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Biofuels: Six Flags over Wall Street! The wild ride continues. Our March and YTD assessment
A volatile month calls the viability of certain biofuel segments into question. Here's our analysis.
KiOR buyers and sellers are waging war with each other in 2012. The amusement park-like volatility has not just been turbulent, it’s been violent. January saw KiOR gain nearly 38%, followed by a 40% loss in February. This month, KiOR took off like an artillery shell late in the month, to end March with a 54% gain! YTD, after being in negative territory last month, KiOR is the star performer in Groundbreaking Energy’s BioIndex, besting peers Gevo, Solazyme, and Cosan. KiOR, Gevo, Solazyme, and Cosan are outperforming the Nasdaq, while Green Plains Renewable Energy remains in positive territory, YTD.
The catalyst sector remains solidly negative, as Amyris and Codexis languish in deeply negative territory. Amyris lost another 3.7% to bring their return to -58% YTD. Codexis continues to lose momentum in the wake of their executive flight syndrome, losing another 7.4% on the month, to bring their yearly return to -33.4%.
KiOR's wild ride continues, while SZYM, CZZ and GEVO continue to outperform the Nasdaq and broader equity market. AMRS and CDXS languish in negative territory.
February Highlights:
KiOR indicates that their Mississippi BioCrude plant is 75% complete and on schedule. Their shares surge, resulting in a 53.7% gain on the month.
Ceres (CERE) shares juped 20% on March 19th, after they indicated that their research group has genetically mapped the biofuel crop miscanthus, which should have the ultimate effect of lowering production costs
FutureFuel, an Arkansas producer of biochemicals and biodiesel announced very strong earnings on March 15th, with positive trends in revenue, net income, EPS, and operating costs. Despite a 6% surge in share price, FF ended March slightly negative relative to February’s closing price
Renewable Energy Group (REGI) is slowly climbing from their February IPO
Solazyme surged, and reviews for their algae-based cosmetic line Algenist are positive, translating into retail sales
February Areas of interest:
Cosan and Gevo have hit some headwinds. Although both have performed strongly YTD, CZZ’s surge that started in January stalled in March, with a slightly negative monthly return. Gevo lost just over 8% on the month.
Political positioning towards biofuels in the 2012 US Presidential campaign. Negative commentary by the GOP, positive support from Democratic politicians.
A summary of Biofuels’ YTD price action by sector:
I have summarized YTD price action by the fuel stream that each firm touts as a primary market. I have categories for Renewable Oil/Diesel, BioButanol, BioEthanol and Refining/Catalysts. The idea is to get a sense of the price momentum in each market segment, and to see how firms in the segment are performing relative to one another. In order to benchmark, I’ve normalized the QQQ and SPY indices into a similar price range as the market segments to reveal any broader trends. My summary is below:
Renewable Oil/Diesel
View the dramatic ascendancy of KiOR. Directional traders have had tremendous opportunities with this equity. SZYM surged as well. There appears to be growing investor enthusiasm in this sector. FutureFuel continues to achieve strong financial results, but increases in the stock price haven't followed.
BioEthanol
CZZ momentum cooled off, and it tracked the Nasdaq. PEIX is stagnant.
Refining/Catalysts
Amyris continues its free-fall. Codexis lost support at the 3.80-3.90 level this month, and lost over 7% from its February close.
BioButanol
Some investor enthusiasm over GEVO waned during the month of March. GEVO's YTD returns are still near the best in peer class.
Comparison of our February assessment to March:
Our February assessment:
The enthusiasm over KiOR has dissipated. IsoButanol enthusiasm remains steady, and GEVO is benefiting. Ethanol enthusiasm grew this month, and Cosan, Pacific Ethanol and Great Plains Renewable Energy are all fetching positive returns for the year. I continue to suggest cautious and dilegent review of GEVO’s financials prior to buying into the momentum. The Refining Catalyst segment, which consists of Codexis and Amyris is showing substantial weakness and warning signs. In my assessment, I believe that the selling in Codexis this month that was triggered by the CEO departure announcement was well overdone. Their revenue figures are decent, new products should add to the top-line, and gross margin improvement is desperately needed. These factors suggest that a leadership change may benefit the company. I do not believe in Amyris at this point.I continue to like Cosan, am still cautiously optimistic long-term on Codexis, though I have tempered my earnings estimates. I am eagerly awaiting Future Fuel’s March 15th SEC filing, and believe there may be some upside post-release. I have performed an analysis of Solazyme’s cosmetics segment, and believe it could add more than $20m this year to revenues, making me more positive on SZYM.
Our March assessment:
The violent volatility exhibited in KiOR trading provides substantial opportunities for directional traders. Until production comes online, investors are making educated guesses about the potential for earnings. KiOR has over $200 million in debt, without a dollar of revenue, but their technology is compelling, and should be competitive in the crude market, once production commences at their Mississippi plant later this year. Enthusiasm over renewable oil in particular seems to be growing, and we like SZYM in this sector, because of their demonstrated ability to fulfill large quantity biofuel orders for the Department of Defense, and their diversification with exposure to the chemical and cosmetic markets.
FutureFuel continues to provide outstanding results, and demonstrates strong management. Why their stock price hasn’t appreciated is worth further investigation.
This may be a buying opportunity for investors interested in getting exposure to Codexis, but due to the negative sentiment in the sector, and continued questions about executive leadership there, we’re a little reluctant to buy.
We continue to like SZYM, FF, and CZZ, though there may be some short-term downside for CZZ in April, based on momentum patterns. We’re neutral on CDXS on this point, and negative on AMRS.
The 2012 US Presidential elections will have significant influence on the biofuel sector. Obama continues to tout biofuels as a significant component of his administration’s energy policy, while there has been posturing viewed as negative towards biofuels by the GOP. The Department of Defense has loudly re-emphasized their commitment to sourcing fuel domestically, and biofuels will be a major component of that strategy.
March 31, 2012