SYNTROLEUM: Third Quarter 2011 Conference Call

November 10, 2011/11:00 a.m. EST

SPEAKERS
Karen Power – Senior Vice President and Principal Financial Officer
Gary Roth – President and CEO
Ronald Stinebaugh – Senior Vice President, Finance and Acquisitions

ANALYSTS
Shawn Severson – JMP Securities
Jin Ming Liu – Ardour Capital
John Dunlea – JWA CPA
Michael Prouting – 10K Capital
Anthony Chen
John Kvale – JK Capital

PRESENTATION

Renewable jet fuels offer the following five advantages compared to conventional fuel. Renewable fuel has more stable fluid properties below freeze point. Soot emissions are reduced 90% at idle and 74% of at cruise. Engine system carbon deposits are 10 times lower than conventional jet fuel, which could reduce engine maintenance. Renewable jet fuel typically has higher energy content reducing fuel consumption and a reduction in life cycle greenhouse gas initiatives in excess to 50%.

In November, we’ve received EPA registration for neat renewable diesel. This allows use in on-road engines of up to 100%, which means no blending of petroleum based diesel is required. EPA registration allows us to market our fuels directly to end users such as fleet operators and transit authorities without the cost of blending.

Further a neat fuel registration will allow Dynamic Fuels to monetize the full value of RINs without having to sell to a blender. We are actively marketing to owners of fleets who are interested in a superior sustainable fuel that is just diesel and requires no change to the way they currently procure fuel.

We continue to conduct research with the Department of Energy on our phase change material. Oak Ridge National Laboratory is currently evaluating samples of pelletized phase change material produced using commercial pelletizing equipment. We are sending pellet samples to gypsum board manufacturer for evaluation as requested by the manufacturer. Similar PCM products have reported to reduce energy usage in homes and offices by 20% to 30%.

Sinopec continues to operate the SDF demonstrating Syntroleum’s FT technology. The results have been excellent to date. The SDF has exceeded 2,000 hours run time while demonstrating full capacity. Sinopec is currently running our FT catalyst on non-dilute syngas with performance better than that demonstrated on dilute syngas. We believe the momentum for coal to liquids in China is building and these encouraging results could lead Sinopec to develop a commercial plant using Syntroleum’s FT technology.

FT technology continues to look economically viable using GTL within the U.S. Recent gas prices have been approximately $3.50 per Mcf while diesel prices have remained strong at approximately $3.10 a gallon. At current prices, the cash margin of a GTL plant will be approximately $70 a barrel. We continue to receive early stage interest from third parties about licensing our GTL technology. Our priorities are currently focused on optimizing reduction in cash flow from Dynamic Fuels, which provides us the financial strength to pursue GTL opportunities for own account.

I would like to review the current plant production performance in detail. Previously we reported July production of 5.4 million gallons or 87% of capacity; in August, we produced 4.6 million gallons or 74% of capacity. In August, we encountered a mechanical issue with our solvent recycle pump. Prior to this issue, the pump experienced a record run time of 3,765 hours or 157 days. Our previous run time before that was 528 hours or 22 days.

The issue encountered with the pump in prior runs related to seal failures. The new seal design continues to perform to expectations. The current event was not caused by seal failure but by a long-term buildup of corrosion debris. We noted this upon inspection of the pump in August and began working on mitigating solutions to be installed at our September turnaround.

During turnaround in September, we installed additional corrosion inhibitor injection points to mitigate corrosion. The pump ran from August 20^th to October 24^th resulting in a runtime of 995 hours. In October, we encountered similar corrosion debris issues in our solvent recycle pump as we encountered in August.

During the post turnaround, when we restarted the plant, the strainer filter systems were insufficient to handle startup-related corrosion debris that remained in the system. To solve this issue, we designed, built and installed a high capacity guard bed to protect the pump. The new system has a holding capacity in excess of 100 times the prior holding capacity of the original strainer.

The plant was down from October 24^th to November 7^th. As of November 7^th, the plant was running at approximately half rates. The pump was serviced at the vendor and reinstalled on November 8^th. We expect to increase rates during the remainder of this week.

In summary, we have significantly improved the reliability of this pump as evidenced by the record runtime and good seal performance. We encountered a new issue related to corrosion debris and have identified and implemented solutions that we believe will mitigate these issues in the future.

On October 19^th, we encountered a mechanical failure of the acid injection pump on the pretreatment system. The pump ran from March to October with no issues. When the pump failed, we immediately installed a warehouse spare, which took two hours to install. The new pump subsequently failed after 12 hours. Two alternative spares were sourced and installed and failed to pump at design requirements. We then installed a lobe-style pump versus the prior diaphragm style pump on October 22^nd and this pump has run without issue since installation. Total loss time to this event was four days.

Feedstocks have solids that are removed in order to process them into fuel. The plant has a system of strainers and filters designed to remove solids, which must be removed to ensure reliable operation of the reactors. We initiated a supplier requalification program in which we prequalified suppliers out of spec feed which include solid content.

On October 22^nd, we have prequalified 21 suppliers, disqualified 57 and are evaluating 71. However on two separate occasions during October we encountered higher than normal level of solids. This overwhelmed our existing filtering capacity. When excessive solids are found in the feedstock, we must re-filter until the solids are removed. This causes a bottleneck in our plant limiting production. The plant was down for four days—October 18^th through 21st—as a result of this bottleneck. We are evaluating design enhancements in order to debottleneck our feed pretreatment system, which includes augmenting our solids handling capacities.

In September, the plant was taken down for 14 days turnaround focused on servicing the HDO reactors. Turnaround service is scheduled for these reactors annually to change out catalyst related materials and to remove the buildup of particulates and debris, as is typical for process reactors such as these. During this turnaround, we installed a new guard bed design to optimize holding capacity of debris that naturally builds up during the conversion reaction.

We continue to focus on improving plant reliability. For example, our prior run time on Generation 2 hydrogen compressor valves was 737 hours. As of the end of October, our Generation 3 valves, have logged 3,602 hours of runtime. In the September turnaround, we noticed trends on the valves that indicate 8,000 hour run times will not likely be achieved, therefore we are designing Generation 4 valves. We have achieved 98% reliability uptime on the hydrogen compressor since May.

On October 29, we changed out the Hydro Isomerizer Charge Pump at 5312 hours due to high vibration. Previous best run time was 168 hours. We own a complete warehouse spare for this pump and change out was completed within 48 hours. Subsequent shop tests determined the pump and gear box were in as design condition and the likely cause of high vibration was the coupling between the electric motor and the pump gear box.

We have had successful run times with our HDO charge pump. As of October 31, run time was 4,152 hours compared to previous run time of 1,200 hours.

In July and August we achieved an average of 80% of plant capacity, producing 10.1 million gallons. We produced 1.9 million gallons in September due primarily to our 14 day scheduled turn around and 2 day disruption of hydrogen supply. Despite the issues we encountered in October, we were able to produce at 54% of capacity or a total of 3.4 million gallons. In addition, we supplied 75,000 gallons of renewable jet fuel to Sky NRG for use in the Alaska Air flights. Solutions were implemented in late October and early November and the plant is currently operating at 50% of capacity.

We plan to take the following steps to continue to improve reliability. First, increase and improve our filtration capacity—that design review is ongoing. Second, we need to refine our corrosion program in the plant, specifically around our solvent recycle loop. Third, we’re at the point where we can specify a spare solvent recycle pump that meets the operational and debottlenecking needs of the plant. These pumps are typically 8 to 12 months delivery. Finally, we need to optimize and debottleneck our feed pretreatment system.

We have contributed $19.25 million to Dynamic Fuels since October 2010. From October through June, we contributed at a rate of $1.6 million a month. From July to November, we contributed at a rate of $800 thousand per month, a reduction of 50%. This reduction is attributed to two primary factors. During October 2010 through June 2011 our plant utilization was 25% and from July to October our plant utilization was 62%, an improvement of 147%. Over the last four quarters our operating expenses decreased from $6.52 to $3.27 to $2.14 to $1.05 per gallon. This is an 84% reduction over the year. Our current revenue and cost structure for the quarter ended September 30, 2011 results in breakeven at approximately 80% of capacity. Had we achieved full RIN value for all of our diesel production, our breakeven would have been approximately 30% of capacity.

Let us review Dynamic Fuels financial performance for the quarter ended September 30, 2011 compared to the prior quarter. For the quarter ended September 30, 2011, our average feedstock costs were $4.26 a gallon and our blended revenue was $5.19 per gallon resulting in a gross margin of $0.93 per gallon. This compares to the quarter ended June 30, 2011 to feedstock costs of $4.11 a gallon and blended revenue of $4.84 per gallon resulting in a gross margin of $0.73 per gallon.

In summary, over the past twelve months we have averaged a $1.10 per gallon gross margin and with a projected operating expense of $0.55 per gallon, Dynamic Fuels would have achieved a cash margin of $0.55 per gallon or $41 million a year at design capacity.

As we discussed last quarter, there remains considerable revenue upside. Prices during the quarter ended September 30, 2011 were as follows; SME Biodiesel was $5.46 per gallon; Dynamic diesel sales were $5.70 per gallon, therefore Dynamic Fuels received a $0.24 per gallon premium over SME. Full RIN value pricing was $6.52 per gallon. We define full RIN value pricing as the sum of Gulf Coast ULSD diesel price plus 1.7 times of RIN price, plus a $1.00 subsidy. Therefore Dynamic Fuels received an $0.82 discount to full RIN value pricing.

As I mentioned above, we have marketing plans for 2012 to maximize fuel sales directly to fleet customers enabling us to capture full RIN value for a greater portion of our diesel sales. That strategy was enabled by obtaining EPA registration of neat fuel on November 1^st.

Let us exam the implication of our achieving EPA registrations and overall margins. Had we been able to receive full RIN value of $6.52 for our diesel for the quarter ended September 30^th, our blended revenue per gallon would have been $5.92 per gallon compared to $5.19 realized, an increase of $0.73 a gallon. With feedstock cost of $4.26 and opex of $1.05, we would have made an operating cash margin of $0.61 a gallon.

RFS2 was implemented by creating a traded compliance commodity known as a Renewable Identification Number or RIN. Each obligated party must purchase sufficient RINs to satisfy its annual mandate. Since the beginning of the year, RIN prices have increased from $0.74 to a high of $1.99 per RIN on September 14^th. RIN values subsequently declined to $0.96 on October 26^th and have since rebounded to $1.44 as of yesterday, November 9^th.

There appear to have been two events that caused RIN prices to fall. In October and November, the EPA posted biomass based diesel production for August and September of 100 million gallons and 119 million gallons, respectively, which implied 1.4 billion gallons per year of production, exceeding the mandated level of 1 billion gallons for 2012. However, EPA announced enforcement actions against two biodiesel producers for the creation of $9 million and $40 million worth of fraudulent RINs, respectively.

Last week, the EPA posted to its Website that, “Invalid RINs cannot be used to achieve compliance with the renewable volume obligation of any obligated party or exporter, regardless of the party’s good faith belief that the RINs were valid at the time they were acquired.” Additionally, regulations prohibit the creation or transfer to any person of a RIN that is invalid.

Implication of these actions by EPA could be as follows: Obligated parties with questionable RINs may need to step back into the market and purchase valid RINs driving up RIN prices and secondly, obligated parties are more likely to place greater scrutiny on the RIN custody chain in the future, enabling them to trace RINs directly back to reputable producers. The U.S. Supreme Court on Monday declined to hear a request from the oil and chemical industry to strike down the Renewable Fuel Standard. We believe the fundamentals of the RIN market remain intact.

With respect to feedstock prices, yellow grease and animal fat prices have softened recently; tallow prices are currently $0.43 down from $0.50 and yellow grease is currently $0.41 down from $0.46 per pound compared to September. Soy prices remain steady at $0.52 per pound.

Based on yesterday product, RIN and feedstock prices together with operating costs from the September quarter, Dynamic Fuels’ full RIN value operating cash margins are approximately $1.30 per gallon. Therefore we believe, the intrinsic economics of this business remain favorable.

I will now turn the call over to Karen.

K. Power            Thank you, Gary. For the nine months ended September 30, 2011, the

Company reported an operating loss of $2.3 million resulting from total revenues of $3.2 and operating expenses of $5.5 million. Revenues relate to engineering services provided to Dynamic Fuels and other customers for process design and research support. We also recorded revenues for royalties from the Dynamic Fuels commercial production which began in October 2010.

The total net loss for the nine months ended September 30, 2011 was $14 million. $12.3 million of this loss relates to Dynamic Fuels operations for their nine months ended June 30, 2011. The loss reflected in our income statement represents the loss incurred for Dynamic from October 1, 2010 to June 30, 2011. Our 10Q filing includes Dynamic Fuels’ financials for their nine months ended June 30, 2011 in the footnotes to the financial statements.

We do not consolidate Dynamic Fuels, instead we report using the equity method of accounting. Income or losses under the equity method are reported below operating income as Income or Loss in Equity of Dynamic Fuels. Per GAAP, we do not report gross revenues associated from Dynamic Fuels because the entity is not consolidated. We will only report our share of the total net income or loss.

As reported in our 10Q, Dynamic Fuels had revenues of $63.1 million and operating expenses of $88.1 million resulting in a net loss of $25.0 million for the nine months ended June 30th, of which we report 50% in our Syntroleum financials. During this time period 13.0 million gallons of renewable fuels were sold and 14.0 million gallons were produced. Our limited production levels during the start-up and commissioning period resulted in losses at Dynamic Fuels.

As of September 30, 2011, our cash balance is $28.4 million. Since July we have provided $4.2 million in additional working capital funds to Dynamic Fuels, which includes $2.5 million in October and an additional $1.0 million in November of 2011.

In summary, we produced renewable jet fuel flown commercially by Alaska Airlines in the U.S yesterday. We received EPA approval for the use of our neat renewable diesel in on-road applications. Our FT technology is being demonstrated by Sinopec via the SDF in China, and Dynamic Fuels has demonstrated reduced operating costs for the most recent quarter ended, September 30, 2011 and continues to focus on achieving higher production rates.

Thank you for your attendance today. We will now open up the call for questions.

So once we get product—for example, we’ve shipped all the way now of course to Alaska Airlines. As we develop—we have demonstrated our ability to put it all the way through the logistics train, all the way through the airframe manufacturers and engine manufacturers, the acceptance continues to grow but it is a technical sale and those technical sales have a lot of stakeholders that need to approve the process.

What we’ve seen this time is from the restart we’ve had some difficulty in a couple of pieces of equipment. So it is a little more difficult on the restart after the turnaround, but what we are very pleased about is during the turnaround, we didn’t see anything negative in the reactors. We didn’t see anything negative in the guard beds or the catalyst itself. Those major key components have performed as we’ve designed. The issue has been primarily lately around this solvent recycle pump.

Now we do understand how that pump runs. This allow us an opportunity to specify and work with the manufactures on a stand by pump, but we needed this year of run life to allow us to customize the specification for a spare pump.

Now prior to the 100% approval, we were limited to a 20% blend and the clients typically don’t want to try to keep track of that they’re below 20% blend in their fuel, neither the client nor the wholesaler. So now that we have a 100% approval, the client doesn’t need to keep track. So he’s burning—as far as he sees, it’s just diesel and that’s what he wants. He wants fuel, which he sees in that commodity, that he can use anywhere any time just like he uses regular diesel. So to your point, the municipalities and clients don’t see any price difference then they do from their current suppliers with us collecting the RIN values and the dollar a gallon directly from the government.