Tuesday, July 05, 2011

Oil in the Dark

Just one month after the initial public offering, shares of Solazyme, Inc. (SZYM:  Nasdaq) have given investors reason to cheer the new age “oil” company.  The company claims oil processing technologies that apply to petroleum, plants and animal fats, but it is really Solazyme’s microalgae that are the fuel generators for the company.

There are plenty of algae-based renewable fuels operations around, but Solazyme is set apart from all of them through reliance on indirect photosynthesis.  Solazyme holds its microalgae in dark fermentation pools where various feedstocks such as sugar cane or corn can be used to feed the algae.

Solazyme management claims the company can achieve profitability at low production volumes with the right partnering deals in the nutrition and personal care markets.  Solazyme estimates its microalgae strains can oil for the fuels and chemicals markets at a cost below $1,000 per metric ton ($3.44 per gallon or $0.91 per liter). 

Late last week, Solazyme signed agreements with Sephora Canada and the leading Canadian multimedia retailer, The Shopping Channel, to launch Solazyme's microalgae-based anti-aging skincare line in Canada.  The agreements follow similar relationships with Sephora USA and the popular U.S. shopping channel QVC.

Fortunately, Solazyme is not relying exclusively on middle-aged women to support its very expensive research and development budget.  In 2010, Solazyme launched a dietary supplement in Whole Foods Markets and General Nutrition Centers.  The company reported $40 million in revenue from the Golden Chlorella dietary supplement in the most recently reported twelve months.

Investors are probably the most interested in non-binding letters of intent with The Dow Chemical Company and Quantas Airways, Inc. to purchase oils.  Dow could purchase up to 20 million gallons of oil beginning in 2013 and Quantas is penciled in for 200 to 400 million liters of jet fuel per year. 

The company has production facilities and produced 500,000 liters or 455 metric tons of oil in the fourteen months ending February 2011. The company received funding from the Department of Energy for building out its operations and Solzayme is using some of the $197.6 million raised in the IPO to scale up manufacturing at its Peoria, Illinois plant.

Solazyme shares appear pricey based on recent financial performance.  The company reported a net loss of $19.8 million on $40 million in revenue in the twelve months ending March 2011.  However, investors would be short-sighted in not considering the very large market opportunities before the company.  Recent strategic agreements suggest Solazyme can bring its technology off the bench and into the market, bringing those markets within the company’s reach.

Neither Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein. SZYM is included in Crystal Equity Research's The Beach Boys Index in the ALternative Chemicals group.

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