Join        Login             Stock Quote

Wishes and Hopes Are Not Enough to Recommend Syntroleum

 November 20, 2012 05:21 PM

(By Steve Alexander) Syntroleum (SYNM) is a fuel technology company. The company has developed 3 technologies:

Syntroleum?: The process of converting natural gas stock into Fischer-Tropsch (FT) wax. FT has a variety of industrial uses, including in the rubber, cosmetics, ink, and coatings industries. Additionally, FT wax is used as a feed product for...

Synfining?: The Synfining process is used to convert FT wax into synthetic diesel, naphtha, and liquefied petroleum gases (LPG - think propane or butane).

[Related -Sector Detector: Is There Still Enough Fuel In The Bulls’ Tank?]

Bio-Synfining?: A process used to convert biomass such as recycled vegetable cooking oil (e.g., from restaurants), animal waste fats, soybean and algal oil, etc., to synthetic diesel, naphtha, and LPGs.

I believe the best way to think of Syntroleum is as an intellectual property (IP) development firm. The business model is to license the above technologies to partners that wish to construct plants to produce synthetic fuels, earning an up-front technology licensing fee and collecting both royalties and service support revenues from their licensees.

The only technology in production is Bio-Synfining, with which Syntroleum partnered with Tyson Foods (TSN) in 2007 to create Dynamic Fuels LLC. The partnership successfully opened their Geismar, Louisiana plant in 2010. At present, this plant is churning out synthetic diesel which has been used by Royal Dutch Airlines (KLMR), Alaska Air (ALK), and the U.S. Navy. Syntroleum owns an equity stake in Dynamic Fuels, earns royalties from it, and collects technical service fees from it as well. In fact, the vast majority of Syntroleum's cash flows are dependent on revenues from Dynamic Fuels.

[Related -Futures Down Ahead Of Service Sector Data; Compugen Ltd. (CGEN) Soars]

An analysis of Syntroleum as an investment opportunity is not real positive. Synthetic diesel demand is largely government-driven, stemming from the Energy Policy Act of 2005 where the EPA sets annual quotas on what percentage of fuel sold must be blended biofuel. The market has had little trouble meeting these quotas - indeed, over 100% of the mandate was fulfilled in the first 9 months of 2012. As a result, demand plummeted, and the price for RIN (Renewable Identification Number, basically a unit of biofuel) crashed from an average of $1.30 to currently about $0.50. While the EPA is set to raise the mandate by about 30% next year, it looks to me like the market is having no trouble keeping up with the demand. That will keep prices low.

The fact is problematic when you understand that Dynamic Fuels' Geismar plant is deeply unprofitable even with over-$1 RIN costs. Since launching in late 2010, Syntroleum has swallowed over $21 million in equity-accounted losses in the joint venture. The plant has not operated anywhere near efficiency, consistently producing at only about 55% of capacity. When I see yearly mandates being met in 9 months, plummeting RIN prices, and low factory utilization, that screams over-supply to me. And in a commodity market, over-supply is bad, bad news for producers.

There are a few additional concerns aside from Dynamic Fuels. First, Syntroleum has been unable to find partners to commercialize the Syntroleum or Synfining processes, making me question to viability to commercialize them - ever. Second, the stock has traded well under $1 for most of the year, triggering a NASDAQ de-listing notice. While the company has recently applied for an extension, it seems likely to me that an already-approved (and embarrassing) reverse split may have to take place to save the listing.

The bull case for Syntroleum is one of wishes and hopes. Of course it would be great if we could take waste products and turn them into clean biodiesel, but organic demand just isn't happening right now. And, given the ever-expanding oil reserves being uncovered in the U.S., my feeling is that demand is unlikely to explode any time soon. Therefore, I recommend MFI investors step away from Syntroleum and look elsewhere.



Post Comment -- Login is required to post message
Alert for new comments:
Your email:
Your Website:

rss feed

Latest Stories

article imageAutomating Ourselves To Unemployment

In this current era of central planning, malincentives abound. We raced to frack as fast we could for the read on...

article imageFed: Waiting For June… Or Godot?

The Federal Reserve left interest rates unchanged yesterday, as widely expected. But the possibility of a read on...

article imageThe Single Best Place To Invest Your Money For Retirement

It was never supposed to be this daunting. At least that's what we were read on...

article imageNegative Blowback From Negative Interest Rates

The Federal Reserve is widely expected to leave interest rates unchanged today. But perhaps standing pat read on...

Popular Articles

Daily Sector Scan
Partner Center

Fundamental data is provided by Zacks Investment Research, and Commentary, news and Press Releases provided by YellowBrix and Quotemedia.
All information provided "as is" for informational purposes only, not intended for trading purposes or advice. iStockAnalyst.com is not an investment adviser and does not provide, endorse or review any information or data contained herein.
The blog articles are opinions by respective blogger. By using this site you are agreeing to terms and conditions posted on respective bloggers' website.
The postings/comments on the site may or may not be from reliable sources. Neither iStockAnalyst nor any of its independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. You are solely responsible for the investment decisions made by you and the consequences resulting therefrom. By accessing the iStockAnalyst.com site, you agree not to redistribute the information found therein.
The sector scan is based on 15-30 minutes delayed data. The Pattern scan is based on EOD data.