Continuing Challenges in Biofuels

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Biofuels promise energy independence and local jobs. Sadly such promises have not played out exactly as was hoped. The ethanol craze came about and the resulting pressure on corn prices and the world's food supply soured investors’ opinions on the technology. As the price of crude came off of its highs of $150 per barrel investors became more conservative. Higher input prices and lower revenues are not encouraging trends for a fledgling industry. Now crude prices are expected to remain around $110 to $130 (in 2010 dollars) over the coming decades. Now some companies like KiOR are starting to commercialize biofuels based on alternative commodities such as woodchips. Surprisingly, the senate recently voted in support of biofuels. The biofuel industry will not become Wall Street’s darling tomorrow morning but over the coming years economies of scale will continue to drive down prices and help make the industry profitable. 

KiOR ) recently put their first commercial plant into operation. They expect that by 2016 their costs per gallon should be below $3.00 and able to compete with traditional fuels. Right now marginal costs are around $9.00 per gallon as KiOR continues to build out more facilities and develop the necessary economies of scale. One of the benefits of their technology is that it is flexible and can use a combination of wood, grasses, sorghum, and other materials. It is not guaranteed that KiOR will be able to bring costs down below $3.00 per gallon but the fact that they are successfully operating their first commercial plant is very encouraging. Currently they have a quick ratio of 3.3 and a total debt to equity ratio of .67. It will be a couple of years before they reach full commercial operations but KiOR is a firm to watch as their technology matures. 

Green Plains Renewable Energy ) is a traditional ethanol company and they have suffered the effects of the recent U.S. drought. Still, they were able to generate a non-ethanol operating profit of $20.8 million in the third quarter of 2012. Their total debt to equity ratio of 1.46 and quick ratio of .7 are not red flags and their price to book value ratio of .49 is not expensive. GPRE has been able to maintain better margins than spot prices over the past couple quarters but their gross margin is only 4.6%. It is hard to get excited about GPRE with expected 2013 earnings around $.53 per share and their current share price of $7.79 which means a paying a PE ratio of 14.7 while larger and more secure firms like XOM trade at cheaper PE ratios.

Amyris ) is a biofuels company which has had a turbulent past. They have focused on using plant sugar fermentation to develop a host of petroleum products. The recent revelation that their biofuels come in at $29 a gallon caused a major shakeup in the firm. After a reorganization of the executives they have decided to focus on higher margin areas like home and personal care products.  Their quick ratio of 1.0 and a total debt to equity ratio of 1.4 appear reasonable but they still need a large amount of capital to build out future facilities and product lines. It is not clear when they will be profitable and their as 2012 10-K clearly states “there can be no assurance that we will ever achieve or sustain profitability on a quarterly or annual basis”. While their technology looks promising the lack of profitability is concerning and it appears best to wait for further commercial development.

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KIOR data by YCharts


The area of biofuels is an exciting area of the energy sector but the lack of mature and profitable technologies makes the environment difficult for investors. While ethanol is a proven technology its growth can be its own demise as it can place a great amount pressure on corn prices. KiOR looks very promising as their technology is not dependent upon food stuffs, but it is expected to be at least 2016 before their prices will fall significantly. Amyris has a very convincing story but investing before they reach profitability is a risky venture. Sitting on the sidelines and waiting for further maturation and commercialization of these various technologies looks like the best course of action for the time being.

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