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Potential Opportunities In Algae Biofuels

|Includes: BP, CVX, DWDP, IQVIA Holdings, Inc. (IQV), OCLN, XOM

The energy research firm SBI Energy recently projected that the market for algae biofuels would grow at a 43.1% annual compound growth rate (OTCPK:CAGR) to $1.6 billion in 2015. Driven by government grants, regulatory support and higher fuel prices, the growth could be great news for a number of small public players in the green technology space.

Solazyme Inc. (NASDAQ: SZYM), OriginOil Inc. (OTCQB: OOIL) and several other companies focused on algae-based biofuels could benefit from these trends and may be worth a second look for green technology investors.

Replacement for Crop Fuels

Traditional biofuels are created using corn and soybeans, since they are already widely grown for human and animal feeds. The problem is that these crops require enormous amounts of water and effort to harvest and using them for biofuels means that there's less land available for human consumption or animal feed, thereby raising food prices.

Algae-based biofuels offer many benefits in comparison. First, algae are far more efficient in converting solar energy into chemical energy than terrestrial crops. And second, algae can be grown in arid environments where terrestrial crops can't be normally grown, such as a desert, which means that it does not impact the price of food.

Commercially Viable Technology

Algae biofuels have not only attracted investment from large energy companies, but they've proven themselves in commercial applications. For instance, in late 2011, two U.S. airlines made flights powered by biofuels for the first time, including a Continental flight from Houston to Chicago made with a biofuel blend in part from algae.

Meanwhile, investment in algae biofuels from major companies is on the rise:

"Strategic partnerships from ExxonMobil (NYSE: XOM), Chevron (NYSE: CVE), BP (NYSE: BP), Dow Chemical (NYSE: DOW), Desmet Ballestra and many others will drive the investment needed to successfully commercialize algae biofuels," said Shelly Carr, publisher of the aforementioned SBI Energy report. "Private investment and venture capital will also provide funding through 2015."

Numerous Catalysts Moving Forward

An October 2011 article in Algae Industry Magazine elaborates on three key catalysts that could help drive algae biofuel adoption over the coming years:

  1. The international standards certifying body ASTM approved its "BIO SPK Fuel Standard" for the use of hydrotreated renewable jet fuel in commercial aviation.
  2. The military has begun testing a number of different HRJ fuels, ranging from algae to jatropha and coconut oil, on civilian and military aircraft.
  3. The U.S. Sentate voted in June of 2011 to repeal its tax credits for ethanol production, leveling the field for biofuels based on things like algae.

Two Ways to Capitalize on the Trends

Solazyme Inc. and OriginOil Inc. are two companies that are well positioned to capitalize on the trends in algae biofuels. Solazyme is the 100-pound gorilla in the industry with a market capitalization of $800 million. The stock is trading up about 37% over the past three months and has seen its sales steadily grow over the past year, although it missed some analyst estimates.

OriginOil is a much smaller player with a market capitalization of under $10 million. The stock is trading down more than 20% over the past three months, but its agreements with the Department of Defense and other commercial entities could eventually result in sales that would serve as a catalyst to move the stock higher - although it's certainly a riskier play.