One of the purest, high-yield financial plays we have ever seen in the energy business is possibly emerging, one that could put fracking returns to shame. Vive le ROI. And Vive le IRR and DCF, while we’re at it.
Catalyst for industry attention is the news that Sylvatex and Valicor inked a Joint Development Agreement to develop and commercialize Sylvatex’s MicroX technology, converting distillers corn oil and other plant-based oil feedstocks into Sylvatex’s proprietary MicroX renewable blendstock. The JDA will also accelerate commercial scale engineering and expedite early market sales of the MicroX blendstock.
What you need to know for know, from a technical POV, is that Sylvatex technology takes one gallon of free fatty acids (made, in this case, by hydrolyzing distiller’s corn oil) and one gallon of conventional corn ethanol, creasing thereby two gallons of a diesel fuel blendstock. Here’s an overview of the Sylvatex process.
The arb play
Obvious to everyone is the potential for expanding an ethanol producer’s market with something less mercurial than the export trade, and that’s the US diesel market. As James Bleyer, R&D Manager for Valicor, observed: “The ethanol market is limited by the “blend wall”, the amount of ethanol that may be blended into the gasoline market. With this technology, not only can we expand the use of ethanol as a fuel by breaking into the diesel market, but also diversify from fuel with new, untapped applications.”
But more interesting to us is the arbitrage play.
In this case, $21 million in value-add, per year, for a $3 million investment for the technology bolt-on, at a reference-case 100 million gallon plant. (The opex is fuzzy, but keep in mind that the most important cost, the ethanol and DCO, is already included.)
How did we get there?
Think of it this way. Today, a conventional 100 million gallon corn ethanol plant generates around $143 million in fuel value ($143 million for ethanol at $1.43 per gallon and $6 million in corn oil (at 25 cents per pound), total of $149 million. (Note to readers: We’ll exclude the value of distiller’s grains and and CO2 value, just for now, since we’re comparing MicroX doesn’t change those values. )
Producing MicroX fuel, the same plant could generate $170 million in value. Here’s how.
First, there’s 95 million gallons of ethanol, so there’s $136 million in ethanol fuel value. On the diesel side, according to Sylvatex, the resulting gallons of fuel they go into the diesel pool as biomass-based diesel blendstock, and are expected to generate D7 renewable diesel RINs. There’s 10 million gallons of diesel fuel, so add $20.7 million (using today’s ULSD value).
But keep in mind that that’s straight ULSD diesel energy value, that $2.07 per gallon. (Note to readers, typical ethanol and biodiesel prices take into account the RIN values, because they are renewable fuels by definition. But diesel and gasoline can be renewable, or fossil-based, and because the volume is overwhelmingly fossil-based, the quoted prices on international exchanges reflect fossil fuels and energy value, not renewable fuels and their RIN value). A blender can detach the RIN from that gallon and sell it in the secondary market, and you still have a perfectly good diesel fuel. And there are 1.7 renewable diesel RINs per gallon, or 17 million RINs, worth $13.4 million. Total of $170 million.
Bottom line? You don’t have to know your way around a discounted cash-flow to see the value.
Writ large
The ethanol industry is not small. According to EIA, there are 198 operating plants with 15.5 billion in production capacity.
So, across the entire US fleet, there’s up to $3.2 billion in value-lift, per year, off a $594 million capital investment, for an ultra-low opex technology that bolt-ons usually represent.
The caveats
There are several, some have a sting in the tail.
First, there’s technology risk. Sylvatex is earlier-stage, they’re raising a Series A round for their demonstration plant. Doe the system work? Is the fuel compatible? but Early-stage ventures by definition have investigated but not locked down technology performance.
Second, there’s the fuzziness on opex and capex at an early-stage company too; the techno-economics need to be validated at scale.
Third, there’s that fuzzy yield. Sylvatex refers to as much as 5 million gallons of corn oil that can be extracted from the inputs into a 100 million gallon plant. Conventional corn oil yields we have seen are lower — and DCO yield caps the amount of diesel blendstock that can be produced.
(Why might that not be a problem? For one, Sylvatex would hydrolyze the corn oil to produce the free fatty acids their technology needs. First of all, there can be volume gain in that step and, also, the stream of inputs coming from corn oil extraction could be higher than finished outputs from conventional corn oil extraction, from losses in separation, distillation and so forth.)
Fourth, there’s the risk that RINs go away. Or that Sylvatex licensees face delays in getting EPA approvals, or that EPA changes the rules.
Here’s the good news on caveats. Someone with a sharp pencil will see that, even with a low end yield and zero RIN value, there’s a $2 million lift in value per year just in the fuel markets, even if using the worst-possible scenario on RINs (zero) and yields (lower). And, there’s always California.
Which leaves us with technology risk, a $20B+ market disrupted by the technology, venture-grade rates of return, a strategic partner in technology execution with bona fides in the sector, willing customers with feedstock in hand, the use of someone else’s money in deployment, and extra markets to chase such as li-batteries.
That checks the boxes for a Series A venture round, you bet.
Why Valicor?
For one, Valicor has sold an awful lot of corn oil separation technology to ethanol plants, and a number of ethanol producers would like to see an alternative market to biodiesel, which is in many ways limited to REG which has the technology to handle DCO as a feedstock.
For another, the companies are simpatico and have complimentary strengths — Sylvatex in its core technology and Valicor in the process engineering and the world of bolt-on upgrades.
As the companies explained, “Sylvatex and Valicor share the commitment to waste resource recovery and upcycling of biomaterials to create valuable solutions for industry. Both Sylvatex and Valicor expect to deploy this technology in partnership with ethanol producers as a way to increase the value of co-products and to provide diversification into other fuels and chemical markets.
Those other Sylvatex markets
Sylvatex creates renewable nanoscale emulsion systems that can be used in not only in fuels, lithium battery manufacturing, and other specialty chemical applications such as food and fragrances.
Reaction from the Valicor-Sylvatex deal principals
Sylvatex CEO Virginia Klausmeier said: “This agreement marks the commencement of a long-term partnership with Valicor, a leader in conversion technologies. Sylvatex and Valicor have enjoyed a strong collaborative relationship, advancing innovations. We look forward to expanding our partnership to create value and better utilize existing assets.”
Tom Czartoski, CEO of Valicor, added: “We are excited to partner with Sylvatex, a company which shares our core values of resource repurposing and sustainability. We have been engaged in DCO processing development for some time and were looking for accretive technologies that would complement our efforts. The technology synergy will exponentially increase the value of each company’s respective work and bring value to the market.”
Visualize the technology
You can see Sylvatex here in our latest Multi-Slide Guide.