Investment Modeling for Biofuels and Biochemicals

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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 Illinois
• Urbana Champaign, Illinois
• May 2, 2014

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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

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Carla M. Wood, Ph.D.

• Academic Career
• B.S., The Evergreen State College - Biochemistry
• Ph.D., Texas AM 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 Career
• Consultant 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

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Outline of Presentation Themes

• What is the Capital Asset Pricing Model (CAPM)
  and who uses it?
• Return on Capital Employed (ROCE) on investments
  in raw materials production (e.g., Extraction)
• ROCE on the Basic Chemicals (generally has
  mining components)
• ROCE on the conversion of raw materials to
  petrochemical intermediates (and Basic Chemicals
  as well as Seven Building Blocks)
• 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

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Capital Asset Pricing ModelReturn 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

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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.
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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.

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ROCE - Extraction Industries Agriculture and
Forestry (2010)

• Return on Sales 7.81
• Return on Assets 8.30
• Return on Net Worth 19.41
• Quick Ratio 0.70
• Current Ratio 1.31
• Inventory Turnover 8.88
• 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.

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ROCE - Basic Chemicals (2010)

• Return on Sales 2.57
• Return on Assets 1.37
• Return on Net Worth 4.52
• Quick Ratio 0.74
• Current Ratio 1.08
• Inventory Turnover 9.96
• 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.

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ROCE - Petroleum Refining (2010)

• Return on Sales 6.14
• Return on Assets 3.83
• Return on Net Worth 9.34
• Quick Ratio 1.13
• Current Ratio 1.21
• Inventory Turnover 53.80
• 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.

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

• Return on Sales 4.36
• Return on Assets 2.44
• Return on Net Worth 11.30
• Quick Ratio 0.97
• Current Ratio 1.53
• Inventory Turnover 7.76
• 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.

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Why Make Biofuels? US Fuel Projections
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What is Corn (Maize) Ethanol All About?Missouri
is The Show Me State Source University of
Missouri - http//agebb.missouri.edu/
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Corn (Maize) Ethanol Follow the MoneyHigher
Yields, Better Basis and Farm Incomes UpUS Farm
Policy is a Success

• Bushels Per Acre!

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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

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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)
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The Two Primary Petrochemical RoutesThere is no
significant Upgrade in Value
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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

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• 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

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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