Syntroleum Corporation Q4 2007 Earnings Call Transcript

| About: Syntroleum Corporation (SYNM)

Syntroleum Corporation (NASDAQ:SYNM)

Q4 2007 Earnings Call

April 02, 2008 11:00 am ET


Edward G. Roth – CEO, President, COO

Karen Gallagher – Principal Financial Officer, Senior Vice President

Ronald Stinebaugh – Sr. Vice President of Acquisitions and Finance


Jesse Herrick – Merriman Curhan Ford & Company

Pavel Molchanov - Raymond James


Good morning, my name is Ashley and I will be your conference operator today. At this time I would like to welcome everyone to the Syntroleum Corporation conference.

After the speaker’s remarks, there will be a question and answer session. (Operator Instructions)

I will now turn the call over to Miss Gerilynn Debock with Haliburton Investor Relations. You may begin your conference.

Gerilynn Debock

Good morning and thank you for joining us for today’s Syntroleum conference call. Opening remarks for today’s call will be presented by Syntroleum’s President and Chief Executive Officer, Gary Roth, followed by Ron Stinebaugh, Senior Vice President of Finance and Acquisition, who will provide an update on our financing efforts for the construction of the first file synfining plant and Karen Gallagher, Senior Vice President and Principal Financial Officer, who will take you through the financial results.

Before I turn the call over to Gary, I would like to remind everyone that during this call, we may make certain forward-looking statements as well as use historical information. These forward-looking statements include but are not limited to timing of project financing, the amount of timing of license and other project revenues, procurements of synthetics, renewable and other fuels, lubricants and chemical feedstocks and technology improvements currently under development.

Words such as believe, estimate, expect, intend and anticipate, could or should are intended to indentify forward-looking statements. Although Syntroleum beliefs and expectations reflected in these forward-looking statements are reasonable, these statements involve risks and uncertainties. Future results may differ materially from those projected in those forward-looking statements. You are encouraged to refer to our Securities and Exchange Commission filing including our most recent annual report on form 10K for a full disclosure of these risks and uncertainties. If you cannot access these documents through the Securities and Exchange Commission or our website at we will be happy to send a copy to you.

I will now turn the call over to Gary Roth, President and Chief Executive Officer of Syntroleum for opening remarks.

Gary Roth

Thank you Gerilynn, let’s review what we told you in last quarter’s conference call.

Last quarter, we announced the strategic corporation restructuring measures and cost reduction initiatives. We reduced our cash used in operations; operating activities from 35.8 million in 2006 to 23.1 million in 2007 and we projected our cash used in operating activities to be 7.8 million in 2008 and 6.5 million in 2009. Our projections for 2008 and 2009 are still on target. Karen will provide additional details on our cost cutting measures in her remarks.

Our projected cash balance at year-end 2007 of $20 million and ended the period with an actual balance of 18.4 million. Variance is primarily due to discounted prepayment of 3.75 million to extinguish 6 million owed to Marathon Corporation. Had we not settled the Marathon obligation at a 38% discount, our year-end cash balance would have been approximately 22 million.

In our last call, we told you that Sinopec, China Petroleum and Chemical Corporation, remained interested in utilizing our cold liquids technology, continue to have active ongoing discussion with Sinopec although it continues to be a slow process. To date we have received no money from Sinopec.

Regarding Energy Equity resources Limited or EER last quarter we said that approximately 5.7 million including interest and legal fees were still owed to Syntroleum related to the sale of our former Nigerian assets. In March, we recovered the remaining 5.8 million owed Syntroleum and we now can consider this item closed.

Regarding our May 2007 site reservation agreement with Energy Infrastructure Resources Limited or EIR of Australia, last quarter we said we reached an agreement with EIR, which provided for an initial payment of 500,000, which has been received and annual payments of 500,000 for a total four years. At that time, EIR was raising 8 million of equity funds to fund its pre-feed studies. AMEC, the lead engineering firm on the project has reached contract terms with Pacific GTL, the EIR project development company for the scope of the pre-feed studies. We anticipate execution of a technical service agreement to occur before the end of the second quarter; the next site reservation payment of $500,000 is due in May 2008.

We are currently working on our previously announced 1.1 million contract with the U.S. Air Force for renewable jet fuel; the contract calls for the delivery of 500 gallons of biosynthetic jet fuel. Operations have started at Southwest Research Institute’s one barrel per day alternative fuels pilot plan in San Antonio, Texas.

In addition to producing fuels for testing, the pilot plant runs provide process-designed validation to they Dynamic Fuel project. As such, all the key features of the commercial process are duplicated at the pilot plant. The feedstock consists of 45% poultry fat, 19% brown grease, 18% yellow grease, 9% flotation grease and 9% miscellaneous fat. The feed components were obtained from Tyson Foods and are representative of the feed stock slate for the Dynamic Fuel plant.

As of March 31, 20% of the total feedstock for the jet fuel production contract has been converted to hydrocarbons and we have observed no reduction in catalyst activity. We are working toward a May 2008 delivery date.

As of December 31, 2007, we recognized approximately 220,000 in revenue associated with this contract. During the first quarter of 2008, we invoiced an additional 330,000, resulting in 50% of the contract value being billed to date.

On our last call, we told you that our primary focus going forward would be the execution of our Dynamic Fuel venture with Tyson Foods. The construction of the first plant in Geismar, Louisiana, at that point, we had secured the initial 12 million in financing through Fletcher Asset Management and we told you that our obligations to Dynamic Fuel is to be financially capable at plant sanctions scheduled for mid year 2008.

We said we were focused on financing our share of the Dynamic Fuel plant with minimum (inaudible).

On March 19, 2008, Dynamic Fuel filed an application with the Louisiana State Bond Commission through the Louisiana Public Facilities Authority, LPFA, to issue revenue bonds for up to $135 million to finance the construction of the Dynamic Fuel Plant in Geismar. Upon approval, the bonds would satisfy our financing obligation for 100% of our budgeted plant capital cost.

Ron will have more details in his remarks.

Dynamic Fuel project continues to be an on budget and on schedule for an early 2010 startup.

Since our last conference call, we have made additional progress on this project, including the following.

The process design package or PDP, which covers internal engineering work, has been completed and it came in on time and on budget. Dynamic Fuel initially budgeted and funded 8.5 million to cover the initial engineering and design work through plant sanctioning. With 46% of the work complete, we current estimate this phases of the project with cost 6.5 million approximately 2 million below budget.

We have awarded the contract for the frontend engineering design to CDI Process and Industrial, Baton Rouge. We have awarded environmental permeating contracts and environmental work is currently underway. We expect permeating is scheduled to be completed by the end of the third quarter 2008.

We have ordered three process reactors from the Korean fabricator du son Mech Tech, these are longly tied items with contracted 16 month delivery schedule. We are still on track for midyear 2008 plant sanctioning in early 2010 start up.

On March 6, 2008, we closed the sale of our corporation offices and lab facilities. You received approximately 1.3 million for the property and have since moved to leased office space in Tulsa, which better accommodates our current corporate structure.

Now I would like to turn the call over to Ron Stinebaugh.

Ron Stinebaugh

Thanks Gary, we are please to report that Syntroleum has made significant progress in arranging financing for the Dynamic Fuel Plant. Together with Tyson, we have been focusing for the last six months on securing project related financing at the Dynamic Fuels level.

During this time, we have had proposals for five finances. Of these, Tyson and Syntroleum have elected to pursue Go Zone bonds because the location of our project in Ascension Parish in Louisiana qualifies the Geismar project with these special circumstance tax-exempt municipal bonds, which is the lowest cost form of financing we have encountered.

As previously mentioned, on March 29, 2008, Dynamic Fuel’s filed an application with Louisiana State Bond Commission through the Louisiana Public Faculties Authority, or LPSA, to issue revenue bonds for up to 135 million to finance the construction of the plant. LPSA revenue bonds were authorized under the Gulf Opportunity Zone Act in response to the devastation caused by hurricanes Katrina and Rita. This Go Zone bond program provided Louisiana with 7.8 billion in tax re-borrowing capacity to distribute to private business developments to help spur growth in hurricane-impacted parishes. The 4 billion approved Go Zone bonds have not been issued and the allocations expire April 22, according to the State Treasurer’s office.

The return of the unused bond issuing capacity to the State Bond Commission and the attractive terms of the bonds has led Dynamic Fuels to pursue this avenue. Dynamic Fuel has selected SunTrust Robinson, Humphrey to underwrite the Go Zone bonds. SunTrust has significant experience with Go Zone bonds having completed seven transactions for an excess of 800 million.

In addition, Dynamic Fuels is engaged in New Orleans office of the law firm Foley & Udell as bond counsel. Dynamic Fuels has requested a hearing before the State Bond Commission. Should Dynamic Fuels application be approved by the Bond Commission, Dynamic Fuels will then have 120 days to successfully close the bonds.

Go Zone municipal bonds can be issued as either variable or fixed rate instruments like other tax exempt municipal bonds, they can have maturities as long as 25 to 30 years. Interest rates tend to be among the lowest cost available with rates priced at approximately two-thirds of LIBOR plus a credit spread. Bonds typically have a 90-day look back period, meaning that Dynamic Fuels can recover qualified expenditures 90- days prior to bond issuance.

The Dynamic Fuels Geismar project has many attributes that positively impact the state of Louisiana. We believe these attributes will lead to successfully securing our requested allocation of Go Zone bonds. The Geismar project ranks number six in Louisiana in estimate attributes when compared to the 687 projects announced by the Louisiana Department of Economic Development in fiscal year 2006.

In addition to creating over 500 total jobs, over ten-year period, the Geismar project with generate over 400 million in employee compensation and product 3.5 billion worth of products.

During plant construction, approximately 70% of the 135 million direct costs of the plant is expected to be procured locally. This includes such services as design engineering, certain construction material and construction labor. The plant will employ highly skilled engineering and other personnel, attractive high paying jobs, average compensation will be almost $100,000 per year.

Lastly, the Geismar Plant has a very strong environmental profile that could benefit Baton Rouge and the state of Louisiana. The project has a very attractive greenhouse gas profile; it reduces greenhouse gases 74% compared to petroleum based diesel fuel. The project could help Louisiana meet the states 2% renewable fuel mandate and the fuel, if used in the Baton Rouge area, can help contribute toward recovery from nonattainment status due to a slow emission characteristics.

Our financing strategy has been focused on securing project debt. The amount of debt will determine how much equity we must raise. Our strategy has been focused on securing the debt first.

As we have said, we have applied for up to 135 million in Go Zone bonds. Strong economics of our proposed plan and the low cost and longer maturities of this type of financing have allowed us to confidently apply for debt financing that covers 100% of the projected capital cost of the facility. Should we receive an allocation of that amount, pending on the interest rate at the time we close the bonds, total project costs, including the plant, working capital, interest during construction and fees will be approximately 160 million. Therefore, the equity that’s in showing will have to contribute approximately 12.5 million. We expect to have 7.5 million to contribute from our cash reserves leaving approximately 5 million in additional equity that we must raise. Given that the bonds fund first, we will not need to raise the remaining equity until sometime in 2009.

I’d like to review with you the current economics related to our Geismar Plant. Economics continue to be very robust, as we have told you before, (inaudible) in finding is a margin business. Each month in our investor presentation posted to our website, we have been updating what the pro forma performance of the Geismar Plant would have been using historical fuel prices and feedstock prices.

The month of March 2008, the pro forma cash-operating margin of our Geismar Plant was $1.10 per gallon or annualized 81 million per year. This compares to $1.09 per gallon and 80 million per year on average of the last six months and $0.94 per gallon, 69 million per year over the last 12 months.

At the 12-month average rate, the payback period on the plant is just 2.2 years on a pre-tax basis. We are confident that this level of cash flow can easily service 135 million of municipal bond financing.

Finally, I would like to update you on the status of our agreed financing with Fletcher Asset Management. Last week, we agreed with Fletcher to extend one week the financing period for the first 3 million of 12 million in total financing that was to begin last Monday.

Currently, we announced on Monday, March 31, that we have moved our share listing from NASDAQ local market to the NASDAQ capital market effective that same day.

Under the terms of the agreement, the listing from the note NASDAQ global market gives Fletcher the right to waive this commitment to fund any of their committed investments. Those 3 million investments would be issued at 91% premium based on our current share price. Fletcher has not yet informed us as to whether they intend to fund the initial investment during the current pricing period. We will file an 8K once we are officially notified of their decision.

Now I will turn the call over to Karen.

Karen Gallagher

Thanks Ron, on March 17, we announced our results for the fourth quarter ended December 31, 2007, reporting net income of 1.6 million or $0.03 per share compared to a net loss of 13 million or $0.23 per share for the fourth quarter of 2006.

Revenues for the fourth quarter were 1.2 million compared to 120,000 for the fourth quarter of 2006.

For the year ended December 31, 2007, the Company reported net income of 3.8 million or $0.06 per share compared to a net loss of 54.6 million or $0.98 per share for the 2006 fiscal year.

Revenues for 2007 were 16.5 million compared to 2.7 million in 2006. The increase in net income for the fourth quarter and year of 2007 were due to several factors. First, SG&A expenses decrease 25% year over year in line with the cost reduction plans that we outlined in our conference call last quarter.

Second, increased revenues associated with technical service work for Dynamic Fuels and other customers as well as revenues associated with fuel related analysis and deliveries for the Department of Transportation and Department of Defense.

Third, decreased expenditures associated with the completion of our technology and demonstration program.

Fourth, a one-time non-cash revenue of 13.7 million related to an agreement entered into with Marathon in January 2007 and a non-cash gain on extinguishment of debt under our promissory note with Marathon of 11.8 million.

Fifth, the stabled assets International Air National Oil & Gas assets related in a gain on the sale of discontinued operations of 10.1 million during 2007. All (inaudible) associated with this sale to EER was received by March of this year.

At December 31, 2007, our cash position was 18.4 million. Since that time, we have received non-recurring cash payments totaling 7.1 million in addition to our operating revenues. The 5.8 million payment was received representing the final payment for the sale of interest in our International Oil & Gas asset and 1.3 million payment was received from the sale of our former office complex.

Cash as of March 31, 2008, now approximates 23.8 million. We continue to generate revenue by providing technical service work to customers, including our work with Dynamic Fuel.

The balance sheet improved significantly during 2007; we have no long term debt as of year end and we are please to report that shareholder equity increased to a positive 6.1 million at December 31, 2007 from a negative 14.6 million at year end 2006.

We mentioned in last quarter’s conference call that with completion of our technology development, we have right sized our operations consistent with our current business model.

We have reduced our cash used in operating activities from 35.8 million in 2006 to 23.1 million in 2007. We project our cash used in operating activities will be further reduced to 7.1 million in 2008, 6.5 million in 2009.

Total cash usage during 2007, which included operating activities, financing activities and investments decreased from 36.2 million in 2006, 15.1 million, which is a 58% reduction. We expect the total cash usage for 2008 to be approximately $1 million due to our continued cost reduction effort and monies received to date from the sale of certain assets and activities, as I mentioned earlier.

As part of our expense reduction initiatives, we recently appointed Tullius Taylor Sartain & Sartain LOC as our independent registered auditor for the remainder of fiscal 2008. This change was made to reduce audit related expenses, which total approximately 294,000 during 2007. With this new appointment, the Company expects to realize significant savings on audit expenses while maintaining the quality of our audit and related services.

Syntroleum estimated potential audit savings for 2008 would be approximately 75 to 85,000 or 25 to 30%.

Cost reductions associated with the sale of our office complex in the fourth quarter, in the first quarter of 2008 will result in further annual overhead reduction of approximately $250,000.

With regard to our status of listing on NASDAQ, on Monday, we announced that NASDAQ accepted our application for listing on the NASDAQ capital market. This change was effective on March 31 and the Company’s stock has continued trading under the symbol SYNM.

As of February 29, 2008, there were 3,127 companies trading on the NASDAQ. Sixteen percent of those companies traded on the capital market; 41% traded on the global market and 43 percent traded on the global select market.

Our change to the capital market does not affect the 180-day period that in total was provided to regain compliance for the $1 minimum bid price. If at any time before July 30, 2008, Syntroleum’s common stock closes at $1 per share or higher for a minimum of ten business days, the NASDAQ will provide written notification that compliance is achieved. If compliance with the one-dollar bid price requirement cannot be demonstrated by July 30, 2008, NASDAQ will determine whether Syntroleum meets the capital market initial listing criteria. If Syntroleum continues to meet the initial inclusion criteria, except for the one-dollar bid price, NASDAQ may extend the compliance period to January 26, 2009.

We thank you for your attendance today; we will now open the call for questions.

Question-and-Answer Session


(Operator Instructions)

Our first call comes from the line of Jesse Herrick with Merriman.

Jesse Herrick – Merriman

I wanted to touch on feedstock pricing. Obviously, diesel-pricing trends are very beneficial to the business model and I just wanted to see how the fat blend that Tyson will be providing to this JV, whether that has been trending in a similar direction or whether that has been relevantly steady state.

Ron Steinebaugh

The feedstock prices have been trending up with the product prices. Our margins have generally held within a certain range. There tends to be some volatility up and down; but, on an overall basis, I would say that the feedstock blend that we track is currently in about the $0.28, $0.29, $0.30 range and as I mentioned to you earlier, for the month of March, our margins were still in the $1.10 range. We are still looking good.

Jesse Herrick – Merriman

Going along with that in your presentations, you have a couple different cases depending on legislation going forward tax credits, what-not; I was wondering if you have any colour on current legislations, where you are seeing that going and which one of those, if anyone of those your seeing as a particular model that we should be focusing on.

Gary Roth

There is various legislations currently in congress but all of them tend to keep or improve the dollar per gallon tax credit and a number of them specifically call out tax credits related to renewable diesel. Both Tyson and ourselves remain comfortable the tax credits will remain in place for the plant.

Jesse Herrick – Merriman

I was wondering if you could go through the timing on the milestones again, permeating the third quarter of 2008 sanctioning mid 2008, if I got that right.

Gary Roth


Jesse Herrick – Merriman

What was the commissioning again, 2010; I didn’t catch which part; still early 2010?

Gary Roth

(Inaudible) first quarter 2010.

Jesse Herrick – Merriman

Full run rate on that?

Gary Roth

Full run rate second half of 2010.

Jesse Herrick – Merriman

Second half 2010, okay.

You were talking about; you were estimating 6.5 million, which is 2 million below budget on which aspect of the plant or design?

Gary Roth

That was engineering design through the sanctioning of the plant.

Jesse Herrick – Merriman

Design through sanctioning, excellent, you are on time and below budget is the basic take away here.

Gary Roth

You’ve got it; we are on time and on budget; we ordered the reactors prior to plant sanctioning to maintain schedule.

Jesse Herrick – Merriman

Excellent, that is all I had. Things are looking good.

Gary Roth

Thank you.


(Operator Instructions)

Our next question comes from the line of Pavel Molchanov with Raymond James.

Pavel Molchanov - Raymond James

Good morning, questions about the sales from the plant are you looking for domestic market or are you looking to export it overseas?

Gary Roth

We run our economics based on domestic gulf coast diesel prices.

Pavel Molchanov - Raymond James

You are not assuming any blending credit or are you assuming that dollar per gallon?

Gary Roth

We assume the dollar a gallon in our economics.

Pavel Molchanov - Raymond James

Okay and would you be doing the blending yourself or would you essentially sell just the B100?

Gary Roth

We are in the process of doing our marketing studies, it hasn’t been determined but once again our product does not need to be blended; it is ASTM diesel in equivalency coming right out of the back end of the plant. We have quite a bit of flexibility.

Pavel Molchanov - Raymond James

Okay, thanks very much.


There are no further questions at this time. Do you have any closing remarks?

Gary Roth

Thank you for joining us today on the conference call. We plan to have annual shareholder meeting on our around June 2 and more details will be included in our noted and proxy statements.

We plan to have meetings with investors in various markets over the next several weeks. If you would like to schedule a meeting with us, please call Gerilynn Debock or Casey Stegman at Haliburton Investor Relations 972-458-8000. We appreciate your ongoing interest in Syntroleum, thanks.


This concludes today’s Syntroleum Corporation conference call, you may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to All other use is prohibited.


If you have any additional questions about our online transcripts, please contact us at: Thank you!