Perhaps the only thing that has fallen faster and further than oil prices in the last month is the stock of renewable oils manufacturer Solazyme (NASDAQ:TVIA). Shareholders in the company, or nearly any domestic oil producer, haven't exactly enjoyed the latest OPEC decision to keep the global market saturated with oil. The move, as opposed to reining in production from countries in the petroleum consortium, is aimed at maintaining market share rather than conceding it to the upstart American oil boom. Downward pressure on the price of petroleum also squeezes margins on shale oil, which OPEC hopes will lead to a slowdown in production.
But it might not be all bad news.
A timely turn of events
When Solazyme was focused on supplementing and replacing commodity oils commonly sourced from petroleum, the company's share price was at least partially associated with the price of petroleum. After all, the higher the price of petroleum the more economical and coveted the company's platform would become.
However, after realizing that markets for commodity oils weren't ready for its unfamiliar replacements, Solazyme pivoted its commercialization strategy to focus on high-margin products that might balance production costs with sales. Shifting focus to specialty and niche products means investors should begin to decouple Solazyme's share price from the price of oil.
At the same time, given the low price of petroleum, domestic oil producers will need to exercise discipline when spending capital, making investments, and growing production from North American assets in shale plays. Many producers have made tremendous strides in lowering drilling costs for oil and gas wells in the Bakken, Eagle Ford, and Utica formations; however, they will be increasingly incentivized to invest in new technology to further reduce costs and fight back against OPEC's attempt to squeeze their margins. Even gains of several percent add up with volume.
This could be great news for Solazyme in 2015. How?
Consider that of the company's three high-value portfolios (cosmetics, food ingredients, and drilling lubricants), Encapso lubricants that serve as an additive to water-based drilling fluids have the best potential for beating growth expectations in the immediate future. Algenist cosmetics have a relatively limited market and can still grow at a healthy annual clip with current efforts. AlgaVia food ingredients have a massive potential market in the long term, but the competition is fierce and commercialization and marketing will take time to gain traction.
On the other hand, Encapso drilling lubricants have been produced at scale; tested in wells in major North American formations; and can offer oil drillers an interesting value proposition. The product has been shown to increase the rate of penetration and reduce torque during drilling, even while protecting valuable equipment and shaving days off of operations when compared to traditional lubricants. If demand picks up, Solazyme should have no problem increasing production at its manufacturing facility in Clinton, Iowa -- located halfway between the Bakken and Utica -- which could boost product revenue from the facility well above the $16 million I estimated earlier.
What does it mean for investors?
Competition from more established and distributed companies, such as Baker Hughes and BASF, also selling eco-friendly drilling lubricants could stunt Encapso's potential, but there's no question OPEC's oil pricing war came at exactly the right moment (eerily so...) for Solazyme. If the company capitalizes on the opportunity, it could expedite its trajectory in the near term and usher in a profitable future sooner than expected. It still won't be easy to develop the market overnight, and the company won't blow the doors off of expectations with Encaspo alone, but oil producers will be more inclined to test the drilling lubricant than ever before.