What: Shares of renewable oils manufacturer Solazyme rose by as much as 25% today before settling near a 14% gain at midday after United Parcel Service announced that it will purchase up to a total of 46 million gallons of renewable diesel in the next three years from three suppliers. Solazyme was one of the lucky bunch.
So what: Renewable diesel is a drop-in fuel that is nearly chemically identical to petroleum-based diesel. Unlike biodiesel, which is a fuel blendstock, renewable diesel is fully compatible with existing engines and infrastructure and can be used as a stand-alone fuel throughout the year.
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That said, Solazyme's jump is a little odd for a few reasons. First, the other two suppliers tapped by UPS are profitably producing renewable diesel today at scale. Renewable Energy Grouprecently purchased a renewable diesel facility with an annual capacity of 75 million gallons, while Neste is one of the world's largest producers of renewable diesel. Meanwhile, Solazyme has suspended the ramp-up of its two commercial-scale facilities for the foreseeable future.
Second, in November Solazyme pivoted away from commodity markets to focus on high-margin products such as cosmetic and food ingredients. The decision was intended to stem losses and balance production volumes with production expenses in the near-term, in direct response to falling petroleum and commodity prices.
Third, UPS didn't disclose how volumes would be divided among the three suppliers. At the moment it makes sense for the bulk of the supply to come from Renewable Energy Group and Neste, which can produce high volumes of renewable diesel without forcing investors to withstand losses.
Now what: It seems that Solazyme shares popped today due to Mr. Market interpreting this news as a sign of life in a stock that has been in a near-continuous slide. Consider that even with today's price increase, shares have fallen 11% since the recent high set on June 26.
The good news is that UPS plans to purchase renewable diesel for the next 36 months under the current program. That could give Solazyme a chance to contribute as a supplier in a more investor-friendly way toward the back end of the time period. Additionally, UPS will likely continue to increase its renewable diesel and renewable jet fuel purchases beyond 2018, which is good news for Solazyme in the long term. But for now, investors have bigger things to focus on than fuels, such as resuming ramp-up at facilities, production costs, and demand for its high-margin products. Look for an update on the second-quarter conference call tomorrow afternoon.
The article Why Solazyme Shares Delivered 14% Gains at Midday originally appeared on Fool.com.
Maxx Chatsko owns shares of Renewable Energy Group. Check out hispersonal portfolio,CAPS page,previous writingfor The Motley Fool, and follow him on Twitter to keep up with developments in the synthetic biology field.The Motley Fool recommends Solazyme and United Parcel Service. 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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