Biofuels made from something other than corn are beginning to look more and more promising to energy strategists and investors. One big reason is that corn prices have risen sharply because of the grain's use in making ethanol, a fuel that's viewed by its supporters as a potentially broad replacement for the world's current petroleum-based options. As a result of this price increase, the ethanol industry has come under increasing political pressure from adversarial lobbies who represent corn interests. And it's forcing companies to consider other means for producing alternative fuels. Nova Biosource Fuels ( NBF), a $300 million Houston-based producer of biodiesel that uses 25 different types of biomass, including animal parts, as feedstock, could be in a prime position to take advantage of this shift. Whereas many of its competitors rely on a single feedstock recipe, such as one that's corn-based, Nova builds refineries that can be adjusted to accommodate different inputs. Vegetable oils and animal fats can be used interchangeably depending on their prices and their logistical access to Nova's refineries. While the materials that are used to make Nova's biodiesel have all sorts of textures and colors, the biodiesel fuel that leaves the refineries is as thin and clear as water. Nova's biodiesel is 100% interchangeable with traditional diesel fuel, and today's internal combustion engines require no mechanical alterations to use it. The company is targeting its biodiesel at large vehicle fleets, including government vehicles and public transportation systems in environmentally sensitive areas. According to the National Biodiesel Board, an industry trade group, the company's fuel produces roughly 70% fewer emissions of greenhouse gasses and particulate matter when burned than traditional petroleum diesel does.
Nova doesn't yet generate revenue from any of its refineries, but President J.D. McGraw says that it will soon be able to operate profitably without the help of government tax breaks or subsidies. That's good news for investors at a time when political support for an energy source can suddenly dry up, as is happening with corn-derived ethanol. Nova closed Thursday at $2.58, but in a recent research report, analysts at investment bank Natexis Bleichroeder gave Nova a fair market value of $7 a share based on their discounted cash flow and price-to-earnings analyses. Nova plans to have three refineries operating by the end of 2008 with a production capacity of 220 million gallons of biodiesel annually. By 2010 it hopes to have seven refineries, each producing between 20 million and 100 million gallons of fuel a year. The company recently signed a 10-year contract with ConAgra ( CAG) to supply its refineries with feedstock, allowing it to lock in expenses at a favorable rate. According to McGraw, the total cost of Nova's product is about $2 a gallon, while it can sell its diesel wholesale for $3.17 a gallon. That gives Nova an industry-leading profit margin of roughly 58%. Additionally, the company has an impressive management team at its helm. Chairman and CEO Kenneth Hern was previously the president of Texaco units in Saudi Arabia and Brazil, and Chief Operating Officer Jody Powers was the president of Halliburton's ( HAL) energy services division. A number of other executives have years of experience across a wide swath of the energy spectrum. As the interest in alternative energy continues to grow, which is a near certainty, this name, though small for now, could be one to watch.