Biofuels Carry Upside for Early Investors: Jim Lane
Source: Zig Lambo of
The biofuel sector, already an $80 billion a year industry, is
still in its infancy. In this exclusive interview with
The Energy Report
, Biofuels Digest
Publisher Jim Lane discusses the exponential growth slated for
this once-obscure energy source, and how its market resembles the
traditional oil and gas industry in many ways. While biofuels are
not for the faint of heart, as Lane cautions, investors who do
their homework can get in early on companies that offer
incredible upside potential.
The Energy Report:
Many investors have some level of familiarity with biofuels, but
don't have the depth of understanding required to enter that
market with confidence. As the publisher of
which focuses exclusively on this sector, what do you think is
the best way for investors to dip their toes into these
The biofuels sector has grown into an $80 billion (
) industry today, even though it's only in its infancy. Why be
interested in the sector? Because it's big and it's going to get
bigger. There's lots of money to be made and lots of good to be
What exactly is a biofuel?
Biofuels include any fuel molecule produced from a plant source
using tools and microorganisms from synthetic biology. It could
be a residue from agricultural waste, forest waste, municipal
solid waste, animal waste, or something made using a biological
process. There are about 100 different plants that can be used to
produce biofuels, and many can be grown in areas that won't
support traditional food agriculture. The main plant sources are
still corn, sugar cane and soy beans, but biofuels can also be
made synthetically from carbon dioxide and water, or carbon
monoxide and water. Biofuel processes can turn pollutant waste
streams with little or negative value into value streams
sometimes worth thousands of dollars per ton.
The main basis to date has been using traditional processes,
such as yeast fermentation, to produce an alcohol fuel known as
ethanol. We also have a process that takes plant or waste oils
and turns that into what's called biodiesel. Those are pretty
built-out industries in many ways. They'll grow, but they won't
grow quite as much in the future as what we call advanced
biofuels, which use exotic processing techniques to extract value
from unusual feedstocks.
Are investors making money in this space at this time? What
segments are doing best at this point and why would that be?
Yes, investors can make money in this market. It depends on the
stage of the company. It generally takes about 10 years to go
from the original lab or research work to producing on a
commercial or industrial scale. Depending on a company's stage of
development, investors may see early-stage cash burn, the
beginnings of commercialization, or substantial profitability.
The companies that are further along on their path are very
profitable. For example,
Valero Energy Corp. (VLO:NYSE)
is a major U.S. oil refiner, and last quarter its most profitable
division was ethanol production, based on about 1,100 million
gallons in capacity. But the bigger opportunities for investors
are in selectively picking the winners of tomorrow, because those
will offer more upside.
Is there a lot of research going on in different areas that
aren't anywhere close to commercialization at this point, or has
commercial production been largely standardized?
While there are well over 200 companies currently developing
projects around the world using advanced biofuel techniques at
various stages of development, there are three basic areas for
investors to consider, much like the oil and gas market. We
designate these areas as upstream, midstream and downstream.
The upstream segment includes companies that are developing
advanced feedstocks with higher yields that grow under more
exotic conditions. They're working on genetics and seed
Midstream companies utilize processing technologies that
extract fuel from plants or waste material, similar to an oil
refinery, whereas upstream is comparative to traditional oil and
gas exploration. Consider the feedstocks an above-ground oil
fuel, if you will.
Downstream companies are the ones that get the fuel to market,
such as the pipelines or the gas stations that are delivering
those fuels to consumers.
What would you say to those critics who suggest that biofuels are
just another passing fad? What are the growth prospects for this
Any business that's gotten to $80B in sales is real, and in the
United States and Brazil it's now an unsubsidized business.
Ethanol, in Brazil, is unsubsidized and actually outsells
gasoline. The International Energy Agency projects that 30% of
all transportation fuels could be biofuels by 2050. We use 1.2
trillion gallons of traditional fossil fuels worldwide, so the
demand potential is in the hundreds of billions of gallons and
the sales will be in the trillions of dollars. It's definitely
not a passing fad; the potential is just being unlocked now.
What are the job creation possibilities in this industry?
It's a very robust job outlook, according to a recent report by
Moving Towards the Next-Generation Ethanol Economy
. Looking just at U.S. ethanol, which is a small piece of the
pie, they expect that by 2030, 2.4 million man years of
employment would be created. A lot of that is in
construction-680-odd thousand man years between now and 2030.
This includes engineering talent, operators, laborers, people who
collect and transport the biomass and the fuel and also the
administration and management. These are very similar to jobs in
traditional oil and gas facilities, with a few more
What factors and investment criteria should investors consider if
they want to get involved in this industry space?
Investors should look at three main factors. First is the extent
to which the processing technology is proven or demonstrated at
scale. Has it been done at pilot? The earlier you take that on,
the more risk you have that the technology may fail along the
line. A later-stage technology gives you more confidence. But,
the returns are going to be commensurately smaller. So, the more
research you do on the processing technologies, the earlier you
can invest with confidence; which should give you a bigger
return. I think that goes for every kind of high technology.
Next is feedstock. To what extent does the processing
technology have a guaranteed price at which that feedstock can be
acquired? A company that has a 20-year contract for municipal
solid waste at a fixed price is on solid ground. If it is buying
a commodity crop with fluctuating prices, investors need to
understand how the company has hedged that, because you don't
want to be buying $8 feedstock to make $3 fuel.
On the downstream, you want to make sure there is an offtake
contract with a credit-worthy buyer. You certainly don't want to
have a long-term contract with a company that may go bankrupt.
Investors should look for companies that have done a really good
job of locking in feedstock costs as well as a reliable offtake
The more certainty investors have on those three fronts, the
less risk they will shoulder. On the other hand, less risk
usually means less potential reward.
What are some of the leading companies in the industry at this
point, and what are they up to?
We've had seven companies with successful IPOs in the last 18
months, with 10 in the IPO queue right now. Of the entire
cleantech sector, 75% of the companies in the IPO queue are
biofuel companies. That tells you a little bit about where Wall
Street is putting its emphasis and which of these sectors is
going to succeed in the short term. The biggest success stories
include companies like
KiOR, Inc. (KIOR:NASDAQ)
, which went public last year. It's a company that uses a
technique called Biomass Fluid Catalytic Cracking. KiOR creates
diesel, jet fuel and gasoline from wood chips very cost
effectively. The company already has over $1B valuation. It's now
building its first commercial facility in Mississippi with very
strong support from former Governor Haley Barbour to build a
total of six plants in the area.
Renewable Energy Group Inc. (REGI:NASDAQ)
is another company that just did its IPO. That company is the
number-one biodiesel producer in the United States, at about 300
million gallons a year, and had strong revenue growth last
What other companies look interesting?
Solazyme, Inc. (SZYM:NAS)
is a company that makes renewable oils from algae using advanced
synthetic fermentation. It also makes skin creams, which are
selling on the Home Shopping Channel very successfully. Solazyme
is making fuel and also has a joint venture with Roquette Group.
It is also making algae cookies and has all kinds of products it
can make from renewable oils. We expect them to be very
successful not only in food and skin care but also in making jet
fuel for the Navy and in all kinds of applications across the
Gevo Inc. (GEVO:NASDAQ)
, went public last year and makes isobutanol, which is an
alcohol-based fuel. Isobutanol also a very important component in
the chemical industry. Gevo is just building its first commercial
facility, which will be open in the first half of this year.
That's a very exciting company to watch.
Amyris, Inc. (AMRS:NASDAQ)
is based out of Silicon Valley. Its technology uses sugar cane
syrup and is being commercialized now in Brazil. Amyris makes an
exotic collection of fuels and chemicals and lubricants and all
kinds of great products from sugar cane, as well as a renewable
jet fuel and diesel being commercializing in Brazil.
Another Silicon Valley company,
Codexis Inc. (CDXS:NASDAQ)
, is an enzyme, fuels and chemicals developer. Its major investor
is Shell, and it is producing enzymes and other components of
fuel creation in its work. The company recently bought its
chemical rights back from its original parent, Maxygen,
Inc.(MAXY:NASDAQ). Codexis is now deploying a wide variety of
solutions to make low-cost sugars for the chemical industry.
That's important because you need sugar in order to turn
something into a chemical. This company is going to be the
"Intel-inside" of the industry.
Then there's Rentech, Inc. (RTK:NYSE.A), which has a very
advanced process making diesel and jet fuel through what's called
gasification. It's based in Los Angeles and commercializing its
technology in Ontario, Mississippi and Colorado. These companies
are examples that are at, or are going to commercial scale right
now, in which investors can take a position today.
Are these companies making money, breaking even, or are they
still in the "trying to get there" stage?
Most of them came out quite early. Biotech stocks often come out
either pre-revenue or early stage. Renewable Energy Group came
out a little bit later in its evolution. The other ones are still
in the cash-burn phase. I think Amyris is deploying its second
commercial plant and the others are in the process of building
their first commercial facility. Amyris will need to get three or
four up to be solidly profitable and cover the overall
administration and R&D costs. You would expect to see most of
those in the black around 2014 or early 2015. The most important
thing for an investor is not current profitability, but where
they are on their path to profitability. Waiting until they are
totally in the black and everything is already established is
less risky, but you're going to be sacrificing some of the
What sort of capital costs are involved in putting a commercial
plant into production?
The first commercial plant is usually the most expensive due to
the R&D involved, and can cost anywhere from $250-400M.
Larger projects can be up to a billion dollars apiece. As the
industry develops standard designs, costs could drop to somewhere
in the range of about $200-300M per project. So this is not for
the faint of heart. Certainly these companies will be accessing
project financing for the debt component. This is a very
capital-intensive industry similar to the traditional oil and gas
You also publish the
Biofuels Digest Index
composed of 30 component stocks that seem to cover a pretty broad
range of companies. How do you determine who you cover?
We look at the 30 companies that have the largest capacity and
also include some pure plays. So, we have companies like
BP Plc. (BP:NYSE; BP:LSE)
Royal Dutch Shell Plc (RDS.A:NYSE; RDS.B:NYSE)
. BP's biofuels unit alone has 4,000 employees. It's a very heavy
investor in biofuels. Shell also just did an $8B acquisition or
joint venture and merger last year. We also have
Archer Daniels Midland Co. (ADM:NYSE)
. From large-caps we go down to some of the smaller ones I've
mentioned like Solazyme, KiOR, Gevo, Amyris, Rentech, Codexis and
Renewable Energy Group. The key there is that all of them are
fully focused on biofuels and chemicals, or it's a significant
part of their operations and profit flow. We change them around a
little bit, of course, as we've had a lot of recent IPO activity.
It has been a pretty good sector to invest in over the last 18-24
Do you have any other points you'd like to discuss and closing
thoughts you'd like to leave with our readers?
Investors usually ask me what the best way is to pick winners and
avoid losers. The answer to that is to read a lot and study up on
the technology. Never buy anything that you're not sure of, or
you don't know. These are exotic technologies. A lot of them are
early stage. It's very important for investors in early-stage,
high-technology companies to be fluent in understanding a
company's upstream feedstock strategy, if its processing
technology is proven, and who's the offtaker. And is that
represented in hope or is that represented in hard contracts and
real dollars? If you've done your homework, you can find a lot of
value, which plenty of investors have. It's all based on being a
knowledge worker before you are an investor.
We greatly appreciate your time and input today on a sector that
certainly provides another growth area for investors to consider.
We'll look forward to talking with you again to see how these
is the editor and publisher of
the most widely read biofuels daily newsletter.
covers producer news, research, policy, policymakers,
conferences, fleets and financial news. It is home to the
Biofuels Digest Index
, The 30 Most Transformative Technologies, and the "50 Hottest
Companies in Bioenergy" annual rankings.
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1) Zig Lambo of
The Energy Report
conducted this interview. He personally and/or his family own
shares of the following companies mentioned in this interview:
2) The following companies mentioned in the interview are
The Energy Report:
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3) Jim Lane: I personally and/or my family own shares of the
following companies mentioned in this interview: None. I
personally and/or my family am paid by the following companies
mentioned in this interview: None. I was not paid by Streetwise
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