If the United States converted just 5% of its estimated recoverable coal reserves to liquid fuel, one company estimates this change would be equal to the 29 billion barrels of proven oil reserves in the U.S., thereby almost doubling America’s oil supplies without drilling another well or building a new refinery.

This company wants to lead the charge when it comes to liquid fuel conversion. And since I’m a relative novice in the world of gas-to-liquid (GTL) and coal-to-liquid (CTL) technology, I decided this particular company would be perfect to research.

The name of the outfit is Syntroleum Corp. (SYNM: NASDAQ). Syntroleum has developed technology that converts natural gas or coal into synthetic liquid hydrocarbons that are mostly free from contaminants that are commonly found in fuels made from crude oil.

The synthetic liquid fuel can be used by itself in traditional internal combustion diesel engines, which reduces emissions. Or it can be blended with traditional fuels to “upgrade” the fuel to burn cleaner.

And diversifying how the United States gets its energy is not just important now, Syntroleum claims, but it will also become vital in the near future. The U.S. Department of Energy predicts China will face shortages of 5.9 million to 8.8 million barrels of oil a day by 2015. This company realizes the tug-of-war that will ensue over the world’s limited oil supply, and like some of the ethanol and biodiesel companies we’ve looked at before, Syntroleum is looking to provide an alternative solution to crude-based products.

A New Way to Make Fuel

Syntroleum has the money it needs to fund operations for 2006-2007, but it has never built a commercial facility. One of the risks of a commercially-viable GTL plant noted in the company’s annual report is that some of the technology in use at Syntroleum’s testing facilities and other technologies being developed might not prove to be commercially applicable.

In other words, they can make the stuff but they might not be able to do it as efficiently as they’d like on a larger scale. Nevertheless, the company is moving closer to commercializing the product.

Syntroleum is involved in a joint venture with Bluewater Energy Services to develop and pay for the first ever air-based GTL plant that would operate offshore mounted on a barge. A feasibility study commissioned by the two companies expects up to 17,000 barrels of the product produced per day, along with 40,000 barrels of oil, according to Syntroleum’s annual report.

And while the company is still in the red, it has a strong cash supply that should carry it through its research and development stage.

Syntroleum reported revenues of $400,000 for the first quarter of 2006 from joint research development activities with the U.S. government and with licensees and from GTL fuel sales. Its net loss for the quarter was $12.9 million, coming to 23 cents per share — about the same as the net loss of 24 cents per share from the first quarter of 2005.

And with more than $60 million in cash, the company is well positioned to fund its research and development and demonstration plants until its first commercial plant is complete (it spent $6 million on research during the first quarter). Jack Holmes, president and CEO of Syntroleum, said that first quarter costs are in line with the company’s budget as the company focuses on reaching financial close on its first commercial plant by the end of 2007.

Risks and Rewards

With a price tag of $7.75 a share before the market opened this morning — and the company tallying a 77-cent loss per share — it is evident that many investors have faith in this company’s technology and its ability to successfully commercialize its GTL and CTL methods. So a volatile share price is what you’ll get from this $436 million company. Almost $10 separates the stock’s 52-week high of $16.50 with its 52-week low of $6.54. So any bit of good or bad news could greatly affect the share price until Syntroleum starts posting a profit, which would be in almost two years at the earliest once its first facility is operating.

And as was mentioned before, the company is still unsure if some of the technology used in making the synthetic fuels will be as effective in a large-scale environment. If Syntroleum finds it can’t turn much of a profit, it could be a long time before the technology is improved. 

Aside from these obvious risks, there are a couple of redeeming qualities that you should check out:

First up is a contract with a behemoth in the oil industry. In 2004, the company signed an agreement with ExxonMobil providing Syntroleum with a worldwide license under ExxonMobil’s GTL patents to produce and sell fuels from natural gas or coal. The agreement also includes all existing ExxonMobil patents in these areas, as well as future patents for the next several years.

Second is the strength of the company’s patents and management. Kenneth Agee founded Syntroleum in 1984 and is still with the company, serving as chief technology officer and chairman. He is credited on many of the company’s patents, as well. In all, Syntroleum has 127 patents issued and pending. Agee obviously sees the potential in this technology and is willing to see it through…

I’ll write more about Syntroleum next week, exploring more about how the company plans to pursue its coal-to-liquid technology. If you have any insight or questions, don’t hesitate to e-mail me at thesleuth@agorafinancial.com.

Best,

Gunner
May 08, 2006

Greg Guenthner

Greg Guenthner uses his experience as a former journalist to dig up the hard-to-find headlines that could lead to big gains for your micro-cap portfolio. Greg offers his readers the scoop on topics ranging from alternative energies to biotechnology, digging up the best penny stock opportunities before they’re discovered by the mainstream media. On top of contributing to Penny Sleuth, Greg also heads Penny Stock Fortunes and Bulletin Board Elite. Special Report: Imagine Getting Rich as Ignored Stocks Soar - You could turn $200 into $1.2 million!

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