Crop of IPOs Provides Expanded Biofuel Bets
Wall Street Journal
Four years ago, alternative-fuel IPOs came in only one flavor in the U.S.: corn-based ethanol.
In the last 18 months, a new wave of initial public offerings has come from companies focused on creating biofuels using everything from wood chips to grass clippings. Three biofuel deals have hit the IPO market this year, from Gevo Inc., KiOr Inc. and Solazyme Inc., after two last year.
All five have proprietary biotechnology to produce biocatalysts and microbes to create different types of fuel using everything from sugar cane to pine-tree chips. Their research has shown that they could generate fuel—possibly at lower cost or with a higher energy capacity than fossil fuels—using engineered organisms ranging from microalgae to genetically modified yeast. Until recently, U.S. oil prices were flirting with $100, and this month's slide may well be a blip on a long-term view. Alternative-energy plays are viewed as more likely to succeed when prices of traditional energy sources are rising.
"People see great opportunities, not only because energy prices are higher, but also because companies are using technology" to make fuels that could be cost-effective, said Neil Suslak, managing partner at venture-capital firm Braemar Energy Ventures, which has a stake in Solazyme.
These newer companies drew stock-market investors despite the very early stage of their business plans. KiOr had no revenue, and the others' sales were derived from beauty products, pharmaceutical discoveries and nutritional supplements—not fuel. None of the firms had started commercial production of biofuels by the date of their stock-market debuts, and none had profits.
In an industry with so many emerging technologies, investors had to make educated guesses about whether these businesses could succeed.
"All these different forms of biofuels could become obsolete, and companies that invested all their time and resources in one path might find a few years from now that theirs is not the favored method," said Gene Fisch Jr. investment manager at FS Capital, who doesn't own any of these stocks. "At the end of the day, investors have to decipher which one is going to be wonderful and make money, and thus which one will sustain itself with stock price gains."
Moreover, shares in ethanol producers, the primary alternative-fuel IPOs seen by U.S. investors before last year, quickly fizzled on concerns about the cost of their primary feedstock—corn—and the expense and logistics of transporting the fuel.
One selling point of these newer biofuel stocks is that most of the new entrants were partnered with larger companies. Codexis Inc., which went public last year, has a research and licensing agreement with a subsidiary of Royal Dutch Shell PLC to research and develop biocatalysts for biofuels. Solazyme has sold military diesel and jet fuel to the U.S. Navy, which the company says has been successfully tested in unmodified engines.
"Nearly every IPO that has gotten done has had some sort of partnership with a larger company.These stocks are analogous to life-science investments because they are not fully baked on their own. ...You need a large, well-respected company as a partner in the business that the market can look to for affirmation," says Paul Deninger, senior managing director at investment bank Evercore Partners, whose firm wasn't involved in the latest string of biofuel IPOs.
But unlike young pharmaceutical and biopharma companies, which nearly always cut their asking prices to attract enough investors, several biofuel firms had an easier time marketing their IPOs. This year, Solazyme priced above its expected range and rose 15% on its first day of trading in May; Gevo priced at the high end of its range in February and rose 10% in its debut. KiOr priced below its range and ended its first day flat. But most of the stocks have been battered since July amid the volatile market, and only Amyris Inc., the other of last year's biofuel offerings, closed above its IPO price Friday.
Analysts and bankers say while there are likely to be more biofuel IPOs ahead, they don't anticipate a flood of companies coming to market. Right now, there are two biofuel-focused companies with IPOs on file with the Securities and Exchange Commission: Renewable Energy Group Inc., the largest biodiesel producer in the U.S., and Luca Technologies Inc., which uses biotechnology to create methane by stimulating native microorganisms in coal and oil deposits. Neither company has fixed a date to launch shares.