Syntroleum Corporation (NASDAQ:SYNM) Q3 2010 Earnings Call Transcript November 8, 2010 11:00 AM ET
Karen Gallagher – SVP and Principal Financial Officer
Gary Roth – President and CEO
Jeff Bigger – SVP, Business Development
Ron Stinebaugh – SVP, Finance and Acquisitions
John Bell [ph]
Jim West [ph]
Joel Stan [ph]
Carlo Curt [ph]
Richard Colbecht [ph]
Dave Henry [ph]
George Bernard – Cox Advisors
Eric Burns [ph]
Kim Souza – Northwest Arkansas
Chuck Howard [ph]
Charles Nelson [ph]
George Polas – SIG
Rodney Odal [ph]
Steve Sparrow [ph]
Lewis Nawaro [ph]
John Anderson [ph]
John Smith [ph]
John Sims [ph]
Mike Walker [ph]
Greetings and welcome to the Syntroleum third quarter 2010 conference call. At this time all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. (Operator instructions)
As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ms. Karen Gallagher, Senior Vice President and Principal Financial Officer for Syntroleum.
Thank you, Ms. Gallagher, you may now begin.
Good morning and thank you for joining us today. Remarks for today's call will be presented by Syntroleum's President and Chief Executive Officer, Gary Roth, followed by Jeff Bigger, Senior Vice President of Business Development, who will provide an update on our Dynamic Fuels Geismar plant, Ron Stinebaugh, Senior Vice President of Finance, who will provide an update on our marketing efforts and government legislation status and Karen Gallagher, Senior Vice President and Principal Financial Officer, who will report the financial results for the nine months ended September 30, 2010.
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. Now I will turn the call over to Gary Roth for opening remarks [ph].
Thank you, Karen. We're excited to announce that our Dynamic Fuels plant in Geismar, Louisiana is up and running and producing commercially renewable products. The plant is on a 39 million gallon per year ramp-up plan. We have the hydroprocessing reactors at full design flow rates and have achieved 100% conversion of the renewable feedstocks into ASTM pipeline quality diesel, naphtha and propane.
The diesel meets all ASTM D975 standards and we have produced diesel with a cloud point as low as 26 degrees below Fahrenheit and with a cetane of 88, more than twice that of ASTM petroleum diesel specification. We have processed multiple feedstocks, including beef tallow, poultry fat and yellow grease. With the plant now online, we are filling the supply chain with a wide variety of feedstocks from more than 20 independent sources. We expect to have stable 4A production in the fourth quarter.
I'm also pleased to announce that Dynamic Fuels is producing renewable jet fuel at the Geismar Plant for the United States Air Force. This demonstrates our ability to make product with excellent cold flow properties. The jet fuel has a freezing point of 56 degrees below zero. Since 2002, Syntroleum has been working with the military on synthetic fuel development. We provided the synthetic aviation fuels for the certification of the B-52 in December of 2006. This was the first U.S. military airframe certified on synthetic fuels.
In 2008, Syntroleum supplied the military with 500 gallons of renewable jet fuel for engine testing. The renewable jet fuel from Dynamic Fuels, we'll deliver is part of the hydrotreated renewable jet fuel certification program. Dynamic Fuels is the only commercial provider in the testing program using readily available feedstocks.
During our marketing efforts, we have received and continue to receive significant interest from major oil, chemical and consumer products companies both in the U.S. and internationally. Demand substantially exceeds plant capacity. We have agreed commercial terms with the buyers for the sale of all the products from our plant. We expect margins to be superior to competing plants due to our ability to produce premium diesel fuel using lower-cost feedstocks. We are also aggressively pursuing specialty product markets with prices significantly higher than diesel prices.
Now that we are producing commercial quantities of fuel, I would like to remind you of our timeline for the commercialization of our Bio-Synfining technology. We began developing our technology in the fall of 2006. Nine months later, in June 2007, Dynamic Fuels was formed as a 50-50 joint venture with Tyson Foods. Six months later, we selected the Geismar site and began construction in November of 2008 and achieved mechanical completion 19 months later, in July of 2010.
During the construction, we employed 470 workers, resulting in approximately 1 million man hours and we currently employ 44 full-time personnel. Final construction costs are projected at 8% over our original estimate. In four years we have commercialized the technology, partnered with Tyson Foods, a Fortune 100 company with specialized renewable feedstock, logistic and marketing skills and created the first second-generation renewable fuels plant in the U.S. We have achieved these goals with an excellent safety record.
I will now turn the call over to Jeff Bigger.
Thank you, Gary. The plant has been producing at 39 million gallons-per-year rate and we are on a prescribed supply, logistics and product delivery plan to increase the plant to full rate during the quarter. The processing technology is working at or above design levels.
As Gary pointed out, a key attribute to our business model is our ability to process low-cost feedstocks into high-quality products. The plant has processed a wide variety of feedstocks from beef tallow to more difficult, lower-cost feeds such as yellow grease and poultry fat. The product quality from all of these feedstocks have exceeded the ASTM D975 diesel product specification. The plant has produced fuel with a cloud point as low as minus 26 degrees Fahrenheit, which is equivalent to Arctic diesel.
In addition to highlighting our commercialization achievements, I would like to point out some key competitive differences of this plant and its products. First of all, the products created using our technology are high-quality and are 100% compatible with existing petroleum-based chemical feedstocks and fuels. Our clients don't need to compromise quality or make expensive infrastructure investments when using our products.
Second, our fuel is drop-in ASTM D975 fungible diesel fuel. In fact, we like to say that our fuel is just diesel. We expect renewable diesel to be eligible for shipment through product pipelines as a fungible fuel by early 2011.
Third, we have built a commercial facility, successfully moving from a demonstration-scale to a commercial-scale renewable energy plant. Many of our advanced biofuels competitors currently have only demonstration-scale projects with commercialization years away.
Fourth, our Bio-Synfining technology can utilize lower-quality, less expensive feedstocks, while maintaining superior product quality. This is a well proven economic model in the refining industry whereby the technology allows for the separation of the product quality from the feedstock quality.
Fifth, we are not part of the food versus fuel debate. Our feedstocks are inedible and not a direct food source. The use of our feedstocks will not impact food prices, increase acreage use for destroying national habitat. Our fuels are produced responsibly and create a sustainable energy source.
Sixth, we can produce much more than just diesel fuel. We are discovering new uses for our product on a daily basis, from detergent to dry cleaning fluids to waterproofing agents.
Seventh, our product is cleaning green. The carbon footprint of our fuel is 75% below that of petroleum diesel. The tailpipe emissions are ultraclean due to the near zero aromatics in our fuel and you can visibly see the difference in our fuel. It is crystal clear.
Eight, our U.S.-based plant reduces dependence on foreign oil, while the same time creating green jobs and opportunities within U.S.
Finally and most important, our product is available now. We’re the only domestic company that is currently producing renewable diesel.
Now, I will turn the call over to Ron Stinebaugh.
Thanks, Jeff. Our marketing strategy includes educating our end users about the quality of our products and their various applications. We are manufacturing some of the highest quality diesel fuel in the world and these all-ASTM D975 diesel standards. We're working systematically to migrate our distillate product, up the value chain to markets that value its many specialized quality.
We have received interest from major oil companies and refiners, blenders, marketers and industrial end users substantially in excess of our plant's capacity. We have agreed commercial terms with buyers for 100% of the fuel's diesel, naphtha and LPG products. Current applications include high-margin markets, such as underground mining, markets that value cold flow properties and specialty product markets.
In its more specialized form, our renewable distillate can be separated into its component parts for use in high-margin applications. Our products displace existing petroleum-based products with a drop-in renewable biodegradable one. Examples of markets we are targeting include base stock for detergent production, dry cleaning fluids, metal cleaning solvents, polishes and air fresheners, drilling fluids for oil and gas wells, liquid printer toner, agricultural and environmental solvents and phase-change material.
With respect to phase-change material, the DOE has provided $1 million in funding to develop commercial applications for this product. We have completed 15% of the project to date and are on budget. Our preliminary tests verified that we can produce the phase-change materials with superior properties. The scale-up of encapsulation of the materials will occur in the first quarter of 2011, with evaluation tests being performed at Oak Ridge National Laboratory.
As you can see, our Bio-Synfining material has many uses ranging from a fuel used in diesel trucks and heavy machinery to a wide variety of specialty products. We're still learning about new applications in which our product can be used.
With respect to government regulations that impact our business, as many of you are aware, the dollar-per-gallon renewable diesel tax credit and $0.50 per gallon alternative fuel mixture tax credit expired at the end of 2009. The entire industry has faced uncertainty surrounding the renewal of these tax credits. At this point we cannot protect a timing or ultimate outcome of this issue.
With respect to fuel use mandates, the Renewable Fuel Standard 2 creates a government mandate for our fuel. Obligated parties must acquire 800 million gallons of biomass-based diesel, which includes renewable diesel, for 2011 or acquire Renewable Identification Numbers, or RINs. RIN prices are currently $0.60 per gallon, up from $0.10 per gallon at the beginning of this year.
We have pointed out that our renewable diesel enjoys structural advantages. Due to the uncertainty in the biofuels industry, refiners typically have not installed blending infrastructure. Therefore, blending is generally done by intermediaries to separate the RINs and resell them to obligated parties. Obligated parties, therefore, obtain RINs without having to invest in infrastructure.
Our fuel has the advantage of not having any infrastructure impediments and will be eligible for pipeline transportation as a fungible fuel. Our fuel has superior properties and we will find the markets that will pay the most for these properties. We believe our superior product quality will translate into better net-backs.
I will now turn the call over to Karen.
Thank you, Ron. I would like to update you on the earnings results of our quarter ended September 30, 2010. For the nine months ended September 30, the company reported a loss from operations of $730,000, resulting from total revenues of $6.8 million and operating expenses of $7.5 million. The total net loss for the nine months ended September 30, 2010 was $4.5 million.
We generated $900,000 in cash from operating activities for the nine months ended September 30 and changes to our business structure and increased revenues have resulted in positive cash flow from operations for the last two years. The company had a cash balance of $20.8 million at September 30 compared to $25 million at year-end 2009. Over the last four years ended September 30, we have invested $34.3 million in Dynamic Fuels.
In summary, we began an effort to commercialize our technology four years ago and we have now accomplished the first of our goals. We have constructed and are now operating a renewable fuels plant utilizing our technology and producing quality fuels. Our technology and plant differentiates us because we have the ability to utilize lower-cost feedstock to produce products with superior properties. Our product also has superior properties to petroleums-based diesel in that the emissions are ultra-clean and aromatics nearly zero.
We and Tyson Foods are excited to have created a breakthrough company, commercially producing the first-quality second-generation fuels within the United States. We look forward to entering different specialty product markets with the production from the Geismar facility and expanding our footprint in the advanced biofuels industry.
Thank you for your attendance today. We will now open up the call for questions.
(Operator instructions) Our first question comes from the line of John Bell [ph], a private investor. Please proceed with your question, your line is now live.
Thank you. First, I’d like to congratulate all of you. I can assure you that some of us private investors have been suffering right along with you folks this past year and I think it’s just a stunning achievement.
My question is this. Starting somewhere around July, after RFS2 went into effect, RIN prices predictably started climbing. Last year, they were somewhere around $0.15. Now they have broken through $0.60. Allowing for you’re a multiplier, please comment on the impact of a further increase, given the lack of a tax credit at this time? And as a follow-up to that, since RINs are taxable, at what point would your mass net operating losses come into play? Thank you.
Thanks for the question, this is Gary Roth. On the RINs, where – as you have pointed out, we are $0.60 on a 1.7 multiplier; we are now at a $1 equivalent value. So if any additional increases in RINs accrues to Dynamic Fuels’ bottom line at 1.7 times that increase. To your questions on taxable, we have accrued losses of over $300 million and those losses are available to Syntroleum to shelter its Dynamic Fuels’ net income. So, those would be available as distributions are made out of Dynamic Fuels.
Thank you. Our next question comes from the line of Jim West [ph], a private investor. Please proceed with your question, your line is now live.
I was on the tour at the plant in Geismar, Louisiana, earlier this year. And it was my understanding at that time that you were not going to have the additional equipment required to make jet fuel. But if I heard right in the presentation, you are currently making jet fuel. And I was wondering, did you come up with a new technology, or did you spend the money for the additional equipment – or did I misunderstand and you’re not making jet fuel?
Jim, thanks for the question, again, Gary Roth. We are making jet fuel. We have completed, actually, making the jet fuel for the Air Force and are about to ship it. We have used a combination of this facility plus a secondary facility to produce the jet fuel. We make – through the technology here we make a base component of jet fuel and then we do a secondary distillation to make the final product. So, we are able and have produced jet fuel. It passed every test. And this is certification volumes for the Air Force, which means it typically has to go through a higher level of testing because it’s the volumes used to certify the military airframes.
Our next question comes from the line of Joel Stan a private investor. Please proceed with your question, your line is now live.
Good morning, gentlemen and again, congratulations on a great achievement. Going back to the question of the RIN pricing and the impact on profitability, from the last conference call we got a strong indication that the plant would not be profitable without the dollar tax credit. Now we see RIN prices are at a point where the money coming into the plant and into your revenue stream is at a dollar or thereabouts, do you all see the plant being profitable if RIN prices go up another $0.03 or $0.04 or $0.05; or, at what point do you see the profitability being impacted?
Thanks for the question, Joel, this Gary Roth again. The dollar tax credit adds stability for all of us in the renewable fuel space. Our government made certain, for lack of a better word, promises to us on these credits. And we built plants, made investments, created numerous jobs, spent $130 million-plus based on those assurances. So, that’s what we told our investors and our lenders, is that we expected that dollar to be in place, which helped develop a floor on which we could operate.
With the RIN prices going up, that dollar has been replaced, but the RINs are subject to market forces that the dollar had not been. So, although we are extremely happy with the RINs – they are up, what, roughly 300% in the last six to eight months, we believe that the government should put the dollar back in place and, if nothing else, give us a timeframe for all of us, not just for Dynamic Fuels, but everybody in the advanced biofuel industry, to have time to transition to a world where we don’t have the dollar. But this incessant off-and-on is what makes it very difficult for those in our space to plan, budget, construct, build, market, turn up feedstock long-term, turn up supply contracts long-term is the continuing changes in the market. We need stability. And I think our Tyson friends would suggest that’s the same issue; we need the stability.
Thank you. Our next question comes from the line of Carlo Curt[ph], a private investor. Please proceed with your question, your line is now live?
Thanks guys, for the presentation. I was just wondering; I thought I remember – is there any shareholder incentive plan or poison pill, also known as, to prevent any hostile takeovers for management? I thought I remembered there being one; I couldn’t find it, though?
Ron, do you want to take that question?
Yes, this is Ron Stinebaugh. We do have a traditional shareholder rights plan, or poison pill, if you will. It was put in place, if I recall correctly, about four or five years ago. If you go back and search our filings, you will find it.
Thank you. Our next question comes from the line of Gary Rumple [ph], a private investor. Please proceed with your question, your line is now live?
On the jet fuel for the government, you are going to a second distillates or distillate? What would cause – if our fuel passes the government certification, what kind of letter are you projecting you would have to add onto the Geismar plant, or, would that be an entirely new secondary plant that you would have to create to take care of that demand?
The way we are making the jet fuel now is to a secondary distillation. So we make the primary product in Geismar, then we distill that, which is a pretty simple process; it’s a well-known process, the distillation to make the jet fuel. What we’ve done is we’ve used the lowest capital cost methodology to make certification volumes. Once again, the stability is the issue with us, Dynamic Fuels. If the government wants to put in terms or in place longer-term off-take agreements for jet fuel, we would be prepared to invest the capital. If they are not, then we think the lowest cost way is to continue to produce the jet fuel with the secondary distillation.
The cost of that – we are under CAs with both the government and a number of other parties, so we really can’t disclose what the cost of it is. And I don’t think we want to, because right now we are pricing products in the markets and we are pricing new products, renewable products, biodegradable products that have drop-in replacements. Our clients don’t suffer on quality by taking a renewable. And we are finding that those products and those product features have values and those values vary between the clients. And by making public announcements of prices we tend to set caps on how much we can charge. The markets are better, as you can imagine in diesel and we see diesel as the lowest common denominator for the fuel.
Thank you. Our next question comes from the line of Richard Colbecht [ph], a private investor. Please proceed with your question, your line is now live.
Yes. Now, that you’ve sold the PDU to the Chinese, are you expecting any other agreements with Sinopec that would provide you with revenue in the future?
This is Gary Roth again. We have an outstanding royalty arrangement with Sinopec. If they develop commercial – if they develop a commercial plant in China, then we participate through the royalty arrangement.
Thank you. Our next question comes from the line of Dave Henry [ph], a private Investor. Please proceed with your question. Your line is now live.
Are there any news concerning a second plant?
Dave, this is Gary Roth. We were very happy with the marketing effort and the response from the clients. So, based on those responses, we believe that there is a market for the products. Now, the question in our mind, I think, in Dynamic Fuels and our partner Tyson, whether those products are specialty chemicals or whether those products are more aviation fuels or those projects – products are diesel fuels or other diesel-related specialty markets. So our plan is to aggressively market the products.
And I want to take one minute and talk about that. When you develop specialty chemicals, it is a different market than when you sell diesel. Regardless of what gas station you pull into, you expect your diesel to be of the same quality and the same performance standards. Now, there is a wide range of chemical compounds in diesel but that's not the specialty chemical markets. Specialty chemical markets want specific molecules. They need them reliably and they need them with no contamination and that's what we supply.
But one has to go through a process of certification with those clients. They test your product, they confirm delivery, they confirm your quality assurance/quality control standards. And that's the process we're going through right now with a number of off-takers, is that chemical certification process. So we need to see how that process finalizes before we determine what we’re going to do on a second plant and that's as fundamental as, will that second plant be fuels or will it be chemicals? And how does that impact the planning of feedstock from our partners at Tyson?
Thank you. Our next question comes from the lines of George Bernard [ph] with Cox Advisors.
George Bernard – Cox Advisors
I have two questions. One has to do with the raw materials, which, I believe, are sourced by Tyson. My understanding is they are not using materials they have in their own system but rather than that they're collecting from other sources. And I'd like to know a little bit, if you possibly can tell us, the financial arrangements regarding the cost of raw materials. And the second question, if that's what you want to call it, will be is – have you got any forecast regarding the profit for the fourth quarter? Get me guidance on that. So those are my two questions.
George, thanks for the questions. This is Gary Roth. I'm going to answer two first, and then I will turn it over to Jeff Bigger, who will answer one. For one, on forecasts, we don't give forecast. This business has just started and without the regulatory environment being firmed up, it is an impossible task to attempt to reasonably forecast profitability. So that's what we are waiting for.
Let's see where we go on the dollar, let's see where RINs go, let's see how the plant stabilizes and then from there we can discuss whether or not it's reasonable for us to prepare a forecast. Onto your second question, I'll turn it over to – excuse me, your first question, let me turn that over to Jeff to answer.
Hey, George, this is Jeff Bigger. On the feedstock, our arrangement with Tyson Foods is that they arrange for the feedstock supply for the plant and they can source that material from wherever the lowest-cost feedstock is available. Because they have such a large logistics organization and are used to and very good at trucking and rail car transportation of feeds, they can look at every location in the country where various feedstocks are available and find for Dynamic Fuels the lowest-cost source of that material. So right now, some of it's coming from Tyson plants, some of it's coming from other plants across the country and some of it's coming from facilities that are making feedstock right here in the state of Louisiana.
Thank you. Our next question comes from the line of Eric Burns, a private investor. Please proceed with your question. Your line is now live.
Thank you for taking my call. I have a question about gas to liquids and coal to liquids, with the amount of reserves America has. I know you guys have some GTL and CTL technologies. I want to know how you are going to capitalize on that. Also, I want to know what's happening with the Sapphire algae oil production.
Okay. I'll let Jeff Bigger answer those questions for you.
First of all, Eric, thanks for the call. On gas to liquids and coal to liquids, we do have those technologies, based on the years of research and development and demonstration we have done on our Fischer-Tropsch’s technologies. And those technologies are available for license right now. We have offered it for use both domestically and internationally. And certainly, as the cost of natural gas in the United States has continued to decline, there has been more interest expressed in those technologies by the folks that own gas reserves as well as coal reserves.
So how will we capitalize on that? We will – we have our technologies available and they are available to license to project developers and owners for gas to liquids or coal to liquids, either here in the U.S. or domestically. One of the things we have to build on is the fact that the Geismar facility is a 5000-barrel-a-day refining project that basically builds on our core refining technology and allows us to have a leap on any competition we have because we have this commercial facility currently operating.
Thank you. Our next question comes from the line of Kim Souza with West Arkansas Newspaper. Please proceed with your question. Your line is now live.
Kim Souza – Northwest Arkansas
I just wanted to ask – the plant is operating at a loss without the credit? Is that true?
This is Gary Roth. That's not true.
Kim Souza – Northwest Arkansas
It's not true? Can you talk about profit margins per gallon at the current level that you are processing?
Once again, we are not going to talk about profit margins. We are out in the market. We're marketing our product. The product has different value to different people and as soon as we offer a price, that sets the ceiling. As soon as we offer a margin, it sets the ceiling. We don't believe that would be consistent with what we are trying to do in maximizing prices.
Thank you. Our next question comes from the line of John Bell [ph], a private investor. Please proceed with your question. Your line is now live.
Hello again. I'd like to switch gears for just a moment. Several months ago, I was reading about your involvement in producing a test project involving phase change material. And I know a little something about it and did a little research on it and the applications for it could probably cause you to build a plant just for that. I'd like you to spend a moment or two and explain your involvement in that and where you think it will lead over the next year or two or three?
John, thanks for the question. In the simplest form, phase change material is a product that acts like an ice cube. So when you put ice in your drink, as the drink cools off, the ice melts. And by melting, it keeps the drink at a constant temperature. So what we have in our phase change material that's produced from the feedstock from our partner Tyson is a material that you incorporate into building products.
And as the sun comes up in the morning and starts to heat the building, this material melts just like an ice cube and keeps the building cool. As the sun goes down in the evening, this material solidifies, goes back to a solid and in doing so, it releases heat and keeps the building warm. So the applications so far have been limited by sources of cost-effective feedstock and cost-effective production.
We believe we have that here in Geismar and it has a lot to do with the feedstock that Tyson supplies us. We've seen numbers that it reduces energy consumptions 30% to 40% in commercial buildings. It's an easy retrofit, it's part of the actual building construction and so what we have is a grant from the Department of Energy on commercializing the product. We already make it. It's readily available here in Geismar.
So this grant is a commercialization grant. And we believe you are correct; if it plays out – we think it will and we have a great partner who is fantastic in marketing consumer products, Tyson Foods. We think this is a big market for the products here and would probably cause another plant to be built.
Thank you. Our next question comes from the line of Chuck Howard [ph], a private investor. Please proceed with your question. Your line is now live.
Congratulations, guys. I just wanted to have one question on the opening ceremonies for the Geismar, wanted to see if you could create some excitement, as much as I feel about this.
Jeff, do you want to take that?
Yeah. Chuck, we're going to celebrate the opening of this plant. We've gotten the plant up and running. And as things stabilize here and we get through some of this political season, we'll have a formal grand opening event and extend invitations to, say, the most easily name-recognizable people we can get that would be supporters of this industry and our plant here in Geismar. So we will have a grand opening ceremony. And it will occur probably after the first of the year.
Thank you. Our next question comes from the line of Charles Nelson [ph], a private investor. Please proceed with your question. Your line is now live.
Good morning, gentlemen. Congratulations on the excellent progress that you are making. I was wondering, is there any possibility that you would maybe turn up the PR a little bit and bring us out of the dark ages? We seem to be left out there with absolutely no information for months on end and it's a little (inaudible) to say the least. When do you expect the second plant to be built and is it going to be – I guess, from what I've just heard, dedicated strictly to phase change materials? Thank you.
Jeff, do you want to answer that?
Charles, thanks for the call. We are developing the markets for phase change materials and other specialty products. And as Gary Roth mentioned earlier, as we see where the demand for our products generate the highest margin for us, we will move towards expanding our capacity to meet that demand. And, as long as the demand and the margin is there, we will seek additional plant capacity to meet that demand.
I want to add one reinforcement item we talked about earlier. Without having the commercial products, you can't get the specialty chemical guys in the door. They need to see commercial, reliable quantities of the chemicals – not pilot plant volumes, not research volumes, but real-world, large-scale volumes that they know are dependable because, when they leave their current suppliers, they need you to make the contracts. And so what we've seen is that, as the plant comes up and as the product quality meets or exceeds their specifications, it's relatively easy to move into those specialty product markets. But you've got to have the volumes, you've got to have them reliably, you've got to have a feedstock supplier like Tyson who is going to deliver. And that's why we think we are in the best position to be able to penetrate those markets, because we have all those things.
One last point, it costs a lot of money for a client to certify a new chemical. They are not going to spend that money unless you can demonstrate deliverability at commercial quantities. And that's what we've demonstrated here and that is why they are visiting the plant.
Thank you. Our next question comes from the line of George Polas [ph] with SIG [ph]. Please proceed with your question. Your line is now live.
George Polas – SIG
Thank you, gentlemen. Could you go over on a comparative basis the diesel refining margins relative to the commercial, the potential commercial products, for instance, the detergent, the dry cleaning, the margin comparison on one end and, two, of the 75 million gallons that are produced, how much of that will be attributed to this new product line?
Once again, this is Gary Roth. We're not going to compare margins. Once we compare margins, people are readily able to see from government publications what diesel margins are. Once you talk about margins and specialties, you limit how much you can charge when you've given those prices in a public forum. The clients know it and you set the ceiling. So we avoid discussion of margins for that reason. We currently believe that essentially all of our products, including the naphtha, the one exclusion, of course, would be propane, have specialty chemical values. And we are pursuing those. Where we started, of course, is the diesel. That's what we have most of, so we got the most bang for the buck. So that's the area we look to certify with the chemical offtakers, is that diesel boiling point range.
Thank you. Our next question comes from the line of Rodney Odal [ph], a private investor. Please proceed with your question. Your line is now live.
First, I just want to thank you all. I think you all are doing a great job on getting this plant up and running at a great time. I was going to ask some questions based on the RIN values in your fourth-quarter profits, but you have already stated that you are not going to comment on that. So let me try to ask it in this manner. If the RIN value prices are currently at, firstly, around $0.60, given the current multiplier, regardless if the tax credit passes or not. Are you currently – is the resulting product at a profit?
This is Gary Roth. The product is profitable in the current environment. We've been asked to project products when RIN's are up 300% in just the last nine months. I don't know how to project profits when we have no stability in those components of our products that keep moving. It's a very difficult proposition to try to project profits up or down. The market is not acting normal because there are, clearly, a group of people who think the dollar is coming back. Those people are going to produce and sell at a loss because they think the dollar is coming back and therefore they will recoup their losses against the dollar.
There's a group of people who don't believe that the dollar is coming back and they are not producing. So the market is in a complete state of flux. That's one of the reasons we target the specialty markets, as Ron pointed out. Because those buyers are market-based buyers as opposed to a government subsidy-based buyer. I hope that answered your question.
Thank you. Our next question comes from the line of Steve Sparrow [ph], a private investor. Please proceed with your question. Your line is now live.
Yes. I'd like to know, is there a location where I can find out what the pricing, current pricing is of RINs? I know you said $0.60 today but is there a location where I can track in the future what the RIN prices are?
Ron, would you take the question?
Yes, I will. This is Ron Stinebaugh. There are a number of publications that provide RIN prices – OPIS, which is Oil Price Information Service, is one. Platts, I believe, is another. These are generally services you have to purchase by subscription. So I am not aware of any service that provides RIN prices that is free but they are available.
Thank you. Our next question comes from the line of Lewis Nawaro [ph], a private investor. Please proceed with your question. Your line is now live.
Good morning, everyone. Congratulations to the entire Syntroleum and the Dynamics fuel team on the current achievement with Geismar plant. My question is, have any U.S. government officials in recent weeks currently in Congress or elected in recent midterm elections contacted Dynamic Fuels or Syntroleum to be educated on the economic value of Syntroleum's technology. What it is to the new energy policy in the USA for the purpose of ratifying an advanced biofuel tax subsidy?
This is Gary Roth. Thanks for your question, Lewis. And I'm sure your thanks extends to our partner Tyson. They have been a great help and a great support in this whole process. As far as the government, we are constantly in touch with the government, whether it's through the Air Force, whether it's through our representatives including Louisiana state representatives. It's probably a little bit early for us to be contacted with the elections. Tyson, as you can imagine, has a big presence in Washington. And they promote the message of the value of the advanced fuels on a routine basis.
Thank you. Our next question comes from the line of John Anderson [ph], a private investor. Please proceed with your question. Your line is now live.
First, I want to thank you for your presentation. And as you reflect back on the Geismar plan, now that it's well on its way, how much do you feel you've learned in the construction planning? I know that it is a highly sophisticated plant in terms of automation. How will those lessons affect the scheduling costs of future plans whether that be for fuel or specialty chemicals? Will it shorten the time frame, lower the cost or just take risk out of the equation?
John, thanks for the question. This is Gary Roth. I can – we have learned an immense amount, both ourselves and Tyson, Tyson learning about hydroprocessing and us learning about feedstocks. We would suspect it would shorten the time, as we have had the preliminary engineering, which took about nine months, already done. We would expect it would enhance the construction period for the things we have learned, what we need to add and what we need to subtract.
We wouldn’t – the cost savings, I think, would be more driven by market. Things that – when you build in a $150 oil environment versus $50 or $70, that's typically the big driver of our costs. But we would expect to shorten things, the time, for example, for commissioning and startup of the plant.
Thank you. Our next question comes from the line of John Smith [ph], a private Investor. Please proceed with your question. Your line is now live.
Yeah. I apologize, if this question has already been answered; I missed the first part of the conference call, but getting back to the Sinopec and the former Catoosa plant, can you tell me at what stage is the plant? Is it still under construction or is it complete? And if you can provide some more color on the royalty issue? As far as, is there a certain percentage of any royalty, of any future plants that Sinopec would have and what percentage would that be, if you can release that?
Thanks for the question, it’s Gary Roth. Sinopec has erected. They expect first quarter startup – commissioning and startup of the plant of the CDF. As far as the royalties, the royalties are a function of oil prices and they vary with certain plant sizes and rates. I think that's all, to your question.
Thank you. Our next question comes from the line of John Sims [ph], Private Investor. Please proceed with your question. Your line is now live.
Hey, team, great job. I think there's one thing that we need to be thinking about and really, the reason that I'm invested in the company as heavily as I am. We are doing – you guys are doing something really good. Yes, it is a profit entity but you are creating green fuel and really helping with the independence that we have on foreign oil. I can envision a commercial with a Tyson associate and a Syntroleum associate or someone from Dynamic Fuels holding up a beaker of the diesel fuel that is produced, getting real credit for what you guys are doing. What are the initiatives that we plan in the future for advertising and getting credit where credit is deserved?
John, thanks for the question. We have been developing a program to get the message out to, certainly our potential clients and consumers about what we’re doing here and to educate folks. We will continue to pursue that, we don't have plans currently to be direct marketing Dynamic Fuels – fuels but we will be marketing our fuels to clients that would be buying it from us.
And we have put on the website a video that shows scenes from inside the plant and we'll continue to update the website with new information as it becomes available and basically working to educate the people and our clients in terms of what our fuels are and with they can be used for, as well as what our specialty products are and what we can make. Thank you.
Thank you. Our last and final question comes from the line of Mike Walker [ph] our Private Investor. Please proceed with you question. Your line is now live.
Yeah, good morning gentlemen. And great job on the plant opening. In regards to jet fuel, I had read in a couple of sources of information, one being Aviation Week and Air Force Times, that the Fischer-Tropsch process was already approved. Am I misunderstanding that you are still currently sending fuel for more testing?
This is Gary Roth. Fischer-Tropsch is approved, but what we are sending now is the renewable fuel that's generated from the Tyson feedstocks, waste, fat, oil and greases, which is a different certification from the FT fuels. And this is an area we’re focused on as military certification in and we're supplying those certification volumes for the renewable fuels. Historically, in '06 we provided the certification volumes from Fischer-Tropsch's production, which were produced at our gas to liquids facility in Catoosa. Thank you.
There are no further questions at this time. I would like to turn the floor back over to you for any closing comments you may have.
Please contact Mandy Burns at area code 918-764-3480 or e-mail firstname.lastname@example.org for samples of our crystal-clear HI product or our phase change material that melts in your hand and freezes at room temperature. We are planning a media plant tour day and an investor plant tour day in the spring of 2011. We will announce details soon. You may also e-mail or call if you're interested in visiting the completed facility for times other than these planned events. Thank you for joining us today on our conference call.
Ladies and gentlemen, this does conclude today's conference. You may disconnect your lines at this time and we thank you all for your participation. Good day.
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