Tuesday, July 22, 2014

A Reason to Pay Attention to Sun Drop Fuels

It would be an oversight to leave Sun Drop Fuels out of my recent string of articles on advanced biofuels developers.  Based in Colorado, Sun Drop is trying to perfect a proprietary process to turn biomass of one sort or another into a drop-in fuel using ultra-high temperatures and intense pressure.  It is a gas reforming process that should sound very familiar after the last few posts on Renmatix, Primus Green Energy and Licella.  Carbon from the gasification of the biomass is mixed with a bit of hydrogen from natural gas is expected to yield a neat fuel ready to ‘drop in’ to existing gasoline infrastructure.

Early in 2014, Sun Drop Fuels quite noisily announced its plans to acquire property in Louisiana for its first demonstration and commercial production plant.  Indeed, the company already picked out an engineering and construction firm, a subsidiary of IHI in Japan.  When completed sometime in 2015, the plant will have the capacity to produce 50 million gallons of renewable fuel per year.  It is an ideal location near large supplies of wood from southeastern lumber producers as well as natural gas pipelines.  What is more Louisiana affords a multitude of midstream and downstream players ready to take Sun Drop fuel to market

At various times the company’s management team has suggested the price tag for their plant could be in a range of $400 million to $500 million.  That is an expensive project.  Sun Drop Fuels has not had to worry a great deal about capital, at least in its recent history.  The company is 50% owned by Chesapeake Energy Corporation (CHK:  NYSE), a natural gas producer.  Private equity funds Oak Investment Partners and Kleiner Perkins Caulfield & Byers have also invested in Sun Drop Fuels.  String those three names together and it does not leave a great deal of room for individual investors like you and me.

Still it would be premature for minority investors who prefer the public markets to ignore Sun Drop Fuels.  If the company makes progress with its process or even just its production capacity build out, it alters the landscape for advanced biofuelds even if Sun Drop is not successful in its own right.  We expect to see consolidation in the advanced biofuel space and any technology or capacity that gets developed becomes a part of available inventory.  We expect the larger, public companies to eventually become the beneficiaries of the build-out.

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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