Friday, October 12, 2007

Two Alternative Fuel Names

For those who were disappointed in with the profile of privately-held GreenPoint Energy in the “Down the Pipe” post, let me add two more “actionable” names. The biomass-to-gas or liquids is a building energy market sub-sector. I have been told by process engineers that anything and everything organic is under consideration for biofuel and gasification. This means that technology innovators are worth consideration by speculative investors.

DynaMotive Energy Systems (DYMTF: OTC/BB) ($0.99 10/11/07) is based in Canada and is probably considered by the few who have run across the name as an oil and gas driller. No so! DynaMotive has developed a process to heat biomass in the absence of oxygen - Fast Pyrolysis - to produce a liquid fuel - BioOil. The advantage is that lower nitrogen oxide emissions and little or no sulfure dioxide gases are generated by the process. The process is also friendly to cellulosic resources and is not dependent upon food-crops (a big plus for those of us who eat corn tortillas and muffins).

The company has been proving the Fast Pyrolysis technology in pilot plants. In September 2007, a fully operational plant near Guelph, Ontario produced BioOil from wood chips for a gathering of bio-fuel experts. The Guelph plant is sourcing wood chips and sawdust waste from a nearby hammer mill. A second plant near West Lorne, Ontario is nearing completion.

DynaMotive thinks BioOil has potential for conversion to vehicle fuel and chemicals. Argentina has given the company a warm welcome. Plans are underway to develop two self-contained biofuel-to-electricity complexes in northern Argentina. Wood waste and residues will power the plants, which are each expected to produce enough BioOil to power 15.7 megawatt electrical generation power plants.

The price tag for the Argentina scheme is a hefty $105 million, for which DynaMotive has not yet secured financing. At the end of December 2006, the last time the company filed a balance sheet with the SEC, DynaMotive had $9.3 million in cash and no debt on its balance sheet. However, since operations are burning about a million a month in cash, financing is an issue for DynaMotive.

In early October 2007, a group of private investors led by Quercus Trust paid in $10.5 million for 11.4 million shares of common stock ($0.9215 per share). The group also received 4.6 million warrants exercisable at $1.06 per share. The step-up looks paltry given that the group was also given three-year anti-dilution rights. This means that any equity round in the next three years will generate a deluge of new shares and/or warrants. Apparently dilution is not a concern for DynaMotive leadership. The company already had 185.4 million shares outstanding before the Quercus deal.

If huge operating losses and the threat of dilution are too intimidating,
Syntroleum Corp. (SYNM: Nasdaq) ($1.66 10/11/07) is a bit further along the path to commercialization of its technologies. Although still not profitable, Syntroleum has produced revenue - $17.6 million in the twelve months ending June 2007!

Syntroleum produces synthetic fuels from natural gas, fats, oils and greases. The company uses the Fischer-Tropsh process, which relies on a catalyzed chemical reaction to convert natural gas to liquid hydrocarbons. There are critics of the FT process - high energy requirements to drive the heat step. Syntroleum has gone a step further with its own
Biofining process to convert vegetable oils, fats and greases to synthetic fuel. The process still relies on heat, hydrogen and proprietary catalysts, but the utilization of waste material is a plus.

It especially attractive to owners of waste. Tyson Foods has teamed up with Syntroleum in a joint venture wherein Tyson will supply fats and oils from its food processing plants. The waste will be used as feedstock for a 75 million synthetic fuel plant currently scheduled to become operational in 2010.

Syntroleum has had some success in selling its biofuel. Revenue in the first half of 2007 was boosted by $13.7 million in license fees from Marathon Oil Company (MRO: NYSE). Unfortunately, the fees were non-cash as Marathon agreed to terminate two promissory notes made previously to finance Syntroleum’s Catoose Demonstration Facility.

The Marathon relationship was a good start. Syntroleum has since signed contracts to deliver 500 gallons of synthetic jet fuel to the U.S. Air Force from the Tyson Foods joint venture. Chicken fat to jet fuel is a big step! The Navy will use the initial order for research and development.

The Air Force has big plans to reduce its reliance on foreign fossil fuels and intends source half of its fuel requirement from domestic alternative sources by 2016. In 2006, the Air Force made a successful test flight with a B-52 bomber using a 50/50 blend of conventional jet fuel and Syntroleum’s synthetic Fischer-Tropsch jet fuel.

Most likely there are a number of hurdles that the Air Force and Syntroleum will need to clear before the Air Force meets is 50/50 goal. However, being involved at the ground floor is a plus for Syntroleum. Management has an oil and gas background, which we see as a plus in commercializing Syntroleum’s product.

Neither the author of the Small Cap Copy
web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

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