Alternative Energy IV - Updated Research and Company Profiles

Alternative Energy – Updated Research and Company Profiles
A Sleuth Whitepaper Report
By Greg Guenthner

If the United States converted just 5% of its estimated recoverable coal reserves to liquid fuel, one company estimates this change would be equal to the 29 billion barrels of proven oil reserves in the U.S., thereby almost doubling America’s oil supplies without drilling another well or building a new refinery.

This company wants to lead the charge when it comes to liquid fuel conversion. And since I’m a relative novice in the world of gas-to-liquid (GTL) and coal-to-liquid (CTL) technology, I decided this particular company would be perfect to research.

The name of the outfit is Syntroleum Corp. (SYNM: NASDAQ). Syntroleum has developed technology that converts natural gas or coal into synthetic liquid hydrocarbons that are mostly free from contaminants that are commonly found in fuels made from crude oil.

The synthetic liquid fuel can be used by itself in traditional internal combustion diesel engines, which reduces emissions. Or it can be blended with traditional fuels to “upgrade” the fuel to burn cleaner.

And diversifying how the United States gets its energy is not just important now, Syntroleum claims, but it will also become vital in the near future. The U.S. Department of Energy predicts China will face shortages of 5.9 million to 8.8 million barrels of oil a day by 2015. This company realizes the tug-of-war that will ensue over the world’s limited oil supply, and like some of the ethanol and biodiesel companies we’ve looked at before, Syntroleum is looking to provide an alternative solution to crude-based products.

Alternative Energy: A New Way to Make Fuel

Syntroleum has the money it needs to fund operations for 2006-2007, but it has never built a commercial facility. One of the risks of a commercially-viable GTL plant noted in the company’s annual report is that some of the technology in use at Syntroleum’s testing facilities and other technologies being developed might not prove to be commercially applicable.

In other words, they can make the stuff but they might not be able to do it as efficiently as they’d like on a larger scale. Nevertheless, the company is moving closer to commercializing the product.

Syntroleum is involved in a joint venture with Bluewater Energy Services to develop and pay for the first ever air-based GTL plant that would operate offshore mounted on a barge. A feasibility study commissioned by the two companies expects up to 17,000 barrels of the product produced per day, along with 40,000 barrels of oil, according to Syntroleum’s annual report.

And while the company is still in the red, it has a strong cash supply that should carry it through its research and development stage.

Syntroleum reported revenues of $400,000 for the first quarter of 2006 from joint research development activities with the U.S. government and with licensees and from GTL fuel sales. Its net loss for the quarter was $12.9 million, coming to 23 cents per share — about the same as the net loss of 24 cents per share from the first quarter of 2005.

And with more than $60 million in cash, the company is well positioned to fund its research and development and demonstration plants until its first commercial plant is complete (it spent $6 million on research during the first quarter). Jack Holmes, president and CEO of Syntroleum, said that first quarter costs are in line with the company’s budget as the company focuses on reaching financial close on its first commercial plant by the end of 2007.

Alternative Energy: Risks and Rewards

With a price tag of $7.75 a share before the market opened this morning — and the company tallying a 77-cent loss per share — it is evident that many investors have faith in this company’s technology and its ability to successfully commercialize its GTL and CTL methods. So a volatile share price is what you’ll get from this $436 million company. Almost $10 separates the stock’s 52-week high of $16.50 with its 52-week low of $6.54. So any bit of good or bad news could greatly affect the share price until Syntroleum starts posting a profit, which would be in almost two years at the earliest once its first facility is operating.

And as was mentioned before, the company is still unsure if some of the technology used in making the synthetic fuels will be as effective in a large-scale environment. If Syntroleum finds it can’t turn much of a profit, it could be a long time before the technology is improved.

Aside from these obvious risks, there are a couple of redeeming qualities that you should check out:

First up is a contract with a behemoth in the oil industry. In 2004, the company signed an agreement with ExxonMobil providing Syntroleum with a worldwide license under ExxonMobil’s GTL patents to produce and sell fuels from natural gas or coal. The agreement also includes all existing ExxonMobil patents in these areas, as well as future patents for the next several years.

Second is the strength of the company’s patents and management. Kenneth Agee founded Syntroleum in 1984 and is still with the company, serving as chief technology officer and chairman. He is credited on many of the company’s patents, as well. In all, Syntroleum has 127 patents issued and pending. Agee obviously sees the potential in this technology and is willing to see it through…

Alternative Energy:Wasting Natural Gas

GTL technology could help eliminate a lot of unnecessary wasting of natural gas across the globe. Many oil companies burn off unwanted natural gas in order to extract crude. The process is called flaring, and it’s a nuisance and an environmental concern. Natural gas is flared because there is a limited market for it in the warmer climates where it is found and it is difficult to ship overseas to viable markets.

To get a good look at flaring problems in Nigeria, you can check out this National Public Radio write-up.

And Syntroleum has a stake in Nigerian oil as well. The company recently acquired two locations in Nigeria with discovered oil and gas reserves, and also claims to be in the process of buying more. Drilling of the first well will happen sometime around September.

And in November, the company signed two memorandums of understandings that will hopefully allow a GTL plant in Papua New Guinea. Syntroleum is looking to develop about 50,000 barrels per day GTL plant as part of an industrial complex dedicated to gas-based industries near Port Moresby.

Talks with Egyptian Natural Gas Holding through one of Syntroleum’s licensees to construct another GTL plant are also in the works. So, the company continues to seek out opportunities to commercially develop its technology.

There are two main reasons Syntroleum thinks it can succeed better than traditional GTL technology. The first is that its conversion process does not require pure oxygen, making it safer and more cost effective. This in turn helps to contribute to its second advantage: cheaper operating costs, opening the door for smaller plant sizes, including mobile plants that can be mounted on barges.

All of this hopefully ensures that Syntroleum’s commercial plant — which is designed to produce just 17,000 barrels a day — will be economically viable.

Alternative Energy: Coal

Syntroleum is also exploring ways to commercialize coal to liquid (CTL) technology. The company notes that the largest coal reserves in the world are located in the United States, Russia, India, China and Australia.

However, a lot of the coal in these reserves is expensive to get due to environmental concerns and how far some of the reserves are located from coal markets. And although the company’s CTL program is not as close to commercialization as its GTL technology, it is making progress.

In November 2005, Syntroleum signed an agreement to conduct laboratory-scale demonstration of its catalyst technology with coal. “This program is targeted at advancing early adoption of our proven FT technology in coal-to-liquids,” according to Syntroleum’s website.

And Syntroleum and Sustec AG, a private company based in Switzerland, have an agreement that provides for exclusive joint business development of projects integrating Sustec’s gasification technology with Syntroleum’s technology.

“The joint venture is aimed at converting coal and other carbonaceous materials such as petroleum-coke, residual fuel oil and biomass into ultra-clean fuels. Each company will own 50 percent of the joint venture,” announced Syntroleum. Jack Holmes, president and CEO of Syntroleum said, “We have long considered Sustec as the state-of-the-art leader in gasification technology. We believe this combination can now offer a truly unique and very compelling technology value proposition to the coal industry… Integration of coal gasification and FT technologies is increasingly being sought after in the United States, China, Australia and elsewhere. This joint venture presents a rare opportunity for companies pursuing investments in this important energy industry segment to access the complete technology package required to develop coal energy in an environmentally-friendly way.”

And Syntroleum throws some more convincing stats in the mix: According to a BP world energy review, the world’s 2004 coal reserves were estimated at more than 909,000 million tons. That’s a lot of coal that could be converted to clean fuels.

Alternative Energy: Analysis

Syntroleum is moving full steam ahead on its GTL projects, and coal shouldn’t be too far behind. It’s still a speculative pick, but the management is dedicated, the technology is in demand, and the price is right.

In its annual report, Syntroleum executives claim that its technologies can be cost effective assuming that oil prices prevail in the $35-$40 per barrel range, so with oil likely to remain much higher, the company should be able to adequately capitalize on its commercial efforts.

If you were to buy the stock between $6 and $8, you would need to buckle up for some price fluctuation for the next year or longer. I don’t think this is the kind of investment that is going to skyrocket in the next few months. However, through all the risks, Syntroleum could become a real player in the alternative fuel world if and when it starts turning a profit.

Up Next: Part V:Reader Comments
Alternative Energy: 2006 is a Year of Crisis…

Saudi oil production is about to drop sharply. And it will keep going down for good.

Other experts have analyzed the numbers and came to the same conclusions.  If the charges are true, we could be facing oil at $150 per barrel and gasoline at $8 a gallon.

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