Propel Biofuels Growth Powered by Coffee?!?

Well, not exactly, but hopefully the headline grabbed your attention...

Companies that are grabbing the most attention in the growing alternative fuels market are fuel developers. Not surprisingly, investors are drawn to the proprietary processes and intellectual property opportunities that promise immense return on investments.

Seattle-based Propel Biofuels, however, is looking to make a name for itself by developing the "last mile" of the biofuels market: getting these new fuels to consumers. Company strategy centers around providing "turn-key" biofuel fueling systems to independent filling stations and non-traditional retail locations. Propel provides equipment, training, marketing at no start up cost to operators.

Two notable Seattle-based companies are intricately intertwined into Propel's future success:

• Imperium Renewables: The leading biodiesel producer (previous posts here and here) provided Propel with a loan to jump start the build out of their distribution strategy. No surprise that Propel will sell Imperium fuel at their stations.
  
• Starbucks: Yes, this is where the coffee headline becomes relevant. In landing $4.75 million in venture funding from @Venture and Nth Power, Propel also got Arthur Rubinfeld as a member of the company’s board of directors. Rubinfeld was previously Executive VP at Starbucks, where he was responsible for the planning and execution of Starbucks’ retail brand design, positioning, real estate, and store growth strategies. With over 3,800 stores worldwide, I suppose he's done a good enough job...

These are, obviously, tremendous assets for Propel. Imperium's leading market position and Rubinfeld's expertise can pay big dividends.

Something to keep your eye on, though. Starbucks became a retail success story by rigorously controlling every aspect of the customer experience, most especially the retail environment. For the time being, Propel is relying on partnerships with independent operators to grow the business. The benefit is access to existing infrastructure. The drawback is an inherent inability to control that all important costumer experience. How well Propel is able to adapt Rubinfeld's expertise is a key issue.

Imperium Renewables is Cruising

Great news for Imperium Renewables (previous post). The biofuel start up recently signed a long term (4 years with a 3 year option) pact with Royal Caribbean Cruises (RCL) to provide the cruise line with biodiesel for the four ships that make harbor in Seattle (the site of Imperium's operations). From Imperium's S-1 filing with the SEC:

"RCCL [will] purchase, at a minimum, approximately 15 million gallons of biodiesel in 2007 and thereafter approximately 18 million gallons of biodiesel annually for four years with an option for a three-year extension. We believe this is the single largest long-term biodiesel sales contract to an end user in the U.S."

Royal Caribbean will also sell it's 7% stake in Imperium's Grey Harbor production facility back to Imperium.

The deal would appear to be a win-win for both companies. The benefits for Imperium are obvious. It provides long term contractually secured revenue for much needed operating income, delivers a large, high profile client to use in future sales initiatives, and showcases (hopefully) the company's ability to deliver products and services to a large commercial entity. For Royal Caribbean, well, let's just say the the cruise industry isn't exactly known for its "tread- lightly-on-the-environment" approach. Using biofuels to generate even a small portion of ship power can only help.

Still, Imperium's got a long way to go before it's all milk and honey for the company. Key issues will include:

• Crop reliance and expense: The company produces fuels from 3 main feedstock oils: soy, canola and palm. Increasing competition and unpredictable yields require that the company explore greater diversity and cheaper sources (these already occupy 60 - 70% of cost of sales. ADM is moving aggressively in this direction by gobbling up corn production infrastructure in Illinois.
  
• Production facility: Increasing production capability in major port and transportation centers is key. Seattle is hell and gone from everywhere.
  
• Diversify customer base: Royal Carribean is a great customer. Hopefully it will serve as a catalyst for securing others.

Still, if you're looking for a market leader in the biofuels space, Imperium is as good as it gets. Their management team is still solid and they've raised over $200 million in venture funding. Perhaps they'll leave the choppy waters and head out to smooth sailing in the near term.

Syntroleum: Fat is good

Syntroleum, a company perhaps best known for their coal-to-liquids conversion technologies (as bizarre an alternative fuel as there possibly is, but that's another story), recently announced it's getting into the fat-to-fuel business with leading meat processor Tyson Foods.

The stated objective for the partnership is to produce 75 million gallons of diesel and jet fuel (!) from cow, pig and chicken waste fat. The plant is to come online in 2010.

For Tyson, this is big step number two in their attempt to enter the alternative fuels market. Tyson, you might remember, recently launched a similar partnership with petroleum giant CononoPhillips (which I blogged on here.) It's an intriguing tactic in that it is taking a byproduct that is quite literally waste and transforming it into a commodity (versus re-tasking a food stock grain such as corn into ethanol, which, incidentally, just gets less appealing by the day... see this BBC article.)

For Syntroleum, the early returns say it all: stock value increased 12% in the day following the announcement. Things have cooled off a bit since, but Syntroleum isn't going away anytime soon. In addition to its new Tyson deal, the company has some proprietary technology in converting natural gas into diesel that has attracted the attention of the Department of Energy and Marathon Oil. I figure this quote from Hillary Kramer at Seeking Alpha says it all:

Syntroleum’s gas-to-liquid technology is patented, it is developing coal-to-liquids, and if it can get plants off the ground smoothly, it should fly high. Further, this an acquisition target: a great option for a larger energy company looking to acquire this cutting edge technology, and if acquired, imagine the upside to the stock under those circumstances.

Certainly Syntroleum is no sure thing, but if you're looking for early stage alt fuel investment opportunities, its certainly worthy of consideration.

Solazyme: Small Product, Big Business

Solazyme seems to be on a bit of roll. This maker of bio-engineered algae stocks recently signed a production and distribution agreement with Imperium Renewables, the leading biofuel company on the US West Coast. (A previous post on Imperium is here.) Solazyme will use their proprietary algae strains to produce feedstock oil for Imperium, who will then convert it to biodiesel.

The agreement comes on the heels of the company's recent completion of Series B funding. The Roda Group and Harris &Harris Group are lead investors.

I suspect that that Solazyme will not have too much trouble raising additional capital in the near future. The company can lure potential funders with a line baited with a business model that is positively redolent with investors' current favorite flavors: biotechnology and alternative energy.

Frankly, it's great to see a company that combines the potential of algae-based bio-fuels with an apparent keen business sense. Other players in this area have suspect business plans or questionable histories.

Is there a lot of work left to do before biodiesel derived from algae is commercially viable? Without question. (See great post on R-Squared Energy blog for algae-to-biofuel hurdles.) However, with it's growing investor population, strategic partnerships, and varied product line (i.e. not wholly focused on energy), Solazyme stands to be able to weather any future storms.

Friday Round Up: Some old friends...

Worth noting a couple of news items featuring some folks we've blogged on in the past.

GreenStar Products (view previous entry) recently completed "Phase 1" of a demonstration facility for their algae to biofuel technology process. The objective of Phase 1, apparently, was to determine if they were able to sufficiently control H2O quality (temperature, salinity, ph, etc.) to create an optimal growth environment for algae stocks. Here's a link to the (long) GreenStar press release that includes a couple of pictures of the test facility.

I've got some issues with GreenStar (which you can review in that previous post), but algae conversion to biofuel is an interesting opportunity to bears watching. Hope the company gets it's stuff together.

Tesla Motors scored another $45 million in series D financing. The capital will be used for further development of the White Star EV passenger sedan, developing sales and service infrastructure, and mass production of the Dark Star Roadster.

Seems like that's a lot to ask of $45 million. Keep a look out for Series E...

Impressive Imperium?

Here's what I like about Imperium Renewables, the Seattle based manufacturer of biodiesel products:

• They're well funded: To the tune of $214 million last February. According to Clean Edge, the equity round is one of the largest private equity investments in a US-based biodiesel company, and one of the top five single investments in a renewable energy company ever. The money is earmarked for plant development aimed at boosting capacity.
  
• Blended skills: Management has a blend of start up and energy experience. CEO Martin Tobias comes from Microsoft, digital media start ups, and (most recently) venture capital firm Ignition Partners. President John Plaza has the background in biofuels that is complemented by an advisory board comprised of chemical and petroleum experts.
  
• A better (though maybe not best) fuel source: Imperium forged a relationship with Washington state-based grower Natural Selection Farms to supply enough canola to produce 1 million gallons of biodiesel. With a yield potential of about 140 gallons per acre , canola far outstrips traditional sources such as soy (~48 gallons per acre). Only palm oil and algae have more potential (see earlier post). The fact that the oil comes from a local producer only increases the efficiency of the product.
  
• Friends in the right places: Speaker of the House Nancy Pelosi recently stopped by for a visit. Can't hurt, right?

Plans for expansion are progressing, as plans for plants in Argentina and Hawaii have been submitted and are awaiting approval.

Biodiesel: ConocoPhillips and Tyson

Energy giant ConocoPhillips (COP) and food producer Tyson (TSN) are cooperating on a biodiesel manufacturing process that converts animal fats into fuel. A fact sheet (replete with pretty pictures) produced by the companies can be found here.

Partnerships of this type that produce closed loop manufacturing and distribution systems will undoubtedly be on the rise in the coming years. McDonald's (yes, that McDonald's) has supplied used fryer oil to a pilot biodiesel conversion program in Brazil since 2004. No word on potential US applications at this point, but consider the following: there are about 12,000 McD franchises in the US, producing an average of about 2,500 gallons of waste fry grease annually. That's 30 million gallons of potential fuel. Ergo, I'm assuming a partnership similar to CP-Tyson is inevitable.

One option may be to consider companies with stagnant market share in existing categories or looking to develop new revenue streams with long term potential to placate shareholders...

Biodiesel: Green Star Products

I admit it. I like things simple. When something isn't readily transparent or understandable, I get twitchy. My antenna starts to quiver.

Green Star Products (stock: GSPI) makes my antenna quiver. And not just because of their rudimentary website design...

The company recently announced that, with it's "consortium of independent companies" will "begin construction of two demonstration algae-to-biodiesel production facilities in the U.S. and abroad... The Consortium has developed a patent pending proprietary algae processing system and it also has assembled a seven-member research team, which has been in operation at the University of Baja California in Ensenada, Mexico."

Now, I've already written that I love the algae to biodiesel process (see Algae Biofuels posting from 3.27.07). It seems to have a lot more potential than feedstock derived biodiesel. I confident that there will be a sound investment opportunities for companies seeking to leverage related technologies.

Green Star Products does not seem to be one of them, however. Here's some of the gems from their last letter to company shareholders:

• "...we are slightly behind on finishing our financials because, as many of you know, the accounting procedures have become immensely more complex over the last two years due to the Sarbanes Oxley Act."
• "GSPI still owes the IRS approximately $200,000 in back-taxes stemming from an item from 1993. Given the related details GSPI does not see this as a particularly detrimental item in our balance statement."
• [Regarding a fire that destroyed their Bakersfield facility that was not covered by insurance]: "The biodiesel industry is a new industry to all the insurance companies. They have no history and they cannot calculate their exposure. We were diligently pursuing insurance on the Bakersfield plant for a long time. Four days after the fire, we received a proposal, which could have insured the plant for only $300,000!"

The president of the company, Joseph P. LaStella, is listed as the principal point of contact on all press releases. Makes me think this is a pretty small operation.

Admittedly, I haven't talked to anyone from Green Star. It's hard to when your antenna is quivering so much...

Biodiesel: Algae BioFuels

It gets interesting when discussion turns to making biodiesel from algae rather than plant or feed stocks. Not only do you remove any moral questions regarding the re-tasking of food for fuel, but certain types of algae have the potential to be substantially more productive than plant based alternatives. The below chart (based on a a Univ of New Hampshire study) seems to bear this out.

Gallons of Oil per	Acre per Year
Corn	18
Soybeans	48
Safflower	83
Sunflower	102
Rapeseed	127
Oil Palm	635
Micro Algae	5000-15000

Not surprisingly, many companies are looking to exploit this potential, including Algae Biofuels, a wholly owned subsidiary of PetroSun, Inc. On the surface, PetroSun (PSUD.PK), with their apparent experience in traditional energy markets (they own drilling rights in the US and Australia) has as much as chance as anyone to bring algae-based biodiesel to market.

But penetrating PetroSun's corporate structure is a struggle. PetroSun appears to be owned by the the Cronus Corporation. Web references to Cronus drop off shortly after the acquisition of PetroSun in 1997. A 1997 listing for Cronus indicates an OTC stock for a company with three employees. Information related to the ticker symbol (CRON.PK) is nonexistent. Finally, of the 4 key executives listed in general information for PetroSun, 3 appear to be from the LeBlanc family and the 4th is a former player for the Dallas Cowboys.

Like I said, there's a lot of potential in algae based biofuels. From an investment standpoint, however, I'm unconvinced PetroSun in the place to look for it though...