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Professional Credentials: The reports that I write are my personal research and opinions. They are not associated with any firm or organization, and are not intended to be taken as investment recommendations or advice. They combine my passions in economics, finance, writing and education, and... More
  • Syntroleum Needs To "Just Run." 0 comments
    Feb 3, 2013 5:21 AM | about stocks: SYNM

    In the Q2 2012 conference call Syntroleum's (NASDAQ:SYNM) CEO Gary Roth claimed that "So the main thing right now is just run." In the following conference call Q3 2012 it was stated that SYNM's Dynamic Fuel Plant had run for "52 consecutive days representing one of our best performance periods to-date." Unfortunately Q4 2012 saw the floor drop out of the RIN (Renewable Identification Number) market, and the economics dictated that the plant remain closed for a large part of Q4 2012. During the down time the Dynamic Fuels Plant installed two new feedstock processing units, equipment that should go a long way towards allowing the plant to run at the promised full capacity of 75 million gallons per year. According to the Q3 conference call the last main hurdle should be the installation of a new and improved solvent re-cycle pump in mid-2013. So as 2012 came to an end, it appeared that SYNM's Dynamic Fuels Plant was finally getting to the point where they just might finally start turning out a profit, if they only could run, something they have been struggling for over 2 years to accomplish.

    Since the start of the New Year, however, some very positive things have occurred that are very beneficial to SYNM.

    1) The Biofuels Tax Credit Extender Passed. This will result in at least a $23 million tax credit going to Dynamic Fuels, one half of which is owned by SYNM. With Q4 2012 likely showing a loss of between $6 and $8 million for Dynamic Fuels, because of a three month lag in reporting, SYNM looked to be starting out 2013 with a $0.03 to $0.04 EPS loss, but with the passage of the tax credit it looks like they are likely to start 2013 with a positive EPS of $0.08 or more. More importantly, Dynamic Fuels now has plenty of cash, and the threat of cash burn that has threatened SYNM's viability is no longer an immediate concern.

    2) Margins have substantially improved. Dynamic Fuels is not only a producer, but they are also a blender, so unlike many biodiesel producers, Dynamic Fuels gets to keep all of the tax credit for themselves. At the stated blend rate that is the equivalent of about $0.85 per gallon, whereas biodiesel producers that don't blend their own fuel are getting about $0.52 of the $1.00 Tax Credit. That is a $0.33 advantage to the margin for Dynamic Fuels. Dynamic Fuels also produces Naphtha in their process that can be used as a gasoline blendstock, so I would imagine they are working of getting part of that tax credit for their Naphtha as well. If they do, that should add about another $0.07 to the margin. Currently I'm showing the full production net margins for Dynamic Fuels to be around $0.94 per gallon, and I use an OPEX of $0.05 greater than $0.55 claimed by the management.

    With a full production net margin of $0.94 it becomes obvious what Gary Roth meant when he said they just need to run. At full production the Dynamic Fuels Plant will produce 6.25 million gallons per month, or 18.75 million gallons per quarter. With a $0.94 net margin, that translates into $17.64 million per quarter, $8.8 million of which goes to SYNM, resulting in an EPS of about $0.088 per quarter. While it is unlikely Q1 2013 will be full production, Q2, Q3 and Q4 may reach those levels. Given that we are likely starting out 2013 with an EPS of around $0.08, a break-even Q1, followed by full production in Q2 through Q4 could have the EPS up around $0.32. Not bad for a company that trades under $0.50 per share.

    Other catalysts that may drive SYNM higher would be:

    1) Announcement they are going ahead with plans to build 4 or 5 more plants with Tyson, of news that Sinopec will be using their Fischer Tropsch GTL/CTL technology.

    2) The stock trading above $1.00 so that there is no longer a fear of de-listing. This would also result in it being added back into the Russell 2000 and other small and micro cap indexes.

    3) Turning a profitable quarter would prove the viability of their technology, lowering the perceived risk of this company.

    4) The remaining lawsuits by Neste would be thrown out like all past ones have.

    5) Margins continue to widen.

    6) SYNM is awarded some Military Contracts either for their Jet Fuel or to build additional plants.

    7) SYNM successfully completes all testing on their "Phase Change Material" (NYSE:PCM).

    In conclusion, SYNM has been struggling for over two years to get their Dynamic Fuels Plant running at a profitable rate. With the addition of two new processing units, a recent run of 52 consecutive days and a $23 million influx of cash, SYNM may finally be able to "just run," and if they do, it will likely be a very profitable run for investors. SYNM has been baptized by fire as it stumbled through an awful learning curve, but it appears most of the mechanical issues may be in the past, and if they are, the markets are likely to start valuing the firm based upon its successes and cash flow, not their past failures. To make a souffle' you have to break a lot of eggs, and SYNM has certainly broken a lot of eggs, but the cake is in the oven, and it is likely the timer will soon ring, and SYNM will serve up a nice meal of cash flow to the markets to feast upon.

    Disclaimer: Opinions expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisor capacity. This is not an investment research report. The author's opinions expressed herein address only select aspects of potential investment in securities of the companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies' SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author's best judgment as of the date of publication, and are subject to change without notice.

    Disclosure: I am long SYNM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

    Stocks: SYNM
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