Dynamic Fuels Plant On Standby, Indefinitely

The $150 million renewable fuels plant co-owned by Tyson Foods and Syntroleum Corp. remains idle despite favorable operating conditions.

The Dynamic Fuels venture in Geismar, La., takes chicken fat or other low-margin greases and converts it into renewal fuel that can be used to fly jets or run trucking fleets. The plant was idled in November because of deteriorating market conditions and the partners anted up $7.3 million this spring to replace a catalyst in the facility that will increase production efficiency. That catalyst was installed on June 28 and the July 30 restart date has come and gone with no signs of plant activity.

Tyson Foods CEO Donnie Smith said this week the plant is ready to open, but restart has been postponed as its partner, Syntroleum, is entertaining offers to sell its 50% interest in the project.

Smith said the plant would not be restarted while Syntroleum is shopping its interest with potential buyers.

He said Tyson remains ready to work with Syntroleum or a new partner to get the plant up and running again, once the co-ownership issues are resolved.

POSSIBLE SALE
Syntroleum told investors today (Aug. 7) during its conference call that the Dynamic Fuels committee has not yet agreed on a list of criteria required to restart the plant. That criteria involves sourcing feed stock and risk planning for continued operation. Analysts peppered Syntroleum executives during the call with numerous questions as to why the Dynamic Fuels plant has not been restarted, given that the economic margins are as favorable as they have ever been since the plant was completed.

Syntroleum said it obtained unsolicited offers for its ownership interest in the plant in July and felt an obligation to its shareholders to explore the possibilities of raising shareholder value. The company has retained Piper Jaffray as a consultant to explore the sales opportunity.

Syntroleum investors remain concerned that the plant is sitting idle and they began selling off shares following Wednesday’s conference call. Syntroleum’s stock price fell 6.5% on Wednesday, closing at $6.46 per share.

The cost of sitting idle is about $2.5 million — roughly $2.1 million of that are cash expenses and $400,000 in depreciation, which is split equally between the two partners. Syntroleum said in May that it will cost about $20 million in working capital to restart the plant, most of which is the investment in feedstock.

At the end of June, Syntroleum had $19.7 million in free cash, which is more than enough for its half of the restart charge.

Gary Roth, CEO of Syntroleum, said in today’s conference call that the weak operating metrics which existed late last year have been resolved as the $1 per gallon tax credit was renewed by Congress in January. He said the profit margin per gallon if the plant were running now would be slightly above $1, and that includes government support.

Roth said the partners have ordered a new pump which will be delivered and installed in October to increase efficiency. However, the plant restart date has not been set.

PLANT HISTORY
Each of the partners committed $75 million toward the $150 million renewable fuels plant venture. They secured $100 million in low interest — 1.3% — government bonds provided to ventures that created jobs in Louisiana. At the plant peak it was to employ 75 workers. The balance of the $150 million was contributed equally between the two partners.

There have been glimmers of hope since 2010, at one time providing test fuel for the U.S. military and a deal in February 2012 to provide renewable diesel to Norfolk Southern Corp.

During September and October 2012, the plant produced 8.8 million gallons of renewable fuel — running at roughly 71% capacity levels. Roth told investors that if the plant were to restart tomorrow it could run at near 100% capacity given the feedstock availability.

Syntroleum reported a net loss of $1.3 million, or 13 cents per share, in the quarter ended June 30.

There is three-month lag in reporting on Dynamic Fuels, but for the six months ended March 31, Syntroleum reported earnings from Dynamic Fuels of $5.2 million. This compares to a loss of $3 million in the same period last year.

During the six months ended March 31, the plant recognized revenue of $26.7 million from the re-instatement of the tax credits for the production of renewable diesel and qualified alternative fuels.

A NEW VENTURE?
Syntroleum is no longer putting all of its hopes in Dynamic Fuels. Company officials recently entered into memorandum of understanding with another energy company for a new venture. Syntroleum said it’s conducting a feasibility study that is looking at nine potential sites in which they are considering the construction of a plant that will convert gas-to-liquids.

He said Syntroleum was recently approached by the energy firm for another venture in which he sees ample opportunities, given the availability of and demand for natural gas, without the need of government subsidies.