got about $4.3 million in military invoices that will got out in the next day – next week or two and I got about $1.6 million in the tax. So, that gives us about $18.6 million. In addition, essentially both our feedstock tanks are full and we have some incoming rail, so we got about $6 million in paid up inventories.

Michael Prouting – 10K Capital

Okay.

Karen Power

AP is about $3 million to feedstock outstanding and about $1.5 million general (inaudible) soap and dove. So, that puts us about $14.1 million cash payables minus receivables. Inventory is still up and paid for and about $2.1 million in fixed costs roughly amount. So, the cash balances look very good. Now there’re always timing issues between the two, but the way we see it right now there is plenty of cash in the business. We got to have to work the timing as hard as we can, but we are pulled up, ready for restart, bills are paid and a pretty good balance in the cash count.

Michael Prouting – 10K Capital

Do you have a sense of how low could that number go before your joint venture partner you think could want to see additional cash at the joint venture?

Gary Roth

I’m not quite sure of the question. We typically – we turn cash pretty quick in the business. Our offtake at Mansfield field, these are two to three day pay. So, we typically turn a lot of cash and we don’t need a lot of cash other than feedstock requirements. So, right now we are full on feedstock and paid up. So, I just don’t see a cash issue other than the time you carry invoices.

Michael Prouting – 10K Capital

Okay, all right, thanks for taking the question. All right, thanks.

Operator

The next question comes from Chris Kovacs of Robert Baird. Please go ahead?

Chris Kovacs – Robert Baird

Hi, thanks for taking my question. Can you just repeat I think you said earlier how the costs for your core feedstock compared to that of how you use for the navy contract? And then can you also maybe comment on how the processing costs for algae compared to your core processing costs, I think you quoted $1.32 outside of the feedstock?

Karen Power

It’s kind of a rule of thumb. We’re talking about $290 a gallon, $280 a gallon for normal customary feedstocks. Algae oils in the $70 gallon range. It’s experimental and those are the costs. And that’s one of the part of this navy initiative was to see the broad range of feedstocks that we could process. Processing cost for the (inaudible) is essentially the same as any other feedstock, if not a little bit less.

Chris Kovacs – Robert Baird

Okay. Thank you.

Karen Power

Thank you.

Operator

The next question comes from Nick Biase of Green Voltage Capital. Please go ahead.

Nick Biase – Voltage Capital

Yes, could you guys give us now an estimate as to when you believe that the plant will be running at full capacity, the $75 million?

Gary Roth

We’ve got notification that we should be backup, have hydrogen backup on the 22nd of May. It usually takes us about two days to get it heated up and back into the tanks.

Nick Biase – Voltage Capital

But you do expect to be running at full capacity from that point on?

Gary Roth

Yes, we do.

Nick Biase – Voltage Capital

Thank you.

Operator

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

Karen Power

Again we want to thank you today for your attendance. As a reminder, our annual meeting is scheduled for June 28 at 2’o clock here at our corporate offices. Thank you very much.

Operator

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.

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