David Sterman

The biofuels industry is abuzz this week. Industry executives are taking a close look at a new contract in place between industry veteran Solazyme (Nasdaq: SZYM) and consumer goods giant Unilever (NYSE: UN).

In a move to make cosmetics with sustainable ingredients, Unilever will buy at least 10,000 metric tons of Solazyme's algae-derived oils. The move is an important endorsement for Solazyme's technology, but it doesn't bring the company any closer to its goal of becoming a provider of alternative fuels as well.

Indeed, in the decade since Solazyme was founded, the company and its rivals have poured hundreds of millions of dollars into alternative fuel research.

Yet progress has been slow. And investor patience is wearing thin.

The Solazyme/Unilever deal is important in another respect. Though Solazyme is still likely to lose money in 2014, it will now move closer to breaking even, and the Unilever contract will enable the company to once again access fresh capital through a secondary share offering, if need be. Solazyme's rivals can't say the same.

The entire biofuels industry has been a savior for investment bankers, and you can get a sense of the serial fundraising by looking at their share counts. Solazyme is an industry exception, as it has raised fresh funds primarily through milestone payments form licensing partners.

Rapidly Rising Share Counts (millions)

Solazyme's share price is now above $10, though the rest of these stocks trade for roughly $2 apiece. That price indicates that investors believe these companies will need to raise money yet again, though it's unclear that there is any desire for investors to participate in future capital raises.

Taken as a group, these stocks are down 30% this year. Analysts at Goldman Sachs say "underperformance (for this group) has largely stemmed from disappointing execution and more recently, increasing liquidity concerns and thus potential for greater shareholder dilution."

As a result, an industry shake-out may be at hand. You can get a sense of how close to bankrupt these firms are by looking at their cash burn for the first six months of 2013, and how much cash they have left.

David Sterman

David Sterman has worked as an investment analyst for nearly two decades. He is currently an analyst for StreetAuthority.com