Can Natural Gas Help Intrexon Take the Lead in Isobutanol Development?

Synthetic biology company Intrexon (NYSE: XON  ) has been busy lately. In the last six months the company has entered into and expanded several exclusive channel collaborations, or ECCs, for numerous health care applications and completed the acquisition of stem cell company Medistem. While pharmaceutical development presents a massive opportunity for Intrexon, the company is also building product portfolios aimed at the food, energy, and environmental markets. The latest developments could bring synthetic biology to your doorstep.

XON Chart

XON data by YCharts.

Intrexon Energy Partners, or IEP, was formed to develop a biocatalytic process for creating isobutanol for gasoline blending from natural-gas feedstocks. It is a bold move that directly challenges the efforts of more-established companies such as Gevo and Butamax, the latter a joint venture between British Petroleum and DuPont, which are using engineered yeasts to convert sugar into isobutanol. Can Intrexon succeed on a timeline that will satisfy investors in the face of fierce competition? Does switching sugar for natural gas provide any economic benefits?  

Surveying the competition
Time to be blunt: Gevo is in a pretty poor place financially, despite touting successful investors such as Richard Branson. While it is further along in commercial development than Butamax, the pair continues to meet in the courtroom over intellectual property quarrels, which could limit timely progress, distract management teams, and dissuade external investment. That sets the stage for more focused teams to enter the market and attract capital from investors for development of competing, yet distinct (and therefore safe from patent litigation), platforms. That would seem to benefit Intrexon, but the company's feedstock approach may paint a different picture.

The problem with natural gas as a feedstock
Natural gas is cheap, abundant, and here to stay. That was the consensus when the nation was drowning in gaseous hydrocarbons in 2011 and 2012, anyway. The reality is that natural-gas pricing is volatile, infrastructure is lacking, and next-generation technologies have the feedstock in their crosshairs. Any business or technology strategy that relies heavily on cheap natural gas trips alarm bells in my mind. Why? Assuming historically volatile natural gas will remain a low-cost alternative is nothing more than wishful short-term thinking.

The mad dash by industry to develop technologies that take advantage of low-cost natural gas are akin to the investing environment surrounding biofuels in 2006. When oil hit an all-time high of $147 per barrel venture capital poured into unproven start-ups. In the three-year period from 2006 to 2008, a total of 161 deals in biofuels ventures were closed with a cumulative value of $2.55 billion. To put that into context, only 60 deals worth $252 million had closed in the four years prior. It did not turn out so well for the investors and start-ups involved.

Whether there are parallels between enthusiasm for biofuels when oil hit an all-time high and for natural gas at a surprising low, it appears recent all-time spreads between raw sugar and natural-gas costs are tightening once again. Further speaking to the volatility in natural-gas prices, consider that in the last 10-year period the maximum price for natural gas was 10 times higher than the low. Raw sugar is relatively volatile as well, but the maximum price for the commodity was only six times higher than the low on the same basis.

Source: Natural gas data from EIA.gov, Sugar data from USDA.

Rising natural gas prices are bad news for those looking to use the carbon source as a feedstock, especially in biofuel and commodity chemical applications where feedstock expenses comprise 70% and 50%, respectively, of total product costs. Couple that with the technical hurdles facing gas-to-liquids biocatalyst production systems and I find it difficult to be enthusiastic about Intrexon's latest venture at this time.

Foolish takeaway
An ambitious gas-to-liquids project is not a red flag, but rather an approach with significant hurdles. Of course, the competition does not instill much confidence when it comes to isobutanol development, and it is not as if Intrexon's entire business hinges on successful development -- far from it. But while synthetic biology can and will be used to convert natural gas into higher-value chemicals, I see such platforms being held captive by the volatility in pricing that is inherent to the carbon source. I would much rather see Intrexon throw its weight behind next-generation sugar feedstocks with lower volatility than chase a short-term market trend.

Buy-and-hold investors shouldn't chase short-term trends
Forget short term trends in natural gas pricing -- that won't make you a successful investor. You deserve much better. That's why our CEO, legendary investor Tom Gardner, has permitted us to reveal The Motley Fool's 3 Stocks to Own Forever. These picks are free today! Just click here now to uncover the three companies we love. 


Read/Post Comments (1) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 12, 2014, at 3:31 PM, jac10047 wrote:

    I appreciate your post, but I'm quite sure your conclusions are wrong. Sugar to isobutinol is NOT the way to go. Natural Gas to isobutinol makes much more sense.

    1. Your 30 year charts on relative prices over the years between sugar and natural gas don't take into account the technological advance in fracking and horizontal shale drilling in the last several years that has led to a huge increase in provable reserves and a recent, and likely continuing decline, in natural gas prices. 34% lower in the just the last few years. And, a the same time discovery of new gas resources have increased. 48%.in 2012 alone. (Don't be mislead by the reduction in "provable reserves" that's a function of gas prices. So when prices drop so-called provable reserves drop because you can't harvest it at that price.) See the projections from the 2013 world report. Http://www.eia.gov/forecasts/ieo/nat_gas.cfm

    For the next 40 years, expect, with variability, stable or declining adjusted for energy inflation Natural Gas prices. Supplies will certainly increase.

    2. Agricultural commodities, however, face a different fate. Except for the possibility of a GMO discovery induced increase in sugar crop yield, expect declining yields and increased prices as global warming reduces yields and available crop land and population increases increase demand food not fuel.

    It is dangerous and silly to think that we can add 2 billion people over the next 30-40 years, add a billion+ folks to the middleclass, and expect that the demand for sugar (or corn or sucrose) will decline. . There are NO projections that moderate to high production tillable land will be greater in 2020 than it will in 2040. So do we grow food for humans or for food or Isobutinol?

    Simply put, if we don't use Synthetic Biology (Intrexon!) to create energy without cannibalizing our farm land while at the same developing synthetic biology ways to make carbon fuels work for us, 2-3 billion folks will starve to death and not have fuel to drive cars in 2030-2040.

    My favorite Canadian Wayne Gretsky said skate to where the puck is going to be, not where it appears today.

    Best JAC47.

Add your comment.

DocumentId: 2919324, ~/Articles/ArticleHandler.aspx, 8/2/2014 2:22:30 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement