Is It Easy Being Green?

Stephen is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Energy independence is a hot topic in American politics.  While I think most agree that increasing our fossil fuel production would be an economic win, many Americans, including myself, are apprehensive of the environmental ramifications of a “drill baby drill” policy some politicians advocate.  I still think renewables hold great promise in the long term, but that won’t solve our energy needs in transportation until America experiences a mass adoption of electric vehicles.  So what is an environmentally conscious investor who also wants to see America’s energy production ramped up to do?  Personally, I’m looking into Solazyme (NASDAQ: SZYM), an innovative company that uses algae to convert plant-based sugars into oil.  These oils are tailored for use in chemicals, skincare products, nutritional products, and most significantly: fuels.  Possibly you’re read about the US Navy’s biofuels experiment, which used Solazyme fuels to power both aircraft and warships.

This is a truly disruptive technology because unlike natural gas which requires an expensive vehicle conversion, biofuels are compatible with current engine systems.  Chances are your car’s gas tank contains gasoline blended with a biofuel (ethanol).  Solazyme has done one better, developing Soladiesel and Solajet, 100% microbial-derived biofuels successfully tested in ships, aircraft, and vehicles.  In 2010 the global diesel and jet fuel markets combined to over $800 billion.  Solazyme’s initial focus is to sell its oil to refiners such as Chevron (NYSE: CVX), who has been working with Solazyme on diesel products since 2007.  In 2011 the company also signed letter of intent with United Airways, part of United Continental Holdings (NYSE: UAL) to purchase 20 million gallons of fuel starting in 2014.  Further regulations to reduce greenhouse gas emissions could encourage the major refiners to increase the use of biofuels in their gasoline blends.  The combined oil market in 2011 was over $3 trillion, and earning even a tiny sliver of this pie could mean big things for Solazyme.

This is certainly the kind of company I want to root for, but does that make it a good investment?  It’s certainly not a stock for the faint of heart.  The company has yet to turn a profit and has so far mostly earned revenues through collaborative research and government grants.  Only 18% of 2011 revenues came from the sale of actual oil.  The rest are recorded as R&D revenues or licensing fees.  I have yet to decide if this is a positive or negative: either the company has barely scratched the surface of the market opportunity for its products, or its products are untested in the greater market and may not find a footing.  One thing is for certain: increased production will require extensive capital expenditures in more bio-refineries.  The balance sheet looks pretty good, with nearly $200 million in cash and only $17 million in debt, but the company has already lost nearly $45 million in free cash flow in the first 6 months of 2012.  It’s likely the company will need to raise more capital within the next few years to continue operations.

In spite of the financial challenges, there is also a lot to like about the company.  I’m a big fan of founder CEOs, and Solazyme’s co-founders combine to own 10% of the stock.  They have done well to develop partnerships with top companies in a wide range of industries, including Dow Chemical, Unilever, and Sephora.  The company commissioned its first bio-refinery in Peoria, Illinois in June 2012: a major milestone in its push for increased production.  As an investment, it has all the trappings of an unprofitable company with incredible opportunity, ie: volatile! In the last year the stock has rocketed from $10 a share to $16 and now sits below $9.  There is still a lot to learn about this one before I consider an investment, but I think with a strong stomach and a long time horizon Solazyme may be a strong addition to my portfolio.         


  


drfrank1 has no positions in the stocks mentioned above. The Motley Fool owns shares of Solazyme. Motley Fool newsletter services recommend Chevron and Unilever. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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