U.S. Government Spurs On Advanced Biofuel Production

 |  Includes: GEVO, SYNM, TSN, TVIA
by: Kevin Quon

On Monday, July 2, the US Navy along with the US Department of Energy and the US Department of Agriculture announced the release of two complementary Funding Opportunity Announcements (FOA) that will be used to spur additional investment into the advanced biofuel space. The first award sponsored by the US Navy is dedicated to the construction of a domestic commercial-scale production facility that meets a target of at least 10 million gallons per year of advanced biofuels production capacity. The second award listed by the Department of Energy will be used for the creation of a pilot or demonstration scale facility that explores either the use of lignocellulosic feedstocks and/or algae to create fuels that pass military-grade specifications.

These FOA's are the result of the initial announcement back in August 2011 in which the Obama administration announced that it will invest up to $510 million over the next three years to help finance advanced biofuels production. The awarded funds will be a joint effort between the public space and the private sector in which companies will be required to contribute at least 50% of the total project costs. This important cost-matching characteristic of the projects will likely serve to further limit the number of companies that may be eligible to apply.

With public companies having the advantage of significant access to capital and typically larger balance sheets to work with, companies like Solazyme (SZYM) and Gevo (GEVO) may be among the eventual list of winning recipients. Specifically, these two companies have already developed relationships with the Department of Defense as Solazyme has had numerous fuel arrangements with the US Navy and Gevo previously received a contract with the US Air Force. Dynamic Fuels LLC, a joint venture between Tyson Foods (TSN) and Syntroleum (SYNM) may also be a winner given their past relationship with the Navy.

According to the first FOA regarding the commercial scale facility, the US Navy will be funding (with the US Air Force as the executive agent) up to a total of $30 million for Phase 1 awards. However, the FOA also suggests that the anticipated number of awards will be for 5 projects resulting in approximately $6 million of government funds per award. Yet for Phase 2 awards, which will likely be a weeding process of the Phase 1 recipients, the amount of total financing available will be for $180 million of government funds. There will be an anticipated 3 awarded projects with these funds with the approximate size of each award being near the $70 million range. All received funds must at least be matched by the winning recipients.

The second FOA sponsored by the Department of Energy will be significantly smaller. With a total of $20 million of public funding available, the DOE expects to award 2-4 projects in 2012 with 2-3 more in 2013. The ideal award range will be for $5-7 million and the award floor will be for $1 million per awarded project. As we can see, the real meat of these announced FOA's will be given to the awarded winners of the Phase 2 commercial facilities as provisioned by the US Navy opportunity. However, the DOE award does provide a foot into the door for a company looking to expand their cellulosic feedstock presence. Again, all funds must at least be matched by the winning recipients.

Of the previously listed companies that are most likely to benefit from this arrangement, algae-specialist Solazyme stands out as a very real possible winner. Apart from their ongoing relationship, the company still has over $200 million of cash and short term investments. Gevo on the other hand has only $74 million and is rapidly burning through its cash accounts. Its recent plans to raise $102 million to fund a plant in South Dakota has only further hampered its ability to raise more.

With the backing of Tyson Foods, Dynamic Fuels is also likely to be a contender. However, there is also a clear push for algae sources due to the fact that there is a very limited constraint as to the amount of available chicken fat which Dynamic specializes in. An additional note of interest lies in the increasing focus on algae-sourced biofuels. A recent request for information for a possible future FOA by the Department of Energy is titled as "Enhanced Algal Biofuel Intermediate Yields." This can be found on the same site as the previously linked FOA. Likewise, the aforementioned $20 million FOA also divided its topic areas specifically into two parts - one that targeted cellulosic feedstock usage and another that exclusively explored the use of algae. Along with Obama's recent support for algae companies, it appears that algae is becoming increasingly embraced as a realistic energy source for the future.

Altogether, these government awards represent a very significant strive towards increasing advanced biofuel research. Led by the US Navy, the need for drop-in fuel replacements has allowed for this funding opportunity even amidst ongoing political criticism. For a company like Solazyme, this particular opportunity may be one that can help leverage their ability to rapidly bring on manufacturing capacity in order to address their target markets.

Disclosure: I am long SZYM.