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What: Shares of renewable oils manufacturer Solazyme Inc are up roughly 20% today after jointly announcing a strategic partnership with energy services company Flotek Industries to develop, market, and distribute drilling fluid technologies to the oil and gas sector.
So what: To recap, Solazyme currently sells Encapso, which is an encapsulated drilling lubricant. Flotek sells everything from drilling additives to modeling software to drilling tool rentals, and it generated $268 million in sales from its Energy Chemical Technologies segment alone in 2014. The strategic partnership is a great development for Solazyme for several reasons.
First, Flotek has agreed to purchase minimum volumes of Encapso drilling lubricants through April 2016in exchange for exclusive rights to sell and market the product in select territories in the Middle East. The additional purchases will help Solazyme to more fully monetize its underutilized production capacity in Clinton, Iowa and Moema, Brazil, which is critical given the company's recently overhauled production focus. It's also the first time Solazyme will have a presence in the all-important, energy-dense Middle East.
Second (or third), the strategic partnership includes a new drilling fluid family called Flocapso, which came up in trademark databases late last year.
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Flocapso products are "advanced drilling fluid additives" that combine Encapso and Flotek's Complex nano-Fluid formulations and will allow water-based drilling fluids to be used in a wider range of wells and geographies. The fact that Flocapso products are a combination of each company's proprietary technology means Flotek is fully aligned with Solazyme in successfully commercializing the product family.
And last but not least, Solazyme gains Flotek's expertise in marketing, distribution, and sales of drilling technologies to drilling companies. That's an often overlooked advantage, but remember: Solazyme's expertise resides in its technology platform, not in being an expert in all of the diverse industries the platform touches. Tapping the knowledge of and learning from Flotek will be huge.
Now what: There's no doubt the strategic partnership is a great development for Solazyme. It may take time to ramp sales through the partnership, but Flotek has managed very impressive growth in the last several years by taking advantage of strategic opportunities.
Of course, while overwhelmingly positive, investors will want to keep an eye on production costs in the coming quarters. If Solazyme cannot manufacture Encapso at a profit -- a capability that has yet to be demonstrated -- then revenue growth from the portfolio might be emptier than investors currently expect. Thus, I still consider Solazyme a speculative investment, although one that is clawing its way back to its previous growth potential.
The article Why Solazyme Inc Stock (SZYM) Flowed 20% Higher Today originally appeared on Fool.com.
Maxx Chatsko has no position in any stocks mentioned. Check out his personal portfolio, CAPS page, previous writing for The Motley Fool, and follow him on Twitter to keep up with developments in the synthetic biology field.The Motley Fool owns shares of Solazyme. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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