The Only Biofuel Stock You Should Own
Carbon is carbon. It may take the form of wood, sugar cane, algae, coal or dozens of other materials. But at the end of the day, the world still runs on processed carbon as a fuel source. That's why venture capitalists have poured hundreds of millions -- perhaps billions -- of dollars into biofuels. These fuels can be made from a range of sources and considering the United States holds an incalculable amount of carbon stored up in spent corn husks, municipal waste dumps, algae-filled ponds and almost anywhere else you look, it's really easy to see their appeal.
Sadly, despite the thousands of engineers working feverishly to figure out how to take all of these carbon-based materials and turn them into crude oil in an effective manner, few have gotten very far. What works in a test tube in a lab is just hard to scale up to a full-fledged production environment.
Yet there is one company that is on the cusp of achieving the Holy Grail. Pasadena, Texas-based KiOR (Nasdaq: KIOR ) recently announced key developments that show real progress in biofuel production and could soon be producing thousands of gallons of biofuel every day -- perhaps as soon as the fourth quarter.
Anything in, crude oil out...
The charm of KiOR's technology, known as fluidic catalytic cracking or FCC, is that it simply doesn't care what source material is being used. FCC is a proprietary process that can turn corn husks, wood chips, sugar bagasse and many other materials into crude oil -- not aliquid that's like crude oil, but crude oil itself.
This means buyers don't need to spend a lot of money to develop a separate pipeline system to transport the liquid, as is the case with ethanol or other biofuels. And once you're dealing with crude oil, it could be any of the usual end-products, from diesel oil to gasoline to home-heating oil.
One down, one to go
KiOR has been dogged by a pair of hurdles: commercialization of its technology and the long-term durability of $2 a gallon federal tax credits.
As I just noted, the first hurdle could end soon. In a discussion of second-quarter results, management noted that KiOR's production process continues to work as planned, and the company now says it will be ready to produce much higher volumes at a newly-built plant in Columbus, Miss., by the fourth quarter. KiOR aims to produce 500,000 to 1 million gallons in the quarter, with volumes rising from there. (A second plant is scheduled to come on line by the second half of 2014.)
At the same time, KiOR just announced that its technology efforts are yielding further breakthroughs.
For example, a new process will reduce unwanted byproducts by up
to 20%. Lowering costs will be crucial as investors have come to
focus on the company's second hurdle: the Environmental Protection
Agency (EPA) has been dangling $2 per gallon tax credits for
cellulose (wood)-based biofuels, but it is unclear whether those
credits will be supported in the next session of Congress. KioR
says it has a path to produce biofuels at competitive prices
without government support, but this will likely only happen after
much higher production volumes. And on the company's production
roadmap, KiOR aims to put out 40 million gallons of oil by 2014,
rising to 200 million gallons by 2016. This would translate into
more than $400 million in revenue by then.
Risks to Consider: KiOR needs money. It takes $1.5 billion just to build four production facilities, as is currently planned. The company must keep proving its technology and then raise more money, a process that may continue for several years. In fact, it's unlikely this company will turn aprofit before 2015.
Action to Take --> In addition to the new plant coming on line next quarter, anothercatalyst exists: KiOR is waiting for an imminent green light from the EPA for the sale of diesel made from wood cellulose. The company hopes to hear back as soon as early September, so a thumbs-up could help boost the stock.
At that point, investors should be focused in the production ramp-up, but should also be gauging how the company addresses itsbalance sheet . The challenge for management is to line up enough demand for newshares so that any equityoffering comes at least at current prices. History has shown that once a company raises fresh funds, sidelined investors tend to jump in, so that event may be the catalyst to finally get its stock moving back into the teens, which would easily be double current levels.
-- David Sterman
David Sterman does not personally hold positions in any securities mentioned in this article. StreetAuthority LLC does not hold positions in any securities mentioned in this article.