Biofuel companies still on shaky ground despite wins with airlines

In August, synthetic fuel maker Rentech signed a deal to produce 1.5 million gallons of diesel made from sewer sludge to power ground equipment for eight airlines at LAX. Today, that same company and competitor AltAir landed preliminary contracts to supply 15 airlines with renewable fuels.
But even deals of this size aren’t enough to give biofuel companies the financial boost they need for the industry to explode. Today, Rentech also reported that its fourth-quarter losses are going to be higher than anticipated due to the tight economy. Even though it supports its biofuel operations by selling fertilizer and industrial chemicals, it still lost $6.4 million in the third quarter, more than the $2.9 million it lost during the same period in 2008. Revenue also fell 67 percent to $24.7 million.

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This is all to say that biofuel, despite its unique advantages — namely that it is a drop-in alternative that could be used in existing cars and planes — is still far from rivaling petroleum-based fuels. Airlines deciding to convert to biodiesel is a good sign for the environment, but until the automotive segment of the business gets its act together, companies like Rentech, LS9, Synthetic Genomics, Coskata, Fulcrum Bioenergy and others may be in for a rough time.

The memorandums of understanding signed today by Rentech and AltAir could supply more than 100 million gallons of biodiesel over the next decade to big name airlines such as American, Delta, JetBlue, United Airlines, U.S. Airways, Hawaiian Airlines and AirTran.

Rentech derives most of its biofuels from sewage sludge funneled to it by EnerTech Environmental, while AltAir relies on camelia oil, one of the newly-emerging feedstocks we have yet to hear much about. Municipal waste, algae, switchgrass and wood waste are the most commonly used for these purposes right now.

Rentech plans to produce the bulk of this product at its planned Natchez facility in Mississippi. That site alone is anticipated to turn out 400 million gallons of fuels and chemicals every year, in addition to 120 megawatts of electricity. The project is costing the company $4 – $4.5 billion, so it must have a lot of confidence in where the market is headed. AltAir, on the other hand, will produce its fuels in Anacortes, Wash. at a plant slated to be up and running by 2012.

As a public company, Rentech is somewhat of a different animal from the many venture-backed firms looking to do the same thing. Particularly in this economic environment, investors are more hesitant to back capital intensive companies that have little to no hope of a near-term exist. If any sector fits that description, it would be biofuels.

Refineries are pricey and, as of yet, there’s not a huge market for the fuels being churned out — although the airline deals are a positive sign. Some of the smaller players in the space could find themselves in trouble, or, if they’re lucky, as acquisition bait for fuel giants like Chevron looking to go green.