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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 of economics, finance, writing and education, and... More
  • Syntroleum And Tyson's Dynamic Fuels Plant Was Profitable For 2012 Due To Tax Credit 0 comments
    Feb 3, 2013 1:10 PM | about stocks: SYNM, TSN

    Syntroleum (NASDAQ:SYNM) and Tyson Foods (NYSE:TSN) have a 50/50 joint venture called Dynamic Fuels, a 75 million gallon per year advanced biofuels plant. The problem is, they haven't been able to get production anywhere near the boiler plate capacity. The best monthly production they have had is 86% capacity in July 2011. The average capacity is around 44%, and has been very sporadic. The plant was closed much of November and December of 2012, and there hasn't been a 8-k announcing that the plant has restarted in 2013. Other issues plagued the plant all throughout 2012, which had an average production level on 48% through October. At the end of 2012, it looked like the year was going to be a complete disaster.

    Fortunately, at the end of the year an important tax credit passed, and Dynamic Fuels should get a tax windfall of $23 million dollars. That tax credit if applied to 2012 would make 2012 a profitable year for the Dynamic Fuels plant. Considering that this is a first of a kind plant, turning a profit after just two years of production isn't bad. Through Q3 2012 the Dynamic Fuels plant had lost $12 million and according to page 21 the recent TSN 10-k, Dynamic Fuels lost another $10 million in Q4 2012. That puts the total loss of 2012 at $22 million, which is less than the estimated tax credit amount at the end of Q3 2012 of $23 million, so Dynamic Fuels should show a profit of at least $1 million for 2012. That number may increase if the plant produced in Q4 2012, but from the $10 million loss, that is doubtful.

    Why is that important?

    1) The Dynamic Fuels plant had an awful year...and turned a profit.

    2) The regulatory system that is in place is working, a bit rough around the edges, but it is ensuring that companies like Dynamic Fuels have the time and resources to get their feet on the ground. While I hate to admit this, it doesn't hurt when you have Uncle Sam in your corner.

    3) Dynamic Fuels now has plenty of cash to resolve any remaining operational and mechanical issues, many if not most of which were resolved last year. This will dramatically reduce the risk of SYNM running out of cash before the Dynamic Fuels plant reaches a self sustaining level of production.

    4) The plant turned a profit after just two years, sure it was largely due to a government subsidy, but the uncertainty of the regulatory environment was partially responsible for some of the losses. The key is, at full capacity Dynamic Fuels should be able to survive without government help as long feedstock prices are undistorted by government intervention or some other exogenous influence.

    5) SYNM accounts for their share (50%) of Dynamic Fuels with a three month lag, and will recognize the tax credit revenues in 2013. That means that the Q4 2012 $10 million loss at Dynamic Fuels ($5 million loss to SYNM) will be recognized by SYNM in Q1 2013. Combine that with $23 million tax credit to Dynamic Fuels ($11 million to SYNM), and SYNM should be starting out 2013 with an EPS of around $0.08 before they produce a single drop of fuel.

    In conclusion, it looks like the Dynamic Fuels plant is finally turning a corner, or at least has bought itself time to fix its problems. While the learning curve has been steep and rocky, and anything but smooth, the existing regulatory system was designed and built knowing that creating an entirely new industry wasn't going to be easy or fast. The fact that Dynamic Fuels can turn a profit, small as it may be, after such an awful year proves that the regulatory system is working. It may be like making sausage, it may be ugly, it may be frustrating, but it is working, and that should be good for firms like SYNM and other biofuels firms.

    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.

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