Many Companies In The Biofuel Spaces Are Focusing On Chemicals Due To Pricing And Higher Margins, Says Analyst At Raymond James; Read More About His Take On The Alternative Energy Space In This Exclusive Interview

Wall Street Transcript

67 WALL STREET, New York - February 21, 2012 - The Wall Street Transcript has just published its Alternative Energy & Utilities Report offering a timely review of the sector to serious investors and industry executives. This Alternative Energy & Utilities Report contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

Topics covered: Outlook for Biofuels and Biochemicals - Asia Pacific Demand for Solar Energy - Grid Parity Timelines for Alternative Energy - Regulatory Headwinds for U.S. Utilities

Companies include: Gas Natural (EGAS); LDK's (LDK); Power-One (PWER); American DG Energy (ADGE) and many more.

In the following brief excerpt from the Alternative Energy & Utilities Report, interviewees discuss the outlook for the sector and for investors.

Pavel Molchanov joined Raymond James & Associates, Inc., in June 2003 and began work as part of the exploration and production research team, becoming an Analyst in January 2006. He initiated coverage on the alternative energy sector in fall 2006 and the integrated oil and gas sector in mid-2009. Mr. Molchanov has been recognized in the StarMine Top Analysts survey, the Forbes Blue Chip Analysts survey, and The Wall Street Journal Best on the Street survey. He graduated cum laude from Duke University in 2003 with a B.S. in economics, writing his senior honors thesis about OPEC's oil output policies.

TWST: Your alternative energy coverage is broad. Which segment are you most interested in at the moment and why?

Mr. Molchanov: At the moment, I would say that the most intriguing one from an investment standpoint is biofuels and biochemicals, and there are three reasons for that. Number one is that unlike many areas of clean tech, what biofuels and biochemicals offer is direct leverage to the price of oil. And that's something that - for example - solar does not offer and wind does not offer, so that's point number one.

The second point is that - unlike, again, solar - the advanced and cellulosic biofuels industry does not depend on government support. So in the solar market, stocks jump from day to day based on the latest noise from Germany, from Italy or from China. But in the biofuel/biochemical arena, that's really not an issue. Lastly, unlike solar and some other areas of clean tech, the biofuel market does not have to confront competition from China. For example, the price of solar panels is down 40% in the last 12 months because of a real lack of discipline among Chinese manufacturers, and that simply is not an issue for biofuels, because for them China is not a competitor.

TWST: What are the biofuel companies you like in particular, right now, and what's the outlook for 2012? What developments may we see in that segment?

Mr. Molchanov: One point to make about the advanced biofuel arena is that, traditionally, it has been almost entirely comprised of private companies, venture-backed startups. That has started to change in the past few years, but there are still very few publicly traded companies. I think that number will increase over time as more of these venture-backed startups go public. But to be sure, it's still a relatively narrow space for public equity investors. There are nine public pure plays, and in total, their market cap is approximately $3 billion. That's very small. Now, in clean tech in general, market caps are pretty low relative to many other segments of the equity markets. So for example, all publicly traded solar companies combined in the United States would be less than one midsized tech stock. In solar, because it's just a more established industry and with a lot more IPOs historically, there is more market cap for investors today.

That's why when many public investors think of alternative energy, they really think of solar first - it is more investable. But as I said, there is fundamentally a much more interesting space right now in what's happening in biofuels. Again, there are nine publicly traded pure plays totaling about $3 billion of market cap. The largest of these is a company called KiOR (KIOR). Its market cap is over $1 billion, easily the largest market cap in this subsector. KiOR is a cellulosic biofuel developer. What they do is they take cellulosic biomass and process it in a catalytic reactor through a catalytic process that is analogous to what refineries use for catalytic cracking. Wood chips are what they started with, but they have the ability to use other feedstocks as well. The outcome of this process is what's called biocrude, renewable crude oil. It's not ethanol. It's actually a hydrocarbon that can be processed through normal refining infrastructure to make virtually any fuel that the end user wants. It can be diesel. It can be jet fuel. It can be fuel oil or other products. There is a lot of flexibility in what this can be turned into. Like just about all of the companies in the peer group, KiOR is a preproduction company, so it's an early-stage business. The first commercial plant that KiOR is building is expected to start up by the end of 2012, followed by another plant in 2013 and more beyond that. Because it is an early-stage business, that, of course, creates a higher-than-average risk profile for stock. But the technology is very proprietary, and the ability to use cellulosic material gives the company an inherent cost advantage relative to biofuels that use corn or sugarcane. So at the company's fully commercial-scale facility, the target cash production cost is $1.80 a gallon, which translates to roughly $75 oil.

Right now, WTI crude oil is near 100 bucks, and Brent is $10 higher. So producing oil at $75 a barrel looks like a pretty good deal. That's KiOR. The second-largest company, again looking at market cap, is Solazyme (SZYM), $700 million. Solazyme has a very different platform than KiOR. Solazyme does not use a catalytic process; it uses a biochemical process, its own proprietary form of fermentation. Solazyme's technology is algae. They take a source of sugar - sugarcane, for example, but there could be other things - and they ferment it using the company's proprietary algae into various types of oils that have a wide variety of applications. They can produce fuel, including diesel and jet fuel, and that's part of what they're working on. But their focus, for the time being, is actually on chemicals. Many companies in this space are going after chemicals. Why? First, quite simply because the pricing and margins are higher. So right now Solazyme has limited commercial sales, but the per gallon pricing that they are getting is a lot higher than, for example, what KiOR will get because they're selling it to high-value specialty end markets. One other difference between Solazyme and KiOR is that KiOR is building its plants in the United States, and Solazyme, for the most part, will be commercializing in Brazil, although they have some U.S. operations as well. From a business model standpoint, the key difference is that KiOR is building plants on a 100% own-and-operate basis, whereas Solazyme is building them through strategic partnerships. Solazyme has a lot of partners.

They have partners in Brazil - for example, Bunge (BG), one of the largest agricultural companies in Brazil. They have a partner in Colombia, which is Ecopetrol (EC), the national oil company. And they have partners on the opposite side of the value chain, that is to say, customers. This includes Chevron (CVX) for fuel, plus Qantas (QAN.AX), the Australian airline, specifically for jet fuel. And they have partnerships in chemicals, for example, with Unilever (UN) for consumer chemicals and Dow Chemical as well. The trade-off is that Solazyme will have less direct ownership of its production, but on the positive side, it does not need to put in as much of its own capital because its partners are going to contribute to its scale-up. KiOR and Solazyme are both good examples of stocks that investors can think about in this space.

TWST: Given what you view as the opportunity in biofuels and relatively small number of pure plays, do you expect to see some new entrants in the form of clean tech companies that aren't pure plays getting more into biofuels or new companies launching?

Mr. Molchanov: We're not going to see solar or wind companies getting into biofuels, but over the next 12 months and beyond, I would definitely expect more IPOs in the biofuel and biochemical arena. In fact, as of today, there are approximately 12 companies in this space that have already filed to go public. As I said, there are only nine that are publicly traded today. So depending on how many of these IPOs materialize in the next 12 months, there could be a much broader set of investable stocks for investors to look at by the end of 2012.

The Wall Street Transcript is a unique service for investors and industry researchers - providing fresh commentary and insight through verbatim interviews with CEOs and research analysts. This Alternative Energy & Utilities Report is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

The Wall Street Transcript does not endorse the views of any interviewees nor does it make stock recommendations.

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