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Biomass Expected Returns: The Capital Asset Pricing Model

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Title: Biomass Expected Returns: The Capital Asset Pricing Model


1
Biomass Expected ReturnsThe Capital Asset
Pricing Model
  • Larry Sullivan, Project Management Consultant
  • Adjunct Professor, The Citadel
  • Economic Geography
  • Trident Technical College
  • Lawrence D. Sullivan Company, Inc.
  • Carla M. Wood, Ph.D.
  • Advanced Bioeconomy Feedstocks Conference
  • Royal Sonesta Hotel, Vieux Carré
  • New Orleans, Louisiana
  • June 9-10, 2015

2
It is a challenge to visit NO and see my
childhood home from the late 1950s to the early
1960s on London Canal where levee breached. This
is 2007, two years after Katrina.
3
Lawrence D. Sullivan Past Present
  • 20 Years in Oil Gas (Dresser, Imperial Chemical
    Industries Conoco/Dupont) as Petroleum Engineer
    and Manager
  • Last 13 Years in Biofuels, Biomass, Biochemicals
    - Early Stage Firms
  • 15 Years Living and Working Outside the USA
    SEAsia, Middle East, EU Africa
  • Speaker at 35 Conferences Beginning at 2004
    Biotechnica America on Biofuels
  • Advisor to Gerson Lehrman Clients
  • Top 2 Expert since 2004
  • Due Diligence for GLG Clients
  • Turner, Mason Company - Oil Refiner
    Acquisitions of Biofuel Assets in 2008 and 2009
  • Expert Witness
  • Adjunct Faculty at Trident Technical College and
    Adjunct Professor at The Citadel

3
4
Carla M. Wood, Ph.D.
  • Academic Career
  • B.S., The Evergreen State College - Biochemistry
  • Ph.D., Texas AM University Biochemistry Cell
    Biology
  • Post Doctorate, Baylor College of Medicine,
    Depts. of Cell Biology Human DNA Repair,
    Cellular Transformation Mutagenesis
  • Staff Scientist, NIH, National Institute on
    Aging, Molecular Genetics Genes of Senescence,
    Stress Response, DNA Damage
  • Research Assistant Professor, University of
    Minnesota 1) Expression Analysis of
    Non-Receptor Protein Tyrosine Kinases in
    Childhood Leukemia 2) Biomarkers in Multiple
    Myeloma
  • Patent Law Technical Advisor, Merchant Gould,
    LLC, Minneapolis Seattle
  • Consulting Career
  • Consultant at L. D. Sullivan Co. Since 2004
    (Owner Since 1998)
  • Advisor to Gerson Lehrman Group Clients - Top 2
    Experts
  • Due Diligence for GLG Clients
  • Expert Witness Biotechnology Cases

4
5
Outline of Presentation Themes
  • What is the Capital Asset Pricing Model (CAPM)
    and who uses it?
  • Return on Capital Employed (ROCE) on investments
    in raw materials production (e.g., Extraction,
    Forestry, Agriculture, etc.) with focus on the
    arms length transactions between owner of
    biomass and buyers of biomass.
  • ROCE on the Basic Chemicals (generally has
    mining components)
  • ROCE on the conversion of raw materials to
    petrochemical intermediates (and Basic Chemicals
    as well as Seven Building Blocks)
  • Capital Investment Expectations and Conclusions
  • References and Sources
  • www.bizstats.com
  • Measuring and Addressing Investment Risk in the
    Second-Generation Biofuels Industry. ICCT.
    December 2013. www.theicct.org
  • NexantThinking Next Generation Biofeedstocks
    Resources for Renewables www.Nexant.com
    Addresses raw materials
  • Luxresearch, http//web.luxresearchinc.com/downloa
    d-webinar-alternative-fuels-9_23_14

5
6
General Concepts for Presentation Terms Defined
  • Private Enterprise without state ownership is
    foundation in US although government is the
    single largest landowner and hence biomass owner.
    And, Crown Lands in Canada is noted. Private Land
    is the Exception, not rule of our world
  • Tax Credits (income versus excise) no income,
    no credit!
  • Crop Insurance and Forestry?
  • Export Import Bank oil subsidy and incentives
    for oil (issues of depletion compared to
    renewables)
  • Basic Land Value or BLV
  • Arms Length Transactions
  • Lifestyle Ranching Farming Decisions
  • Forestry versus Agriculture and the BCAP Program
  • Bone Dry Metric Tonne (2,205 pounds)
  • Real Estate Investment Trusts (REIT) - Forestry
  • Master Limited Partnerships (MLP) OG
  • Farm gate, FOB, ex-works, CF, CIF, etc. Or, what
    is the price laid on the side of the road?
  • What is Economic Rent and why few talk about it
    in public?
  • CAPM shows early or pre-mature IPOs challenged
    the investors and resulted in excessive ROI
    expectations
  • Beta in the CAPM
  • Cases with KIOR, GEVO, SYNM, CERE, AMRS, etc.
  • GEVO should be compared to PEIX and GPRE as they
    use corn as feedstocks.

7
Capital Asset Pricing ModelReturn on Capital
Employed (ROCE)
  • Formula
  • Terms
  • Return on Capital Employed (both equity and debt)
    or Equity or Debt
  • Beta of 1.0 moves with markets
  • Market Return is set by Investors
  • Risk Free example is United Kingdom Perpetual
    Bonds
  • ICCT reports that Beta on public biotech requires
    high ROCE for investment

7
8
Oil and Gas Extraction (2011)High Risk, High
Rewards
  • Return on Sales 38.56
  • Return on Assets 20.53
  • Return on Net Worth 29.28
  • Quick Ratio 1.62
  • Current Ratio 2.28
  • Inventory Turnover 13.86
  • Note Oil prices in 2011 averaged 111/bbl (WTI -
    Cushing, OK) and natural gas was 3.98 per
    1,000,000 cubic feet (Henry Hub, LA).
  • Data for typical 25-50 million asset class
    independent oil exploration firm.

8
9
Farmers and Real Estate Investment Trusts (REITs)
  • The DOE Billion Ton Study and Update relative to
    landowners does not look at expected return on
    Bare Land Value (BLV).
  • Generally landowner and REIT are passive. They
    own land the resources under it or on it.
    Sometimes they retain ownership and lease for
    value added but are not active in the value chain
    as Pulp Paper went offshore and/or exited (MWV,
    IP, etc.)
  • Landowners technology firm with genetics or
    equipment to convert cellulose to sugars
    conversion company to make cellulose into
    biofuels, biochemicals or power who is whom?
  • Levi Strauss was quoted to be mining the
    miners.

10
Extraction Industries Agriculture and Forestry
(2011)
  • Return on Sales Ag 17.81 Forestry 3.14
  • Return on Assets Ag 28.42 Forestry 20.62
  • Return on Net Worth Ag 72.02 Forestry 137.39
  • Quick Ratio Ag 0.8 Forestry 0.48
  • Current Ratio Ag 1.11 Forestry 0.5
  • Inventory Turnover Ag 4.53 Forestry 88.26
  • Notes LLC, Inc., (no MLPs) with Net Assets from
    1000 500,000 which would include farmer-owned
    cooperative societies, cattle ranchers,
    independent forestry owners and small time
    miners. Does not cover processors like ADM,
    Cargill, Bunge or REITs in forestry, agriculture
    and mining like Plum Creek or Hancock.
  • 65 of SE USA Forestry is ma and pa or small
    time land owners or Sole Proprietors who make
    at 10.86 net profit.

10
11
Early stage producers are naïve about the real
costs of cellulosic biomass according to
luxresearch
Lab
Concept
Development
Introduction
Scale
Company Maturity
12
Gartners Time Lines compared to the Typical S
Curve
13
Basic Chemicals and/or Mining (2011)
  • Return on Sales 5.26
  • Return on Assets 10.80
  • Return on Net Worth 21.25
  • Quick Ratio 1.04
  • Current Ratio 1.78
  • Inventory Turnover 13.03
  • Notes Covers Bizstats data for both the
    chloro-alkali industry (NaCl, NaOH, Na, Cl, soda
    ash, bicarbonate, NaO) and the sulfur (H2SO4)
    from both synthetic to mining. Not petrochemicals
    or TiO2. To a degree this can be considered an
    extractive industry. Asset class is 100 to 500
    million.

13
14
Petroleum Refining (2011)
  • Return on Sales 24.46
  • Return on Assets 31.02
  • Return on Net Worth 46.33
  • Quick Ratio 2.96
  • Current Ratio 3.93
  • Inventory Turnover 8.69
  • Notes Covers Bizstats data for both independent
    refiners (e.g., Tesoro, Valero) and integrated
    oil gas production companies who own refinery
    assets (e.g., Shell, ExxonMobil, Total, BP). It
    does not cover NYSE traded part State Owned
    Enterprises (SOE) of China, Brazil, Norway. The
    typical refinery in this class is 25 - 500
    million in asset class.

14
15
Conversion of Olefins to Petrochemical Plastics
(2011)
  • Return on Sales 6.04
  • Return on Assets 8.72
  • Return on Net Worth 18.47
  • Quick Ratio 1.08
  • Current Ratio 1.97
  • Inventory Turnover 6.36
  • Notes this includes Bizstats heading resins,
    synthetic rubber, and fibers filaments for
    example polypropylene, not propylene, or PET
    resin, not para-xylene, ethylene glycol or
    dimethyl terephthalate. Asset Class here is 100
    250 million. Cargill Natureworks PLA Plastics
    could be in this class.

15
16
Why Make Biofuels? US Fuel Projections
16
17
What is Corn (Maize) Ethanol All About?Missouri
is The Show Me State 2011Source University of
Missouri - http//agebb.missouri.edu/
17
18
Corn Ethanol Follow the MoneyHigher Yields,
Better Basis and Farm Incomes UpUS Farm Policy
is a Success
  • Bushels Per Acre Farm Income in Millions

18
19
As Corn (maize) Producers have Done Wellso have
the Petroleum (Oil) Producers However,natural
gas producers need to export(note nominal US
per million btu)
19
20
Fundamental Economics - Petrochemicals
  • If integrated to large refinery complex (BASF,
    Shell, ExxonMobil, Saudi Aramco, etc.), then
    petrochemicals are world class cost basis. In
    biomass it appears algae could be the only
    integrated pursuit.
  • If a stand-alone facility, then purchasing of the
    key intermediates could be disadvantaged
    depending upon locations in the world.
  • Historic fuels/refinery ROI over 40 years
    averages 9.6
  • Historic standalone petrochemicals are 16.7 -
    however it is 5 - 7 the size of the fuel markets
    with few producers and buyers.
  • Most integrated refinery and petrochemical plants
    have ROI between the two above since locations
    can widely for returns. And there are many
    national petrochemical firms like Sabic which
    operate outside these parameters.
  • Source www.bizstats.com and 35 years in oil
    and gas, petrochemicals.

20
21
Conclusions
  • Financial analysts use a variety of tools to
    evaluate biofuel, biomass, algae, biochemical,
    etc. investments today.
  • CAPM is a common tool for equity analysts.
  • Historic data and benchmarks such as Bizstats
    allow analysts to advise fund mangers.
    Transparency is the key term!
  • To Review ROCE (Net Equity and Debt)
  • Oil and Gas Extraction 29.53
  • Cooperative Agriculture and Forestry 72.02 and
    137.39
  • Basic Chemicals 21.25
  • Petroleum Refining 46.33
  • Conversion to Petrochemicals 18.47
  • Advanced Biofuels needs to demonstrate over 20
    ROCE to attract capital against these benchmarks
    using existing IPO Beta and CAPM.
  • Conclusions of Lux and ICCT work. Thanks to them
    for insights.
  • Thank you for your time and attention to our
    presentation.

21
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