My first speculative stock and ramblings about energy (and first post with PICTURES!)

I made my first foray into a speculative growth stock on the NASDAQ in the US. Why do I consider it speculative? The criteria which I picked this stock is vastly different from the rest of the stocks I hold. This company has not turned a profit, it has negative return on equity, has not and has no plans to pay a dividend in the foreseeable future. It isn't anywhere near a value play, as it currently trades at over 4 times its book value.

What is this company? Solazyme Incorporated, and I recently bought 100 shares at US$7.60 each. Solazyme is a company that uses microalgae to produce various oil products. Sounds pretty dull you might say. But here's (a really long roundabout story) why I decided to buy a small stake in it.

Picture!

Two of my interests are transportation, be it by sea, land, air or space. The other is green and sustainable energy. Transportation is the lifeblood of a large part of the global economy, and energy and transportation have always been tightly interwoven. In order to be able to transport goods and people, energy as well as the means to store energy is required. Since the dawn of time, humans have been harnessing different sources of energy to stay mobile, from human power, to animals, and the wind in the age of sail. Then came fossil fuels, and the engines which extracted the energy from these fuels which powered humanity into the industrial revolution, and further on to the era of limited space travel and the rest of the modern era as we know it.

However, these fossil fuels are limited, and though I don't see us running out of them in the near future (supposedly there is enough coal for more than a 100 years), petroleum and natural gas production has been tapering off in the recent years. This is because much of the easy to extract oil and gas has been already extracted, and what we have left now is more difficult (and expensive) to extract. This means that the price of oil/gas has to be high enough for it to be economically viable to extract oil/gas from the ground. Further down the road, there is also the issue of Energy Return on Energy Investment (EROEI). Simply put, extracting these fossil fuels also require energy. When it comes to a point where the amount of energy you require to extract these fuels are more than what you will get out of the extracted fuels, there is simply no point in doing so.

Random old 2004 graphic of forecasted oil/gas liquid extraction levels

The point where oil extraction is unable to go any higher due to physical and economic constraints is known as Peak Oil. There have been many studies that give different dates where global oil production peaks. Some say it has already peaked, other say within the next 10 years, others further out. Whenever this actually happens in reality, what it means to society would be that the era of cheap fossil fuels running our society is over, and we have to, as a species, move away from these fuels for our energy needs eventually.

To power our electrical grid, there are many options. Solar, geothermal, nuclear, wind, hydroelectric, tidal are some. On land, Trains and trams have the advantage of being able to harness electricity through the grid, and I foresee greater proliferation of these all over the world as we move away from fossil fuels. However when dealing with transportation, many forms of transport are unable to be plugged into the electrical grid all the time, such as ships, aircraft, and cars (and of course spacecraft. woo!). For these modes of transport, their travel range is limited by how much energy they can store.

If we take a look at cars, electric cars are a viable option, as in urban environments, if there are enough charging points available to keep their vehicle charged whenever they are parked. However, they are not a popular option currently due to lack of infrastructure in most countries, as well as limited range due to limited battery capacity (Most electric cars have a full charge range of 100-160km Top 10 electric vehicle ranges. 1 mile is 1.6km). Also, charging of the battery takes longer than say, filling up a regular car's tank with petrol. One promising electric car company as you might have heard about is Tesla. Their latest model, the Tesla Model S, has a range comparable to that of gasoline powered vehicles, and looks pretty awesome to boot. Also, Tesla has managed to setup a pretty awesome network of chargers around the California region, and it aims to have enough charging stations in the near future so that drivers are able to drive across the entire continental US without worrying about the lack of charging stations.

However when it comes to ships and aircraft, conventional batteries simply do not store enough energy for them to sail or fly the distances that they do. Ships do have the option of nuclear power though, as many warships, submarines, and even an icebreaker are already running on nuclear today.

Then comes aircraft. Being in the aviation industry, this has a special place in my heart :) Electric aircraft are actually in development today, however unless there is a huge leap in battery technology which allows them to be as energy dense as liquid fuels are, they are unlikely to be commercially viable. Nuclear reactors are simply too large and heavy (although there have been experimental nuclear reactors on aircraft), and of course there is the unthinkable danger of a nuclear powered aircraft crashing in populated areas.

Presently, liquid fuels are the only viable way of powering aircraft (and spacecraft), due to their high specific energy (40-50Megajoules/kg. The best lithium ion batteries have less than 2 MJ/kg), relative stability in a wide variety of operating environments and ease of handling. Asides from fuel derived from petroleum, there is a process of converting coal into liquid fuel using a process called the Fischer-Tropsch process. However this still involves a nonrenewable fossil source, and the process releases quite a bit of greenhouse gases as well.

This (finally) brings me to Solazyme. As mentioned, Solazyme uses microalgae to produce various oil products. They range from food and personal care oil products, to fuels and other lubricants for industrial use. Of the many biofuels that are available, algae is able to produce the highest oil yield for the amount of space needed, giving it an advantage over other crops as seen in this table.  Solazyme was one of the first companies to produce algae fuels on a large scale, and is currently the world's largest producer of algal oil. It was also the first company to produce certified jet fuel from an algal source.

Compared to other companies in this line, Solazyme already has multiple facilities that are churning out these products at a commerical-scale, and they have contracts with multiple customers to supply them with oil-based products. It has supplied the US Navy with both marine diesel as well as JP-5 jet fuel, and United Continental Holdings, which operates United and Continental airlines, agreed to buy 20 million gallons of algae-derived jet fuel from Solazyme. In addition, it produces the Algenist line of algae-oil beauty products for Sephora (these have a lot better profit margins compared to fuel), as well as supplies Unilever with oils for soap products, just to name a few.

In addition to public equity, they also received quite a bit of funding from the US government as well as some debt funding which is due in 2018.

Given all this, there are still several significant hurdles before the company becomes profitable. Conventional oil is still a lot cheaper than algal biofuel, and I read some reports that at current costs of producing algal fuel, oil has to go up to $300 a barrel before algal fuel is able to compete with it on a price basis, just to mention one.

All in all, I believe that Solazyme is well poised to capture a large share of this potential market when crude oil supplies begin to dwindle and become more expensive, or when carbon taxes come into play. With further R&D as well as scaling up of its operations, the price of production of its algal oil products should further decrease, and hopefully be able to compete with traditional fossil fuels.

Though my current stake in it is less than 1% of my total equity portfolio, I hope to be able to increase my position in this company in the near future when my asset allocation allows for it. Who knows, in the long haul, this might have a chance of becoming a dividend paying stock. Or it could just be wishful thinking on my part. But only time will tell :)

Thanks for reading this longwinded post of mine. Cheers!