Tuesday, August 31, 2010

Fast Fire

In our April 13, 2010 post “PotLuck” on Honeywell’s UOP subsidiary (HON: NYSE) we made the call that Honeywell is a company to watch in the renewable fuel segment. The reference to an assorted menu was inspired by UOP’s plans to use a variety of feedstocks to produce a green biofuel using the pyrolysis process licensed from its joint venture partner Ensyn Corp.

Green diesel has similar energy content to fossil fuel diesel, but produces less NOx emissions. That is a compelling idea, which is probably why the Department of Energy was willing to front UOP with a $25 million grant made last December 2009. The pilot project located in Hawaii.

The UOP-Ensyn duo uses “fast pyrolysis” to convert biomass to liquid pyrolysis oil. The process starts with a fluidized bed of sand that is heated to 510 degrees Celsius. The biomass then is gasified to produce the oil. A wide variety of biomass, such as wood, crop residues, energy crops and urban waste, can be utilized.

UOP and Ensyn call their joint venture Envergent Technologies. The economics of their green biofuel is compelling if their numbers are accurate. At a recent symposium at the University of North Dakota representatives claimed that the pyrolysis processes can commercially produce pyrolysis oil that is 40% cheaper than No. 2 fuel oil, a common heating fuel. UOP and Enysn are targeting the electric turbine market, since such turbines can burn a wide variety of liquid fossil fuels.

While all that is very appealing, the UOP-Ensyn due admits there are some disadvantages inherent in their pyrolysis oil product. First, it is highly acidic and can corrode most steel storage tanks in the current energy infrastructure. A stainless steel lining is a viable remedy, but only at a cost that would bite into the 40% lower price comparison with No. 2 fuel oil. High viscosity is another problem. Indeed, the UOP-Ensyn pyrolysis oil is almost tarlike in appearance and does not automatically ignite. Further research is needed to overcome the last two problems.

Assuming a resolution to these problems we might expect Honeywell to capitalize on its investment in Envergent through a stock offering. Then again perhaps Honeywell simply plans to fold the joint venture into its own ample bosom. Envergent Technologies is identified as “a Honeywell Company” on the Envergent corporate website. If the public market remains as unforgiving of new energy operations as it has been over the last couple of years, a public stock offer may be out of the question anyway.

In the meantime, Honeywell is trading at a forward PE multiple of 13.5 times the consensus estimates for 2010 and offers a 3.1% dividend yield. The stock is trading off the 52-week high of $48.63. In addition to the venture with Ensyn Honeywell licenses is own Ecofining process around the world. We expect “greentech” to become a larger portion of Honeywell’s revenue sources as these initiatives reach commercial stage and Honeywell drives market penetration.

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


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