EBI Investment Modeling for Biofuels and Biochemicals

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

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 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 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

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

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http://www.bizstats.com/

http://www.theicct.org/

http://www.nexant.com/

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

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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)




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.

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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.

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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 notcover NYSE traded part State Owned Enterprises (SOE) of China, Brazil, Norway.

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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.

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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 Money

Higher Yields, Better Basis and Farm Incomes Up

US Farm Policy is a Success

Bushels Per Acre!

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As Corn (maize) Producers have Done Well

so 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 Routes

There 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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http://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

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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

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EBI Investment Modeling for Biofuels and Biochemicals

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