May 2, 2008 – Congress is fast approaching sign-off on a farm bill that will likely be very favorable to further investment and development of cellulosic biofuels as a welcome alternative to corn-based ethanol which has caused a pretty heated debate on a global scale due to rising food prices attributed to the diversion of corn feedstock for ethanol production.
One of the companies that we think is best poised to benefit from the additional favor to cellulosic is Verenium Corp. (Nasdaq:VRNM). At $2.98 per share, and a market cap of $189 million, the stock is trading about 4.10 times trailing-twelve month price-to-sales. The Company is set to release financial results for the first quarter on Monday.
We first saw Verenium present last winter at Think Equity’s Clean Tech conference and then saw them again at Piper Jaffray’s Clean Tech conference in February. On both occasions we have been impressed with the business model and the company’s progress. Verenium recently was awarded one of four grants available by the U.S. Department of Energy (DOE) to develop cellulosic technologies.
Key to its success, Verenium is focused on owning and managing cellulosic ethanol production facilities with strategic partners where it is able to incorporate its depth in technology and IP (with more than 300 issued patents and 400 patent applications) to maintain a leading edge.
Key Legislative Drivers
• Farm Bill (pending)
• Energy Independence and Security Act of 2007 (EISA) which amended the renewable fuels standard (RFS) mandating annual usage of 9 billion gallons of renewable fuel in 2008 growing to 36 billion gallons by 2022, including 16 billion gallons of cellulosic biofuels. This represents a $37 billion market opportunity with ethanol prices at $2.30 to $2.35 per gallon.
• Favorable Tax Treatment
Other Key Drivers
• Geopolitical – the need to move away from foreign dependence (60% of total consumption) on oil. The DOE and the U.S. Department of Agriculture have reported the U.S. is capable of producing a sustainable supply of 1.3 billion tons per year of cellulosic biomass, where 1 billion tons is sufficient to displace about 30% of the current petroleum consumption in the U.S.
• Environmental – The Argonne National Lab reports that corn ethanol reduces greenhouse gas emissions by 18% to 29% per vehicle mile traveled while cellulosic reduces the emissions by about 85% per vehicle mile traveled.
We are still at the early stages of Verenium’s model being proven out, but the prospects look promising and the company has several distinct technology advantages. Important milestones this year will be reported progress on its pilot plant and demonstration plant in Louisiana. After it has proven out the plants, it will be able to ramp its efforts to commercialization of additional plants with strategic partners. In addition, the company’s deep patent portfolio is looks promising on the licensing front.
We are accumulating share at current levels, and believe that, given the company’s technology and positioning in what we think is going to be a strong performing sector over the coming years, as well as conditioned on its proving out the demonstration plant in Louisiana, the company should be able to sustain a 4-6x current year price-to-sales, which would put its implied market cap at $216 million to $324 million and a projected trading range throughout 2008 from $3.50 to $5.30.