Thoughts

With oil around $110, attention inevitably turns to alternative energy names. I see a bunch of activity coming, especially in biofuels. Similar to Web 2.0, Biofuel 2.0 is upon us. The first wave of basic ethanol companies boomed then busted, with GPRE the only successful play, mainly because the company managed its spread so tightly and is integrating up and down the supply chain to diversify the revenue stream. (By the way, Green Plains is partially owned by the important Irish cleantech player NTR, the old National Toll Roads, which is a very interesting play on cleantech in general.)

FF is an undiscovered value gem that plays in the biodiesel space. The company is dependent on the biodiesel credit but is diversified with a specialty chemical revenue stream that supports the business profitably during biodiesel downturns. This one is a specialty chem play with an option on biofuel upside with no analyst coverage and trading at a 18x trailing P/E. The stock recently uplisted to the NYSE, so liquidity issues are easing.

The real action now is in Biofuel 2.0, in which bioengineered algae and other processes are used to create fuels and other products. On the public side, I like CDXS. The company uses "directed evolution" to create enzymes for the production of pharmaceuticals and biofuels. Codexis is partnering with Royal Dutch Shell (RDS.A/RDS.B), so it has great technology and great business partners.

On the private side, watch for a potential IPO from Solazyme, which recently filed its S-1. This is a great company that will be one of the hot deals of 2011. It has created engineered algae that can produce oils from sugar feedstock. The innovation is that the company does it in the dark, in commercial brewing vats. This is a huge cost advantage vs. most algae oil players, which need huge outdoor ponds and thus have ROI challenges. Solazyme has a great business model, first custom-engineering oils for high-value end markets such as consumer products and foods, then the compnany will move into volume markets such as biofuel as it comes down the cost curve.

Another interesting private name out there is Enerkem based in Montreal. The company has an economic technology to turn municipal waste into biofuel. The process technology is modular so can be located close to feedstock supply. The company is backed by WM, which is a huge plus.

Who will fall next?

The Portugal bailout was fairly well anticipated, but it just raises the question of who will fall next. Greece and Ireland are the poster children, of course, and will default, IMHO.