investment modeling for biofuels and biochemicals lawrence d. sullivan & company, inc. larry...

Investment Modeling for Biofuels and Biochemicals

Lawrence D. Sullivan & Company, Inc.

Larry Sullivan, Project Management Consultant

Adjunct Faculty, Trident Technical College

Carla M. Wood, Ph.D.

Lawrence D. Sullivan & Company, Inc.

Presentation for the Sixth Annual Biofuel Law and

Regulation Conference

University of IllinoisUrbana – Champaign, Illinois

May 2, 2014

Lawrence D. Sullivan – Past & Present

20 Years in Oil & Gas

(Dresser, Imperial Chemical

Industries & Conoco/Dupont)

as Petroleum Engineer and

Manager

Last 12 Years in Biofuels,

Biomass, Biochemicals - Early

Stage Firms

15 Years Living and Working

Outside the USA – SEAsia,

Middle East, EU & Africa

Speaker at 25 Conferences –

Beginning at 2004 Biotechnica

Advisor to Gerson Lehrman

Group Clients as Top 2% Expert

Due Diligence for GLG Clients

Turner, Mason & Company - Oil

Refiner Acquisitions of Stranded

Biofuel Assets

Adjunct Faculty at Trident

Technical College

Carla M. Wood, Ph.D.Academic CareerB.S., The Evergreen State College - Biochemistry

Ph.D., Texas A&M University – Biochemistry & Cell Biology

Post Doctorate, Baylor College of Medicine, Depts. of Cell Biology – Human DNA Repair, Cellular Transformation & Mutagenesis

Staff Scientist, NIH, National Institute on Aging, Molecular Genetics – Genes of Senescence, Stress Response, & DNA Damage

Research Assistant Professor, University of Minnesota – 1) Expression Analysis of Non-Receptor Protein Tyrosine Kinases in Childhood Leukemia 2) Biomarkers in Multiple Myeloma

Patent Law Technical Advisor, Merchant & Gould, LLC, Minneapolis & Seattle

Consulting CareerConsultant at L. D. Sullivan & Co. Since 2004 (Owner Since 1998)

Advisors to Gerson Lehrman Group Clients - Top 2% Experts

Due Diligence for GLG Clients

Expert Witness

Outline of Presentation – Themes

1. What is the Capital Asset Pricing Model (CAPM) and who

uses it?

2. Return on Capital Employed (ROCE) on investments in raw

materials production (e.g., Extraction)

3. ROCE on the Basic Chemicals (generally has “mining”

components)

4. ROCE on the conversion of raw materials to petrochemical

intermediates (and Basic Chemicals as well as Seven

Building Blocks)

5. Capital Investment Expectations and Conclusions

References and Sources:

www.bizstats.com

Measuring and Addressing Investment Risk in the Second-Generation Biofuels Industry. ICCT. December 2013. www.theicct.org Addresses conversion of raw materials

NexantThinking™ “Next Generation Biofeedstocks: Resources for Renewables” www.Nexant.com Addresses raw materials

Capital Asset Pricing Model

Return on Capital Employed (ROCE)

Formula:Terms:

Return on Capital Employed (both equity and debt) or Equity

Beta of 1.0 moves with markets

Market Return is set by Investors

Risk Free example is United Kingdom Perpetual Bonds

ICCT reports that Beta on public biotech requires high ROCE for investment

The difference between return on assets and return on equity in a general sense

is based on gross versus net profits. Assets usually represent the market price

of durable goods such as real estate, automobiles, and heavy construction

equipment, and businesses themselves or investments like bonds that hold their

value over time. Equity, on the other hand, represents what the actual monetary

value of something is after all outstanding debts and liens have been subtracted

from it, and this can also include taxes that must be paid such as those on

retirement accounts or annuities when they are cashed in. Both return on assets

and return on equity calculations are often used in the investment community to

ascertain what the value of a business is if it has to be liquidated, or how much

built up value it has for determining a safe level of borrowing for business

growth. More specifically, however, return on assets (ROA) and return on equity

(ROE) are metrics that corporations use based off of company earnings or net

income to determine if the company is producing what is considered a healthy

profit and growth margin.

ROCE – Oil and Gas Extraction (2010)

High Risk, High Rewards

Return on Sales 13.43%

Return on Assets 6.67%

Return on Net Worth 13.04%

Quick Ratio 1.08

Current Ratio 1.38

Inventory Turnover 34.40

Note: Oil prices in 2010 averaged $80/bbl (WTI - Cushing, OK) and natural gas was $4.48 per 1,000,000 cubic feet at the wellhead.

ROCE - Extraction Industries: Agriculture and Forestry (2010)




Quick Ratio 0.70

Current Ratio 1.31


Note: Covers a Bizstats’ range (LLC, Inc., MLP) with Net Assets from $1 to $500,000 which would include farmer-owned cooperative societies (LLCs, Inc.), independent forestry owners and small time miners. Does not cover processors like ADM, Cargill, Bunge, etc. or Real Estate Investment Trusts in forestry, agriculture and mining like Plum Creek or Hancock.

ROCE - “Basic Chemicals” (2010)




Quick Ratio 0.74

Current Ratio 1.08


Notes: Covers Bizstats data for both the chloro-alkali industry (NaCl, NaOH, Na, Cl, soda ash, bicarbonate, NaO) and the sulfur (H2SO4) from both synthetic to mining. Not petrochemicals or TiO2.

ROCE - Petroleum Refining (2010)




Quick Ratio 1.13

Current Ratio 1.21


Notes: Covers Bizstats data for both independent refiners (e.g., Tesoro, Valero) and integrated oil & gas production companies who own refinery assets (e.g., Shell, ExxonMobil, Total, BP). It does not cover NYSE traded part State Owned Enterprises (SOE) of China, Brazil, Norway.

ROCE - conversion of raw materials to petrochemical intermediates (2010)




Quick Ratio 0.97

Current Ratio 1.53


Notes: this includes Bizstats heading “resins, synthetic rubber, and fibers & filaments” for example polypropylene and not propylene, or PET resin and not para-xylene, ethylene glycol or dimethyl terephthalate.

Why Make Biofuels? US Fuel Projections

What is Corn (Maize) Ethanol All About?Missouri is “The Show Me State”

Source: University of Missouri - http://agebb.missouri.edu/

Corn (Maize) Ethanol – Follow the MoneyHigher Yields, Better Basis and Farm Incomes UpUS Farm Policy is a Success

Bushels Per Acre!

Fundamental Economics - Petrochemicals

If integrated to large refinery complex (BASF, Shell, ExxonMobil,

Saudi Aramco, etc.), then petrochemicals are world class cost basis

If a stand-alone facility, then purchasing of the key intermediates

could be disadvantaged depending upon locations in the world.

Historic fuels/refinery ROI over 40 years averages 9.3%

Historic stand alone petrochemicals are 16.7%

Most integrated refinery and petrochemical plants have ROI

between the two above since locations can widely vary the ROI.

Billings, Montana and US Gulf Coast are examples.

Source – www.bizstats.com

As Corn (maize) Producers have Done Wellso have the Petroleum (Oil) Producers – However,natural gas producers need to export from US(note “nominal” US$ per million btu)

The Two Primary Petrochemical Routes

There is no significant “Upgrade in Value”

Fundamental Economics - Petrochemicals

If integrated to large refinery complex (BASF, Shell,

ExxonMobil, Saudi Aramco, etc.), then petrochemicals are

world class cost basis

If a stand-alone facility, then purchasing of the key

intermediates could be disadvantaged depending upon

locations in the world

Historic fuels/refinery ROI over 40 years averages 9.3%

Historic standalone petrochemicals are 16.7%

Most integrated refinery and petrochemical plants have ROI

between the two above since locations can widely vary the

ROI

Source – www.bizstats.com

Can a completely

integrated biorefinery

make high ROCE?

Closest analogue is the

Cargill Nature Works/Corn

Wet Mills and the world

class pulp & paper mills

(Chemrec/UPM in Sweden

or MWV in US)

Petrochemicals from natural gas and condensates are cost “advantaged” low cost, low molecular weight (MW)

Petrochemicals from petroleum crude oil are “disadvantaged” today due to high MW or energy density

Lipids can only come from land or algae (e.g., Solazyme)

Lowest costs are SEAsia (palm) and Brazil (sugar)

Race is to build high MW from low cost MW like sugar or petrochemicals

Conclusions

Financial analysts use a variety of tools to evaluate biofuel, biomass, algae, biochemical, etc. investments today

CAPM is a common tool for equity analysts

Historic data and benchmarks such as Bizstats allow analysts to advise fund mangers

To Review – ROCE (Net Equity and Debt):

Oil and Gas Extraction 13.04%

Cooperative Ag and Forestry 19.41%

Basic Chemicals 4.52%

Petroleum Refining 9.34%

Conversion to Petrochemicals 11.30%

This emerging industry needs to demonstrate over 20% ROCE to attract capital against these benchmarks using existing IPO Beta and CAPM but not for biopharmaceuticals

Thank you for your time and attention to our presentation

investment modeling for biofuels and biochemicals lawrence d. sullivan & company, inc. larry...

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