Report offers advanced biofuels primer to investors

By Erin Voegele | November 21, 2011

Financial services company Raymond James published an industry brief in early November discussing the status and potential of the second-generation biofuels industry. The report, titled, “Gen2 Biofuels: Despite Growing Pains, Billion-Gallon Milestone Within Reach,” is a follow up to a similar analysis published by the company in April.

According to Pavel Malchanov, an energy analyst with Raymond James who authored the new report, the objective of the analysis was to underline the rapidly growing nature of this industry. “It is what I might call a primer [designed] to really introduce the topic for investors,” he said. “Many investors are not particularly familiar with the advanced biofuel arena. The reason for that is that that until a year and a half ago, none of these companies were public. Even today, as I discuss this report, there are only a handful of companies, and most of them are quite small … I think this is a very interesting topic to introduce to the investment community.”

The report contains an overview of the second-generation biofuels industry, as well as the types of fuels that can be produced. The analysis also addresses the requirements of the RFS2 and the primary reasons behind the delays experienced in project scale up. Specifically, Malchanov points out that the road to commercialization entails significant execution risks and that expansion is highly capital-intensive. He also discusses federal incentives and the support of government agencies, and the military. The analysis also addresses the role of strategic partnerships as well as an explanation of the biorefining companies that have gone public in the past 18 months.

Malchanov said there are several aspects that differentiate the advanced biofuel market from traditional biofuels that he hopes investors will better understand after reviewing the report. First, he said that unlike corn ethanol, the second-gen biofuels industry does not rely on government incentives to be competitive. “Now, there are some incentives, but if they went away tomorrow companies could still make a lot of money,” he said.

Another important distinction, Malchanov said, is that the advanced biofuels sector has little competition from China. While companies in the solar and wind energy industries face steep competition from comparable Chinese technology companies, the same is not true in the biorefining sector. If anything, increased demand for oil in China helps the economics of U.S. biorefining companies by driving up the price of oil. “That,” Malchanov added, “ultimately makes biofuel projects that more profitable.”