Wood Bioenergy: The Rise and Fall of Wood-Based Biofuels, Part II

20 07 2013

This post includes an excerpt of the feature article in the May/June/July edition of Wood Bioenergy US (WBUS) written by Brooks Mendell, Ashley Barfield, and Amanda Lang. It is the second part of a two part series on liquid biofuels.

Investors in wood-based biofuels must keep in mind how ethanol investments have generally lost their luster.  John Eligon and Matthew Wald of The New York Times summarized the struggle of hundreds of corn ethanol plants built throughout the U.S. Corn Belt with government subsidies and mandates (“Days of Promise Fade for Ethanol”, 3/16/13). According to the article, “thousands of barrels of ethanol now sit in storage because there is not enough gasoline in the market to blend it with…”

Regardless of the quality and status of individual technologies and plants in development, analysis of public firms active in the wood biofuels sector confirms how they continue to face extreme economic and market challenges.  First and foremost, ethanol-related production efforts operate in an over-supplied, low-demand market.  The U.S. is flush with excess ethanol production capacity and, thanks to blending walls and other logistic limitations, is holding the bag for a product with few customers.  This is economics 101.  Second, high production costs for wood biofuels, even as firms show progress and improve yields, actually can look worse on a relative basis as the prices for alternative fuels, such as natural gas, decline.  Through no fault of the U.S. biofuels sector, it remains subject to external benchmarks and exogenous forces that erode progress and diminish the attractiveness of wood biofuel investments.  Third, time works against wood biofuel projects in the U.S. when evaluating wood feedstock strategies and alternatives.  With an improving economy, demand for wood raw materials from traditional forest industry users such as building product manufacturers and pulp and paper producers is increasing.  In addition, wood bioenergy projects with existing markets and ready technology, such as wood pellet producers, are increasing production and investment in new capacity.  All of these factors push potential wood biofuels projects to the back of the line for securing woody feedstocks.   As a group, these firms have shrinking relevance to timberland owners and wood raw material competitors.

WBUS Market Update:  As of July 2013, WBUS counts 459 announced and operating wood bioenergy projects in the U.S. with total, potential wood use of 128.6 million tons per year by 2023.  Based on Forisk analysis, 296 projects representing potential wood use of 78.5 million tons per year pass basic viability screening.  To download the free WBUS summary, click here.

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The Rise and Fall of Wood-Based Biofuels, Part I

16 04 2013

This post includes an excerpt of the research in the February/March/April edition of Wood Bioenergy US (WBUS) and is the first part of a two part series on liquid biofuels.

In May 2011, Forisk and the Schiamberg Group evaluated the viability of 36 wood biofuel projects in the United States.  The study emphasized the unlikely and problematic development of the wood biofuels sector while singling out projects with drop-in fuels and specific technology types as having investment potential for investors.  As of April 2013, 13 of the original 36 projects have been cancelled and 12 remain in the planning or construction stages.  Four have been shut down.  Since the 2011 study, ten new wood biofuel projects have been announced.  New projects emphasize feedstock flexibility beyond wood raw materials and focus on multiple, existing end markets including diesel, sugars and industrial chemicals.  Analysis of potential wood use highlights the minimal relevance of the biofuels projects to timberland investors in the U.S. today and over the next ten years (Figure 1).  

 Image

Newly announced wood biofuel projects have become increasingly less ambitious and less relevant to forest industry firms and timberland investors.  Analysis comparing projects in 2013 to those from 2011 find that current projects use less wood and scale at smaller production levels.  Meanwhile, the traditional forest products industry is reopening closed plants and building new capacity in response to increasing housing demand.   

In the bioenergy sector, wood pellets provide a ready, realizable market.  The enthusiasm for wood biofuels from a few years ago has been replaced with well-earned skepticism and caution. For timberland investors, potential demand and wood-based revenues from biofuels have been discounted.  For traditional forest industry firms, biofuel worries have been replaced by demands to be treated fairly in legislation or mandates that could affect wood raw material costs.  And for biofuel investors and project developers, the needs to produce product for existing markets that can produce cash today have strengthened business models and modified expectations for potential growth in the next five years. 

WBUS Market Update:  As of April 2013, WBUS counts 456 announced and operating wood bioenergy projects in the U.S. with total, potential wood use of 125.0 million tons per year by 2023.  Based on Forisk analysis, 293 projects representing potential wood use of 75.4 million tons per year pass basic viability screening.  To download the free WBUS summary, click here.





2013 US Timberland Ownership: Descriptive Statistics

21 03 2013

According to Forisk tracking of timberland ownership in the United States, 117 firms currently own or manage in excess of 100,000 acres of timberland. These firms feature the following descriptive statistics:

  • As a group, they own/manage 86.2 million acres of timberland.
  • On average, they own/manage 736,589 acres of timberland.
  • The median ownership is 312,000 acres.

Assuming an average per acre value of $1,500, each firm owns or manages on average $1.1 billion in timberland assets.

Analysis of private timberland in the U.S. affirms the concentrated nature of large ownerships.  While U.S. Forest Service research by Brett Butler concludes that 10 million family forest owners account for 264 million acres (35%) of U.S. forestland, Forisk research indicates that the 286 largest owners alone account for 92.1 million acres.  Each of the top ten own or manage in excess of 2 million acres.

The top 10 timberland owners as of January 2013 include:

20130321 Timberland ownership

For detailed data on US timberland ownership and more information on Forisk’s 2013 US Timberland Owner List, click here.





Thomas Jefferson and Timberland Ownership in the United States

15 03 2013

Through executing the Louisiana Purchase in 1803, President Thomas Jefferson proved himself, among other things, the preeminent timberland acquisition professional.  In this bold embrace, he more than doubled the size of the United States by acquiring 820,000 square miles of land west of the Mississippi from France for $15 million dollars.  That equals 524.8 million acres at 2.9 cents per acre (or just over 50 cents per acre in today’s dollars).

[Picture an excerpt from Jefferson’s resume:  Experienced negotiator and real estate professional.  Acquired over half a billion acres of fertile soil and natural resources. Includes land in 14 states such as Arkansas, Colorado, Iowa, Texas, the Dakotas (both) and Wyoming.  Creator of the swivel chair.]

The Louisiana Purchase was opportunistic.  U.S. negotiators wanted to buy New Orleans, but Napoleon needed financing to wage war on England.  So he rejected the New Orleans proposal and countered with a deal to sell all of France’s North American land holdings.  The U.S. team, led by Secretary of State James Madison, took the offer and closed the transaction.  Bada bing, bada boom.

Forisk’s ongoing research of timberland investment vehicles highlights how private timberland owners and ownership have changed over time since the days of powdered wigs.  Today, timberland investment professionals scour the landscape and courthouse documents for the next purchase in Louisiana or in Arkansas or in Texas.  As of 2013, Forisk counts 217 owners that each own and manage 25,000 acres or more for a total of ~91 million acres of private timberlands.  Of these acres, 18% are owned by the four public timber REITs (Plum Creek, Potlatch, Rayonier and Weyerhaeuser).

For detailed data on US timberland ownership and more information on Forisk’s 2013 US Timberland Owner List, click here.





Forest Finance: “Drive-By” Timberland Valuations

3 02 2013

Want a simple method for valuing stocks and income earning real estate or timberland?  Consider the Dividend Discount Model by dividing next year’s income, assuming it will be earned annually in perpetuity, by a constant discount rate or cost of equity.

20130203 Forest Finance figure 1

For example, assume that Forisk stock pays $1.00 per share annually in perpetuity.  How much would you be willing to pay per share if you required a 10% rate of return?  According to the Dividend Discount Model, you would pay $10 per share.

20130203 Forest Finance figure 2

If we think about this model with forestry investments in mind, assume a timberland ownership generates $100 of net income per acre per year.  Applying a 6% discount rate in the Dividend Discount Model ($100/6%) gives a valuation of $1,667 per acre.  For those of us in timber, we can see that this approach gets us “in the ballpark” and provides a simple approach for “drive-by” valuations…..

Click here to register for “Applied Forest Finance” on February 7th in Atlanta, Georgia.  The course details necessary skills and common errors associated with the financial and risk analysis of forestry-related investments. Registration includes copies of our “Forest Finance Simplified” handbook.





Forest Finance: When is the “Current Stand Approach” Useful for Valuing Timberlands?

30 01 2013

When talking about timberland investing while having a beer or standing over the hood of a truck, not when signing checks or allocating capital…..

A reasonable estimate of a forest’s current economic value equals the standing merchantable volume multiplied by the current stumpage prices in the local market. Investors sometimes use this “back-of-the-envelope” technique to estimate the liquidation value of a timberland investment or forest-owning firm. However, this basic approach suffers from observable, value-destroying limitations.  Why? It ignores the potential for generating greater wealth by holding the forest to economic maturity, investing in forest management, identifying other revenues, or accounting for taxes or opportunity costs associated with the land and capital.

This snapshot value faces other weaknesses.  First, current realizable values for the standing timber will be low at any given point in time.  Also, for large timberland ownerships or plantations, the local market can rarely absorb a total liquidation (clear cut) of inventory without depressing local prices.  From a valuation standpoint, the former incents conservatism and the latter incents unreasonable optimism.  Generally, appraisers valuing forests completely avoid current stand valuations (in writing)…..

Click here to register for “Applied Forest Finance” on February 7th in Atlanta.  The course details skills and common errors associated with the financial and risk analysis of timberland and other forestry-related investments.





Forest Finance: Common Errors and Suggested Solutions

23 01 2013

News flash: we all make errors when analyzing forestry investments.  Which are the most common and how can we avoid them?

At the end of the day, most analytic errors in forestry relate to the data used – the inputs – or the math in a spreadsheet.  Errors associated with inputs affect the cash flows in the analysis and how it impacts value when discounted back to the present.  When reviewing models for clients, we commonly find errors associated with the assumed costs, the estimated revenues, the timing of cash flows and the expectations associated with inflation and asset appreciation.  Specifically, in our work and the work of others, we focus on and observe three major categories of errors in Excel models and spreadsheets.

First, we find that analytic errors in Excel are common.  Of all of the spreadsheet models we review, approximately one-third have an error in a formula (that we find). Most often, these are associated with “relative” and “absolute” referencing, where a formula is pulling in data from the wrong cell or worksheet.  Professor Ray Panko at the University of Hawaii, who actually conducts spreadsheet research (http://panko.shidler.hawaii.edu/ssr/), noted in a 2006 interview with the Wall Street Journal that “you’re going to have undetected errors in about 1% of all spreadsheet formulas.”

Second, we observe application errors, which basically reference issues with the thinking behind the spreadsheet, the formula chosen, the use of a formula, or a comparison made.  For example, analysts commonly make mistakes with inflation by mixing real and nominal discount rates and cash flows.  Also, spreadsheet models of forestry investments may inappropriately compare before and after-tax results and investments of differing duration (time periods). Finally, using the incorrect metric can be problematic, such as misapplying cash-on-cash return, pay back analysis and internal rate of return (IRR).  We typically find errors of this type when analysts are comparing timberland and forestry investments with alternative asset classes, such as stocks, bonds, agricultural commodities and commercial real estate.  Historically, the day-to-day metrics for forestry differed in application, so a bit of time spent checking assumptions and thinking through the communication of results can be helpful.

Third, errors of omission are especially problematic (and embarrassing).  We work hard to avoid the situation of being asked “did you check _____?” and, if relevant, having to answer “No, we didn’t think of that.”  Ugh.  Unfortunately, we find that third-party spreadsheets often omit key facts or considerations, including relevant costs and potential revenues.  Just as important can be confirming that the assumed costs and revenues are current and reflect the best available, accessible information.  In short, know what’s knowable.

We observe a few key practices in our work with clients to minimize the chance and occurrence of errors.  First, we label tabs and worksheets, and date all files. That way, if we revisit a model several weeks or months later, we can retrace our steps and know what we’re working with.  Also, if we correct an error or make another improvement, we know which version is the most current.  Second, we try to set aside time to check each other’s work before sending results “out the door.”  Admittedly, this is also the most challenging.  We find that imposing and embracing milestones – midpoints for deliverables or reviewing work – throughout a project institutionalize a level of quality control.  Finally, at the end of the day, we ask ourselves the question “where could we have blown this?” Some level of paranoia and self-awareness is required for quality analysis of forestry, or any other, investments.

Click here to register for “Applied Forest Finance” on February 7th in Atlanta.  The course details skills and common errors associated with the financial and risk analysis of timberland and other forestry-related investments.