Tuesday, July 29, 2014

Fulcrum Bioenergy: Moves Ahead with Renewable Diesel

A couple of months ago Fulcrum BioEnergy announced the successful demonstration of its process to convert municipal solid waste (MSW) to jet fuel.  The company started out trying to convert MSW to ethanol.  However, the economics of ethanol, even quantities produced with feedstock as in expensive as waste, have been challenging on so many levels.  It makes sense to expand potential end products to include jet fuel and diesel that can be dropped directly into the transportation fuel infrastructure.

Fulcrum Demonstration Plant
Fulcrum has commenced work on a full-scale commercial plant located near Reno, Nevada.  The company has arrangements with waste collection service providers Waste Management, Inc. (WM:  NYSE) and Waste Connections, Inc. (WCN:  NYSE) to supply solid waste.  There is an off-take agreement in place with independent power producer Tenaska Biofuels for the 10 million gallon planned production. 

With the supply chain secured the only element missing is capital to pay for the Nevada plant.  Fulcrum claimed funding commitments long before its processes were successfully demonstrated.  In August 2012, the U.S. Department of Agriculture bestowed a conditional commitment for $105 million in loan guarantees for Fulcrum’s commercial pant.  Then in November 2012, the company announced it had collected $175 million in commitments for construction financing.  Fulcrum management was so pleased with its success at that time that it began discussing the possibility of an initial public offering.  The company had filed a registration statement for an IPO in late 2011, but had to withdraw as market conditions turned inhospitable.

Things never happen so quickly in the real world as they do in the dreams of executives.  Fulcrum is still private.  However, one thing has changed.  The company has actually accomplished something that looks like it could generate profits.  The economics of its production process is compelling given the near-zero cost of feedstock.  The math supporting Fulcrum’s agreement with Waste Connections is a bit opaque, but we do know Waste Management is an investor in Fulcrum BioEnergy.  Most likely WM expects to receive its reward in through capital gains in Fulcrum stock rather than monetizing its waste collections.

While Fulcrum is still beyond the reach of most investors, WMI and WCN are interesting options. Both of these companies seem poised to gain eventually by the transformation of their waste collections to renewable fuel feedstock.  It is not entirely clear how waste collectors will reap the gains from the upgrade of waste from liability (something to be sent to a landfill) to an asset (something to sell to or trade with a fuel producer).  If waste is to be an asset, the aggregators will eventually be winners.  We can ponder these gains while we wait for Fulcrum Bioenergy to finally stage its IPO.

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.



Anonymous said...

A great development

Anonymous said...

The fact that they have actually demonstrated this at a demo scale is a key differentiator. The other player in this space, Solena fuels have not done any testing at any scale. I know where Id be putting my bets on success....