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:

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“… 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.'”

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
Member
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
Member
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
Member
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
Member
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
Member
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