Tuesday, April 08, 2008

The New Black Gold

Judging by the number of oil and gas executives that are getting into the renewable fuels sector, the new “black gold” must be green. This was apparent in looking at the biographies of senior management at GreenHunter Energy, Inc. (GRH: AMEX). Chairman and CEO, Gary Evans, made a presentation at the recent Wall Street Analyst Forum in New York City. Evans is a twenty-year veteran of oil and gas exploration and production.

While Evans may have an edge through his knowledge of the energy pipeline, he still has his work cut out for him at GreenHunter. The company is taking a portfolio approach to alternative energy, embracing wind, biomass, solar and geothermal for power production and biodiesel, ethanol and biobutanol for transportation fuels.

Evans is a shrewd bargainer and apparently spends most of his time out looking for bargains. Take for example, the company’s biodiesel refinery in Houston, Texas. It used to be a waste oil and chemical refinery and gives GreenHunter the ability to transport finished product via barge, pipeline or rail. The facility gives GreenHunter bragging rights to have the largest capacity in the U.S. with 700,000 barrels storage capacity. Evens claims production will begin in April 2008 and ramp to 100-plus gallons per year of B100 biodiesel. GreenHunter is already producing commercial grade methanol at the Houston refinery, with 20% of the methanol earmarked to power refinery operations and 80% for commercial sales.

Evans is particularly proud of his frugal approach to building GreenHunter’s capacity. He claims retrofitting the existing facility has cost $0.50 per installed gallon, which is less than half required for new construction.

The company also leased property for wind energy projects in Montana, New Mexico and California and then struck a sweat deal with a Chinese wind turbine producer, Guangdong MingYang Electrical Co., Ltd. (private). The first of 22 wind turbines are expected to arrive in June 2008. GreenHunter management is also fairly proud of this investment, since they have data that suggests the MingYang turbines are 15% more efficient that General Electric turbines. The data better be right, because GreenHunter has agreed to invest $10 million for a 6% equity stake in MingYang.

Evans also acquired a biomass-fired power plant in California that runs on cow manure and wood waste, both of which are in plentiful supply in California’s Imperial Valley. Another of Evan’s bargains, the plant is under refurbishment and will have 25 MW capacity. The company will be under a bit of pressure to make the power flow as GreenHunter has entered into a 15-year power purchase agreement with Southern California Edison (subsidiary of Edison International [EIX: NYSE]). Production is expected to begin in late 2008.

GreenHunter will be using low-quality waste materials to power its biomass plant, but Evans has his eye on more exotic feedstock - jatropha. It seems like a renewable energy company cannot resists the allure of this little tree. It is not much to look at, but it grows in tropical and subtropical regions and requires little water or fertilizer. Most importantly burning it up in a biodiesel plant will not take food out of the mouths of people or animals. We would not be surprised to see GreenHunter form a partnership with a grower to lock in supplies of jatropha feedstock.

It is a very ambitious business model with lots of moving parts. GreenHunter is modestly capitalized for the effort even as Evans and his team find themselves stretched thin commercializing multiple technologies. Evans injected $5.0 million into the company himself and then raised $20 million through a private equity round in early 2007. Two private rounds of $2.0 million and $20 million were completed in late 2007.

GreenHunter closed out 2007 with $18.8 million in cash and $16.7 million in debt on its balance sheet. The cash burn in 2007 was $2.2 million, but investment and working capital requirements are still significant in 2008 to push the project mentioned above to full commercial operation.

Investors looking at GreenHunter may also be disappointed to find only the 2007 annual report to review. The stock is unseasoned having just begun trading on the AMEX at the beginning of 2008.

This is the second in our series of posts on alternative energy companies that presented at the recent Wall Street Analysts Forum. See the April 4th post “Picked too Green?” for comments on Rentech, Inc. (RTK: AMEX).

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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