Codexis (CDXS): The higher gas prices go, the better the outlook

ByBrendan Coffey, Editor of Cabot Green Investor
From Cabot Wealth Advisory 3/17/11 Sign up for free Cabot Wealth Advisory e-newsletter

California-based Codexis (CDXS) produces biocatalysts, which make the creation of ethanol faster and cleaner than traditional methods.

In the past, biocatalysts have been too unstable to use reliably, but because they can be utilized at room temperature and without the creation of hazardous byproducts—as in chemistry-based catalytic actions—stable, reliable biocatalysts have long been sought after. Codexis identifies and isolates the microorganisms that produce the best enzymes, then performs a series of intricate processes, including gene shuffling and mutation identification to breed proprietary “superenzymes” that can be used more cheaply and efficiently in the creation of biofuels. The benefits include being able to use water as a solvent at normal atmospheric pressure, eliminating the need for purification actions later on and using less energy overall.

With biodiesel, which is chemically different from bioethanol (the latter is an alcohol, the former an oil), Codexis believes it has discovered a process that allows its creation both faster and cheaper.

Right now, biodiesel requires intricate steps from start to finish, including halting the production process at one point to chemically modify the intermediate product, and other costly side steps. Codexis believes its process eliminates the need to chemically modify the intermediate product, allowing the process to run continually and slash expenses. Because biodiesel is chemically identical to fossil fuel diesel, this may in fact be the more promising of the two biofuel areas. Ethanol, being chemically different from gasoline, requires additional infrastructure “drop in” fuels that biodiesel does not.

There are plenty of other companies pursuing advances in biofuels and catalysts, such as Gevo (GEVO), Verenium (VRNM) and PetroAlgae (PALG), but Codexis has two characteristics that give it an edge. One is that Codexis also has a market for its superenzymes in the pharmaceutical industry. If you take Lipitor, you’ve experienced the end result that includes Codexis. The company’s superenzymes are also sold to Dr. Reddy’s Labs (RDY), Teva Phamaceuticals (TEVA) and Arch Chemicals (ARJ), among others. That gives the company a solid revenue stream while it looks to ramp up the biofuels business.

And the biofuels business is looking good. Codexis has been tied to Shell Oil since 2006, when the pair teamed up to produce biocatalysts for fuel production. For much of that time, Shell has provided payments to Codexis to support development (Shell will pay royalties if it uses Codexis’ technology in fuel production).

A big uncertainty has been whether Shell will stick with Codexis, having earned the right as of November to terminate the relationship with nine months notice (an option Codexis does not have). That uncertainty is waning, with the pair announcing in early February they will use Codexis technology to produce biofuels directly from straw and sugar cane waste by year’s end. This is potentially important because Shell has also teamed with Cosan (CZZ) Brazil’s largest ethanol producer, which uses sugar cane as its raw material.

A potential long-term bonus with shares: Codexis recently announced it has made progress in a carbon sequestration technique using custom enzymes that can be deployed in coal-fired power plants.

In its most recent year, ended December 31, Codexis made $107 million (up 77%) and shrunk its net loss to $8.5 million (35 cents per share) from $20.3 million. Shares in the Cabot Green Investor portfolio are up just 8% so far from our buy price, but they look like they are in the midst of building a rock solid base around these levels to work higher in coming months. The higher gas prices go, certainly the better the outlook for Codexis.

Click here to learn more about Codexis and other top Green stocks recommended by Cabot Green Investor.

Brendan Coffey

Analyst and Editor of Cabot Green Investor

Brendan Coffey is a member of the Cabot investment team and editor of Cabot Green Investor. A veteran financial journalist, Brendan has spent more than a decade writing about investing for publications including Barron’s, Forbes, The Wall Street Journal and a number of private-client brokerage newsletters.