Prairie Power: Switchgrass is a double threat investors should plant in their portfolios

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You may know it as Panicum virgatum but if you do, you also may have had your school lunch money stolen a bunch of times when you were a child. For the majority of people reading this post, Panicum virgatum is also commonly known as switchgrass. It is my view that switchgrass will soon gain mainstream interest for its promise as a feedstock in the production of bioplastics and biofuels without the concerns of tapping into food crops such as corn or wheat. That presents opportunity for producers of switchgrass and that means the upside momentum seen by some refiners in 2012 is likely to continue into the New Year.

First, for those not familiar with switchgrass, it is made of cellulose and lignin (both fibers) and stands about 10 feet tall predominantly in within North America. Switchgrass has traditionally been used for wildlife and conservation. However, it is being proven it is not only be a renewable source of fuel which can be grown in a variety of weather conditions, it is also environmentally friendly since it recycles atmospheric carbon and creates smaller amounts of atmospheric pollutants, such as sulfur and nitrogen oxides, than fossil fuels. Secondly, increased use of switchgrass should help the U.S. move closer to meeting 2020 carbon goals. Thirdly, it doesn’t require much fertilizer, is naturally resistance to disease and yields double the amount of tons per acre vs corn. Fourthly, I believe much has been learned from the evolution of the ethanol industry and that will result in a cleaner, more sustainable market that can actually store more CO2 in soils and roots – that means growing more switchgrass could result in less CO2 in the air. Talk about prairie power!

Players

So who are the players of note to keep an eye on? Valero (NYSE: VLO), the world’s largest independent petroleum refiner and marketer, is a name high on my list of names to consider when thinking of investing in cellulosic ethanol. The company has been a pioneer in moving into the production of ethanol (this doesn’t get much publicity). In fact, Valero now has 10 ethanol plants globally. Through its subsidiary Valero Renewables, the company is looking to commercialize biofuels, including ones made from switchgrass cellulosic ethanol. To that end Valero invested as much as $50mln in Mascoma Corp. biofuels back in 2011 (the plant should produce ethanol in Michigan in 2013).

Marathon Petroleum (NYSE: MPC), a leading blender of corn-based ethanol and General Motors (NYSE: GM) through its Ventures unit are also principal investors in Mascoma primarily to advance non-food feedstocks such as switchgrass which are needed to produced next generation biofuels that in GM’s case may directly lower fuel prices and benefit auto sales more than biodiesel autos which in many cases are not covered under automotive warranties (for full investor list click here).

While ExxonMobil (NYSE:XOM) is focusing on creating biofuels more from algae through it relationship with Synthetic Genomics, in 2007, ConocoPhillips (NYSE: COP) may be a major oil company to keep on the radar since it entered into an 8-year $22.5mln biofuels research program with Iowa State to help diversify fuel supply and reduce pollution. That research endeavor includes developing the use of switchgrass. Furthermore, ConocoPhillips also entered into a deal with Archer Daniel Midland (NYSE: ADM) five years ago to develop biofuels from crops, wood and yes, switchgrass.

Looking at switchgrass more for its potential in biodegradeable bioplastic materials outside of conventional landfills, I’m intrigued by microcap player Metabolix (NASDAQ: MBLX). The company, which sports a market cap of ~$55mln despite having $53.6mln in unrestricted cash and investments (short and long-term) as per the Q312 earnings release, was awarded $6mln by the Department of Energy (DOE) in 2011 to develop biofuels from switchgrass. Keep in mind Metabolix operates in cash intensive sector, so my bias towards the company will improve further with the company gaining more funding. Through a restructured business that is more streamlined, they have also been working on developing ways to use switchgrass to improve plasticization (most notably with PVC resins). New samples of the polymeric modifiers, marketed under the brands Mirel and Mvera, are expected in early 2013 and are gaining a buzz since they are very strong and can biodegrade in soil, water as well as in composting facilities (residential and commercial). Considering Earth911.com reported in 2010 that over 7 bln pounds of PVC are thrown away in the U.S. each year, only 18 mln pounds of that, about one quarter of 1%, is actually recycled, that potentially presents big opportunity for Metabolix to develop a more sustainable plastic versus petroleum-based resins.

Issues

While the prospects for switchgrass are bright for biofuels and bioplastics, there are issues surrounding transportation due to the hefty weight. Also, switchgrass is more expensive than wood and coal. Optimizing the harvest and storage of switchgrass needs to be developed, like most new industries. There are concerns that burning switchgrass could result in large amounts of ash which could impact breathing (something that can be overcome with more calculated seasonal preparations) while the strength of switchgrass could make combustion problematic (i.e. pellet stoves). Due to the size of switchgrass, one could make the argument that land would be better served devoting to food crops versus energy—a question that has endless arguments for and against. However, one thing is clear, the use of switchgrass as a feedstock for ethanol holds much potential and that may actually negate some of the issues presented.

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12.12.12

[...] Valero Renewables, the company is looking to commercialize biofuels, including ones made from switchgrass cellulosic ethanol. To that end Valero invested as much as $50 million in Mascoma biofuels back in [...]

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John is a great energy strategist. I first noticed his writings in connection to the nuclear and uranium sector over 2 years ago. While uranium/nuclear was going through a slow period John had the vision to see the short/medium/long term potential of this energy source. John has continued to be a visionary and ahead of the pack in understanding this sector.
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