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Revealing the Fool’s “Silicon Valley Oil Superstar: 1 Company Pulling Profits Out of Thin Air”

Checking out the latest teaser pitch from Motley Fool Hidden Gems

By Travis Johnson, Stock Gumshoe, December 16, 2013

I spent the weekend in New York enjoying the overwrought holiday scene with my family, and I must admit to being delighted to catch a Broadway show and see the Radio City Music Hall Christmas Spectacular for the first time, but though I’m now fully immersed in holiday merriment I must confess that nothing quite warms the heart like sleuthing out a “top secret” stock pick for you.

So let’s get to another one, shall we? This time it’s a pitch from the Motley Fool’s Hidden Gems newsletter, which has been sort of a quiet underachiever in recent years — this is the Fool’s small cap “value” newsletter that used to be run by Fool founding brother Tom Gardner, but it has been through a series of editors since he refocused on other things. In the early 2000s the letter was a solid market-beater much of the time, with picks like Middleby (MIDD) and Chipotle (CMG) doing spectacularly well, but according to Hulbert they had a few weak years following the market crash — until this year, when they have again been beating the market average.

This teaser pitch was written by one of their analysts, a biotech guy named Dr. Max Macaluso, which is pretty typical — recently the Fool has started using teaser pitches signed by folks other than the newsletter editors and stock pickers, I don’t know why … other than that it helps to further differentiate the hype-filled promise of the ad from the real and hopefully more sober analysis published in the actual newsletter. Here’s how Dr. Macaluso gets us interested:

“Imagine how much money you’d stand to make if you found a way to pull…

“Endless oil straight ‘Out of Thin Air’ …

“Sound impossible? I thought so too until I heard this…

“It’s more than 10 times cleaner than petroleum oil, works in exactly the same way, and its production (which takes only a couple days) is virtually unlimited. No wonder industry insiders are calling it ‘The New Petroleum.

“Billionaire entrepreneur Richard Branson of Virgin Group leaped at the chance to make a recent investment, proclaiming this radical new oil “Will play an important role in our future.”

“Continental Airlines just used it to fly a jet airliner from Houston to Chicago… and its parent company United was so thrilled they immediately locked in a contract for further delivery of 20 million gallons of fuel per year.”

So what’s the idea? Well, there’s a long presentation going into all of the reasons why this upstart will turn the massive energy business upside down, how it has the upside of “four Microsofts put together” and about how the process can create oil in just a few days, here’s a bit more for a taste:

“… it has industry experts saying this radical oil could help put the world on a cleaner, more energy-efficient road to the future.

“In fact, independent energy research firm Life Cycle Associates found it can reduce greenhouse emissions by a mind-bending 93%.

“OriginOil simply calls it ‘The ideal replacement for petroleum.’

“To put it in context, this is such a large-scale phenomenon that entire generations could go through life without witnessing something comparable…

“And as you can probably imagine, whatever ends up replacing petroleum as the world’s primary source of fuel would almost certainly make early investors tens of thousands of dollars with relative ease.

“Possibly even hundreds of thousands. Maybe even more…

“To put it in perspective, MarketResearch.com — the watchdog of emerging markets sectors — sees the potential for a multi-hundred billion-dollar market opportunity within the next few years alone.”

The Fool even pulls in Clown Prince Jim Cramer for an endorsement:

“… this astounding technique was actually developed by a publicly traded company.

“A tiny Silicon Valley company that’s already erected a Fort Knox-like 300-patent fortress around their ‘oil out of thin air.’

“To put it in perspective, they have more patents than employees.

“So it’s no wonder Jim Cramer ran a special segment on his TV show Mad Money to specifically call attention to their ‘Competitive advantage with many layers of patents and trade secrets.'”

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There’s more, of course — lots more. But that’s plenty for us to throw into our Mighty, Mighty Thinkolator — and once it churns and chews a bit we learn that our answer is: Solazyme (SZYM — free trend analysis here)

And yes, it was covered by Jim Cramer as a “speculative” stock that his viewers had asked about, but the coverage on Mad Money was in March, 2012, less than a year after Solazyme went public in the Summer of 2011. You can see his coverage here if you’re curious. Back then the stock was around $12 and his attention helped to drive it up to about $15 as he called it a “terrific speculation,” but it’s been mostly downhill from there with the stock dipping to $7 or so, bouncing back up to $12, and then falling back down to where it is now between $9-10.

We can certainly agree that Solazyme is speculative — this is a company with a cool technology in their ability to create biodiesel by harvesting it from giant tanks full of sugar-consuming algae, and they have (or have had) lots of primo partners in Bunge, the US government, Chevron and others. But it generates very little revenue so far, and is probably quite far from ever generating a profit.

Solazyme’s unique proposition, as I understand it, is that they don’t produce oil using photosynthesis like the land-intensive algae pond operators do, they couldn’t make that work in volume. They produce oil in dark tanks using sugar, so they have heavy input costs in the form of tonnes of sugar (there’s an interesting piece from SeekingAlpha on that here, I haven’t checked his facts), but it seems that the immediate hopes for Solazyme rest far more with high value-added oils for food products and cosmetics that earn a much higher price — they can create fuel oils, but it’s hard to see how they could do so and be competitive with $100/barrel crude oil unless they have heavy government incentives. People will likely pay more for biodiesel that’s derived from alga, because premium “green” products can always garner a higher price, but that’s a strategy for a segment of the market, not a strategy for really upsetting a trillion-dollar market.

This is a key period of time for Solazyme, their big commercial plant openings (one in Brazil colocated with Bunge at a sugar plant, one at an Archer Daniels Midland facility in Iowa) are a bit delayed but are now supposed to come online in the first quarter of next year, so there will undoubtedly be substantial news out of the company in their quarterly announcements over the next six months or so … but it will still be speculative.

That doesn’t mean there’s anything particularly wrong with Solazyme, I don’t know the company well, it just means that they’re dependent on a process that’s inherently high-cost and difficult to scale — the only way to really quickly turn them profitable would be to license their technology to someone who wants to invest billions of dollars into massive algae plants. These new plants of theirs seem wise to me, they’re locating their production in areas where they can take advantage of cheap energy and proximity to feedstocks and a strong infrastructure run by their partner, and it makes sense that they’re targeting specialty markets for their expensive fuels since they can get multiples of the crude oil price for nutritional or industrial oils, but I have no idea if or when Solazyme will ever become a profit-making enterprise.

They’ve got enough cash to keep going for a while thanks to a substantial debt offering this year, they will see additional cash flow as their facilities come online in the coming months, and they have solid management and a cool technology and lots of patents, but I don’t know them well enough to predict when or if they’ll start to make investors happy again. Analysts are predicting that revenues will quadruple next year, but that the company will still be losing a dollar a share.

Oh, and yes, several investors have noted that there’s a long stretch to go before profitability — SZYM has a pretty hefty short interest of about 17% of its shares, so that could help pop the stock up if they get surprisingly good news and those short sellers have to cover … but that also means a lot of folks are betting pretty heavily on SZYM being a bad investment. If you’re interested in Solazyme and have an opinion to share, feel free to shout it out with a comment below.

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Engineer
Guest
Engineer
December 21, 2013 12:09 pm

In order for this system to work as reported, the amount of energy leaving would have to be greater than the energy going into it. It is quite UNlikely that anyone is going to come up with a process that violates the law of conservation of mass and energy and consequently these type of companies have to resort to smoke and mirrors to get science ignorant investors to fund their efforts “to improve the economics.”
This is simply a scam for ignorant investors who can’t recognize a perpetual motion machine.
An Engineer

Dave
Dave
December 21, 2013 3:55 pm
Reply to  Engineer

Engineer, “as reported”, I saw no mention of the energy value of the produced oils being greater than (or even equal to) the energy value of the carbs going in. Of course there is an energy cost when converting from one source of energy to another. No violation of therm. laws here, and this is not a perpetual motion scam. Since fat has roughly 2.25x the energy density of carbohydrate, and considering the cost of conversion (dunno how efficient the algae are), it probably takes at least 3lbs of carb to make a pound of oil. IOW, they have to use a lotta lotta carbs to get a lotta oil out.

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bob kochnowicz
bob kochnowicz
December 21, 2013 12:57 pm

No comment on this stock but for people that arent familiar with Motley Fool I would like to say this is a terrific service.I subscribe to MF Sock Advisors and MF Canada.For the small cost you get terrific results.Just throwing my experiance with MF out there.Happy holidays investors!

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Klaus Kaiser
Guest
December 21, 2013 3:20 pm

Whether you make ethanol or diesel out of sugar does not matter. Both conversion processes are well understood but, overall, neither one will result in any energy savings and, therefore, are not “green” at all.
For more reading on the subject, see for example “The Scam of Scum” at http://www.canadafreepress.com/index.php/article/45028

Merry Christmas

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Dave
Dave
December 22, 2013 2:05 pm
Reply to  Klaus Kaiser

Is it energy savings they’re after, or is it CO2 recycling and production of oil from, in part, waste carbohydrate? They are not growing algae (as in your pond-scum piece) as a means of converting CO2 to carb in algal cell walls; they are using them as factories to convert existing carb (from cane, but also from a variety of other sources—the usual list of fast-growing grasses and wood-related waste materials). So it’s more of a CO2 recycling operation which happens to spew oils, and to that extent it’s “green”, seems to me. And I like the idea of using junk carb, or even cane sugar, to crank out omega-3 marine oils, for example, instead of sacrificing fisheries to meet the demand for supplements of these oils. More “green”, IMO. Whether their process could be scaled up sufficiently to make even a small dent in our overall energy needs, I don’t know (watch their vid where IIRC this is briefly addressed), but I don’t see anything “un-green” about using waste carbs that might otherwise end up in a landfill.

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Klaus Kaiser
Guest
December 22, 2013 3:24 pm
Reply to  Dave

I don’t think you have looked at their website where it clearly states:
“Our proprietary microalgae are heterotrophic, meaning they grow in the
dark (in fermenters) by consuming sugars derived from plants that have
already harnessed the sun’s energy.”
The salient points are “consuming sugars” and algae.
They also state that they are making “algal-derived marine diesel.”

Dave
Dave
December 22, 2013 6:07 pm
Reply to  Klaus Kaiser

Yes, I had read most of the website and watched the 4 vids which are quite interesting. They are making many oil-related products, including diesel. Again, they are mainly growing the algae for the various lipids that they have managed to get them to produce using carbs as the carbon source, although they will also sell the algal remains as a source of protein (see website–algal flour and other products) . But that’s a side-line that brings in some extra money; the main interest is in producing various oils.

Perhaps I have misunderstood the point of your pond-scum piece, which seemed to me to say that growing algae in sunlight as a means of fixing carbon into fuel was too inefficient to bother with. But that is not what this company is doing.

Carbon Bigfoot
Guest
Carbon Bigfoot
December 23, 2013 9:11 am

I hate to rain on anyone’s parade, but the infrastructure to make this process in the volume of distillates required is ginormous and not realistic.
Dave are you a pumper and dumper?

Dave
Dave
December 23, 2013 10:45 am
Reply to  Carbon Bigfoot

CB, no, I do not own it and do not intend to buy it any time soon. I just like their technology and it seemed to me there was some confusion here about what they do.

privateerwolf
Member
privateerwolf
December 29, 2013 8:20 am

I just read an article on Gizmag about algae to crude oil – million year process takes minutes in the lab. There is no mention of sugar, but of using wet algae (no drying process) subjected to high pressure and temperatures. The company mentioned is Genifuel Corp. – the process was developed at the US Department of Energ’s Pacific Northwest National Laboratory. Read more here:
http://www.gizmag.com/algae-crude-oil-process-pnnl/30235/

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Klaus Kaiser
Guest
December 29, 2013 6:37 pm

@ Jens-Ancher Sonne says
1. At a given air concentration of CO2, the amount of algae growing depends on the nutrient supply and the usable radiation energy received from the sun.
2. While the process described in the link is quite conceivable, heating and pressurizing the whole slurry to 350ºC (662ºF) and 3,000 psi will consume a lot of energy.
3. Then you still need refining, etc.
Overall, no energy or cost savings to be had!

Bosko
Guest
Bosko
January 10, 2014 7:57 am

Their so many great idea’s & inventions out their. This one being one of them of course. Their is one very big problem with this idea. The oil tycoons wont like the fact that their profit margains will start to shrink. But once these billionaires die they wont be takeing all that money with them. We should stop polluting this great planet we live in & save it for our future generations. Hydrogen was around since the 1900s. So why have we been useing gasoline all this time? GREED.

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nanoc
Guest
nanoc
February 18, 2014 11:03 am
Reply to  Bosko

Hydrogen-is-not-an-energy-source.

John Harris
Member
John Harris
February 24, 2014 1:22 pm
Reply to  nanoc

Hydrogen certainly is an energy source, just as much as oil or coal. Hydrogen burns releasing energy (heat) and water. Perhaps Nanoc is trying to say that it takes energy to make the hydrogen from water in the first place so that you don’t gain any energy (you actually lose some). But it still is a means to store energy that is no different than coal or oil that are storing sun energy and geo-pressure energy from centuries ago. The difference is that hydrogen is not laying in the ground under pressure like natural gas. But like natural gas and oil it can be compressed and carried in gas tanks to power cars and planes that just don’t go very far on electricity and take too long to recharge. The beauty of Hydrogen is that unlike electricity that must be sent over wires (or stored in very heavy batteries), you can use that electicity to make hydrogen that can be burned on the road in cars or planes or trains much like we currently use liquid fuels like gas and diesel. And if the electricity comes from a nuclear reactor that creates no CO2, well then you have a clean liquid fuel for our cars and trucks and planes that does not increase global CO2 or warming. It can be the future of clean fuel that can be refilled in your tank on the road in minutes rather than the hours to recharge batteries. Seems like a great energy source to me – once we build those thorium reactors all over the globe to power the conversion from water to hydrogen in the first place. It can do most everything oil and natural gas do now but without any CO2 emissions or the consequent global warming.

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Bill Beduke
Guest
Bill Beduke
February 18, 2014 3:26 pm
Reply to  Bosko

Nobody has mentioned the energy input into growing feedstock for this and other “green” processes. Most agriculture depends on chemical fertilizers derived from, drum roll please, petroleum. This is the folly of ethanol – – sure, you get some benefit from the sun helping to grow that corn, but the amounts they need are only made possible by chemicals. I also agree that using arable land and/or feedstock that could potentially be produced for human consumption is a far better use of the land. This reminds me of electric cars: sure there is no pollution at the “tailpipe” – – it has been exported back to the electricity-producing plants needed to keep the things running, and to the facilities that first produce the batteries, and those that deal with the chemical mess resulting from decommissioning them. All this makes thorium seem like a decent idea!

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Bosko
Guest
Bosko
January 10, 2014 8:06 am

Happy New Year to everyone on Gumshoe. All the very best in 2014.

jeff hoogendyk
Guest
jeff hoogendyk
February 17, 2014 4:09 pm

keep up the good work

nanoc
Guest
nanoc
February 18, 2014 11:02 am

I don’t understand how can they seriously claim these guys produce oil out of thin air when they have to consume tons of sugar to produce it? And how many acres of sugarcane would be needed to satisfy the world’s daily demand for oil? How many people believe this bullship?

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Lisa B
Guest
Lisa B
February 18, 2014 8:49 pm

Does anyone here REALLY understand the complete technical process (product), partnerships and recent headway, and can intelligently comment on the value of szym as a stock? I’d appreciate that feedback minus the politics and the tangents please. Thanks.

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oliver i
Guest
February 22, 2014 9:02 am

We have too many trouble shooters, need more solution takers. Thin Air Science and Technology is example because their mindset is not tainted like most professional subjective views from antiquated information. Old science can be fatal in many respect due to various mismatch in application. R&D is too old need even better than that, it is
visionary idea which in the case of this new Thin Air stuff. This stuff is not in criminal court and the jury is still out.

maryyugo
Guest
maryyugo
March 3, 2014 12:49 pm

When did the Motley Fool switch from giving controversial if interesting advice to shady scams and misleading and interminable internet infomercials? What’s next for them? Snake oil sales? Full scammer mode?

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Rashmi
Guest
Rashmi
March 4, 2014 11:39 pm

The Motley report talks about a technology that can make fuel out of thin air not through microbial decomposition of organic matter (sugar/algae) . A British company recently claimed of doing so by harvesting CO2 from air and combining it with hydrogen to form carbohydrates which is the building block for fuels.

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Andrew
Guest
Andrew
March 11, 2014 9:59 pm

Bought Solazyme at 11 a month ago; today over 14
If it’s a pump and dump, it’s one of the longer ones. I’m hanging in

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