Energy Business

Alt-Energy Watch: Are Biofuel IPOs The Next Ethanol? (CDXS, AMRS, GEVO, SZYM, PALG, PEIXD)

For about six months in 2010, Codexis, Inc. (NASDAQ: CDXS) had the publicly traded biofuels market to itself. Then Amyris, Inc. (NASDAQ: AMRS) and Gevo, Inc. (NASDAQ: GEVO) jumped in, and in May 2011, Solazyme, Inc. (NASDAQ: SZYM) joined the party.  Kior Corp. is planning its IPO this week and three more biofuels makers are also lining up for IPOs.

Solazyme raised about $227 million in its May IPO, and Kior is expected to raise about $240 million later this week. Myriant Technologies hopes to raise $125 million, while Ceres, Inc. wants to raise $100 million in its IPO. Petroalgae Inc. (OTC: PALG) filed for an IPO last August, but has yet to take any further action.

Eight companies, each with a different technology, are trying to build a footprint in a very competitive space. If this sounds something like the competition in the early days of the corn-based ethanol boom, it’s not just your imagination.

For the market in corn-based ethanol to take off, it required both a government mandate for consumption and government subsidies to blenders. The mandate is likely to remain in place, but the subsidies appear to be on their way out.  Biofuels lack a mandate and the subsidy for production is also set to be phased out at the end of this year. For a group of unprofitable companies, this state of affairs could be crippling, if not fatal.

Biofuels does have small advantages over corn-based ethanol. First, each technology is, in some way, rocket science, where making corn-based ethanol is not.   That means that the first few biofuels companies that can reach scale could survive.

But to do that, far more than a few hundred million dollars will be needed. Investors aren’t likely to keep putting up large stacks of cash if the biofuels makers can’t show a profit. Access to capital could dry up before any company can reach scale.

Second, ethanol makers Pacific Ethanol, Inc. (NASDAQ: PEIXD) and Aventine depended on low corn prices to make their operations profitable. That didn’t happen, and Pacific Ethanol also faced the expense of importing corn from the Midwest because not much corn is grown where it is based in California .

Because the biofuels makers use a variety of feedstocks, plants can be located near feedstock sources. This will help, but it won’t be enough by itself.

Of all the renewable energy products available, biofuels have the most ambitious goal: to replace fossil fuel as a transportation fuel. Reducing US gasoline consumption of some 13 or so million barrels a day is a worthy goal. Still, changing the world remains very risky.

Paul Ausick

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