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Dow Pens Agreement with Solazyme

Zacks Equity Research

The Dow Chemical Company (DOW) announced that it has penned a contingent offtake agreement with Solazyme (SZYM), a renewable oil and bioproducts company. Under the agreement, Dow will obtain non-vegetable microbe-based oils from Solazyme until 2015.

However, the agreement is contingent on Solazyme’s capacity to supply oils according to specifications laid down by Dow along with other terms and conditions pertaining to the deal.

Dow uses these oils in dielectric fluid applications, which offer added safety from fire due to higher flash points. They also offer extra functionality, which may perk up the operating efficiency and extend the useful life of transformers. As per the agreement, the final price of the oil will depend on certain terms and Solazyme’s sugar-based feedstock costs will also be taken under consideration.

In addition, the two companies have also entered into a Phase 2 Joint Development Agreement (JDA2). This is an exclusive and multi-year extension of the existing joint-development agreement. The agreement includes accelerated commercialization timelines due to Solazyme’s speedy progress in the production of tailored algal oils. Solazyme’s capability of scaling up its custom-made algal oil feedstock will help Dow in conducting additional application developments.

Dow is focusing on bringing innovative solutions to the power industry and the JDA2 agreement is a step in that direction. Dow is convinced that it is well-positioned to commercialize these oils and has already made progress on the application work. Dow expects that the agreement will enable the company to pursue its aim of commercializing bio-based dielectric insulating fluids and it is counting on Solazyme’s capability of supplying tailored algal oils.

Last month, Dow announced its first quarter 2012 results. The company earned 61 cents a share on an adjusted basis in the quarter, but this was below the 82 cents earned in the year-ago quarter. Its revenues went down marginally from last year to $14.7 billion in the quarter. The company managed to beat the Zacks Consensus Estimate on bottom line but failed to meet top line expectations.

Dow did not provide any guidance in particular but said that it expects the economy to recover at a faster clip in the second quarter and the rest of the year. However, Dow is hopeful of meeting its targets in the short and long runs, even if the economy does not turn in its favor.

Dow faces stiff competition from EI DuPont de Nemours & Co. (DD). We currently have a long-term Neutral recommendation the company. The stock maintains a Zacks #3 Rank, which translates into a short-term (1 to 3 months) Hold rating.

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