Tag Archives: PetroAlgae

Will PetroAlgae and Gevo poison the IPO pond for other biofuel and biomaterial developers?

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In early August, PetroAlgae filed for an immodest $200 million IPO with the U.S. Securities and Exchange Commission (SEC). The filing contains a number of aspects that warrant closer scrutiny.

The company grows “selectively bred” strains of an aquatic algae-like plant called duckweed in open ponds. PetroAlgae claims its process yields up to 14,000 gallons of oil per acre per year (see the March 24, 2009 LRBJ – client registration required), and that its production is “economical versus $20/barrel oil.” Its prospective yield compares favorably with competitors’ claims, like Solix’s 2,200 gallons of oil per acre per year. But unlike Solix, PetroAlgae has had no success producing oil.

According to the company’s S-1 filing, it experienced net losses of $8.3 million, $20 million, and $30.3 million in 2007, 2008, and 2009, respectively, on zero dollars in revenue, ever. Even firms with much more significant product revenues have struggled in the current market. Solyndra withdrew its filing (see the June 24, 2010 LRSJ*), A123Systems’ stock is off over 60% from its initial pricing, and Codexis has shed 40% of its IPO value in just four months. So accompany with no revenue to date and very uncertain prospects for producing an economically competitive product is unlikely to be a winner. Despite its lofty claims, expect PetroAlgae to either withdraw its IPO, or flop mightily.

Gevo, which also filed for an IPO in early August, is looking to raise $150 million. Underwriters include UBS, Goldman Sachs, and Piper Jaffray. Gevo develops yeast to ferment corn, cane, or cellulose-derived sugars in order to produce butanol and isobutanol (see the August 11, 2009 LRBJ*). This filing does not come as a surprise, as we heard from our network several months ago that a Q3 filing was forthcoming (see the April 27, 2010 LRBJ*). This news comes only a few days after Gevo announced the acquisition of a Minnesota ethanol facility it planned to retrofit into an isobutanol production plant. The retrofit will cost $17 million, and will produce 18 MGY of isobutanol when complete in Q1 2012. According to Gevo’s S-1 filing, its net accumulated deficit is $50.3 million, with a net loss of $8 million in Q1 2010 alone. 

Although Gevo’s (relatively) capital light business model is a reason for praise, its S-1 indicates that it will need to invest another $17 million in the Minnesota plant to retrofit. That’s in addition to the $20.7 million for the plant itself – a steep bill to foot with no revenues in sight for almost two more years, even if all goes as planned. In its filing, Gevo reports it “expects our relationships with customers such as Total Petrochemicals, Lanxess, Toray Industries, and United Airlines to contribute to the development of chemical and fuel market applications of our isobutanol.” The relationships that Gevo develops with these companies (and other commercial chemical and fuel companies) will make or break the company – but the large losses and long time to revenue its asking investors to stomach might be enough to sink this IPO.

Both offerings are indeed risky in this environment, as we have seen Codexis shares drop from $13 per share at IPO to about $8 currently. Clients should maintain some healthy skepticism as these two firms prepare for risky and uncertain public offerings. Although Gevo has a better chance of success than PetroAlgae, both firms have the potential to poison the biofuels and biomaterials pond for years to come. On the heels of Codexis’s shaky debut, it won’t take much more bad news for investors to sour on the biofuels space. What’s more, with other recent IPOs like Tesla (see the June 23, 2010 LRPJ*) and IPO candidates like Bloom Energy (see the June 30, 2010 LRPJ*) looking uncertain, on top of disappointments like A123 and debacles like Solyndra, the “cleantech” theme risks ending its run as a Wall Street darling.

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Drilling, spilling, and tilling: Will Obama act on the BP oil catastrophe with rhyme and reason?

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It’s said that history doesn’t repeat itself, but sometimes it rhymes. Shortly after the BP Deepwater Horizon explosion in the Gulf of Mexico, biofuel supporters were chanting “Till, Baby, Till!” in a parody of offshore drilling supporters’ cries of “Drill, Baby, Drill!” at Sarah Palin rallies last year. In the same spirit, political commentators have sought the right rhyme for the giant oil spill itself among prior comparable catastrophes. The disaster was initially called “Obama’s Katrina” by the President’s political enemies, comparing his inaction to President Bush’s widely criticized slow response to Hurricane Katrina. When the scale of the disaster became known, BP’s chairman made a comparison to “Three-Mile Island,” implying that this disaster could put a stop to petroleum as the 1970s disaster effectively froze the U.S. nuclear industry. And now, as the spill has become the worst environmental disaster in U.S. history, even the president’s supporters are comparing it to 9/11 – with “The World is Flat” author Tom Friedman and others making the case that Obama is squandering a historic opportunity to unite the country and possibly the world behind renewable energy.

Given that biofuels are the most direct substitute for the petroleum that’s central to the current crisis, they are likely to receive the most attention from politicians and citizens alike. Moreover, they’re a natural fit for the climate and the economy of the southern U.S. states directly affected by the spill: if Mendel’s 1,200 gal/acre yield claims hold true, Alabama farmers could replace their 360,000 acres of cotton (worth about $250 million at 850 lbs/acre yields and a price of $0.78/lb) with miscanthus, and convert it using technology being developed in neighboring states, like BlueFire’s* cellulosic ethanol biorefinery in Mississippi or DuPont Danisco’s 250,000 gal/yr cellulosic ethanol plant in Tennessee to produce 432 million gallons of ethanol (worth nearly $1 billion at today’s spot price of $1.98). Gulf-state algae companies like PetroAlgae* and PetroSun could get a political and economic boost with their potential to provide biocrude and biodiesel. The risk, however, is that many sketchy biofuel startups will reap millions of taxpayer and investor dollars as they use the oil spill catastrophe to opportunistically promote technologies that have no chance of ever working.

What’s the best path forward for the U.S. government? Despite his acknowledged missteps, Bush’s response to 9/11 provides useful analogies and ideas. At the bottom line, there’s the scope: the total cost of the wars in Iraq and Afghanistan is $2.4 trillion according to the nonpartisan Congressional Budget Office, which would amount to a pretty large check for cleaner energy. Where neither Bush nor his then-rival Kerry opted to tax gasoline to fund the war and invest in alternative fuels when gas prices cost half what they do today, Obama should seize the moment and push to tax carbon. A carbon tax would encompass not just oil but also the coal industry, which the recent mining catastrophe shows is also ripe for action. As Bush united 22 federal agencies ranging from Defense to Transportation to Treasury under the Department of Homeland Security (DHS), Obama should create a Department of Energy and Environment Security that unites overlapping and conflicting activities at the U.S. Departments of Energy, Transportation, and Agriculture, as well as the Environmental Protection Agency. The envisioned agency would also expand the Coast Guard, and totally overhaul the corrupt and ineffective Minerals Management Service – effectively absorbing it, as the DHS absorbed the Immigration and Naturalization Service. And as Bush invested in developing and deploying new airport security technology like terahertz scanners, the country needs investment in developing and deploying new technology like biorefineries, bioremediation, and other alternative fuels (such as coal-bed methane) in development by startups like Luca, Taxon, Ciris, Profero, and in an ironic rhyme, by Synthetic Genomics in collaboration with BP.

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To read more insights from Lux Research analysts visit Lux Populi.

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