Gevo is a “low-carbon” company developing and commercializing renewable diesel, jet fuel alternatives

Nasdaq-listed next generation “low-carbon” fuel company Developing and commercializing renewable alternative jet fuel and diesel Uses feedstocks that have the potential to lower greenhouse gas emissions What Gevo does: Gevo Inc (NASDAQ: GEVO) is a next-generation “low-carbon” fuel company focused on the development and commercialization of renewable alternatives to petroleum-based products. The Englewood, Colorado-based company is developing gasoline and jet fuel using renewable feedstocks that have the potential to lower greenhouse gas emissions at a meaningful scale and enhance agricultural production, including food and other related products. The group has developed a breakthrough process that converts a high-octane fuel called isobutanol into clean, renewable diesel. The green diesel can also be made from fusel oils, a mixture of several alcohols produced as a by-product of fermentation. Renewable diesel is expected to compete head-to-head on price with natural and petroleum-based equivalents, while reducing particulates and CO2 emissions, according to Gevo’s CEO Patrick Gruber. Low-carbon fuels reduce the carbon intensity, or the level of greenhouse gas emissions, compared to standard fossil-based fuels across their lifecycle. Demand has increased since California’s Low Carbon Fuel Standard came into effect, which is designed to decrease the carbon intensity of California’s transportation fuel pool and provide an increasing range of low-carbon and renewable alternatives, which reduce petroleum dependency and achieve air quality benefits. In addition to serving the low-carbon fuel markets, Gevo’s technology can also serve markets for the production of chemical intermediate products for solvents, plastics, and building block chemicals. The group's stated strategy is to commercialize bio-based alternatives to petroleum-based products to allow for the optimization of fermentation facilities’ assets, with the ultimate goal of maximizing cash flows from the operation of those assets. How is it doing: On April 15, Gevo closed a more than $68 million “green bond” private activity bond offering to finance the construction of its renewable natural gas (RNG) project in Northwest Iowa. The project will generate RNG (renewable natural gas) captured from dairy cow manure, or what's called feedstock, from more than 20,000 milking cows on three dairy farms in Iowa.  When fully operational, which the company projects will be early 2022, the project is expected to generate about 355,000 MMBtu of RNG per year. The company broke ground on the project in April 2021. The company added it may use some of the RNG as process energy in its Net-Zero 1 project or other future Net-Zero projects to produce energy-dense liquid hydrocarbons (jet fuel and renewable gasoline). Gevo is currently developing its Net-Zero 1 Project at Lake Preston, South Dakota and other Net-Zero projects are planned.  The company expects the Net-Zero 1 project will have the capability to produce around 45MGPY (million gallons per year) of liquid hydrocarbons that when burned, should have a “net-zero” greenhouse gas footprint. In addition, the Net-Zero 1 plant is expected to produce at least 350 million pounds per year of high-protein animal feed.  Gevo, which is working with Citigroup, said preliminary capital estimates for Net-Zero 1 are $700 million to $800 million (including on-site renewable energy generation). The company also said the Front-End Engineering Design (FEED) work for its Net-Zero 1 project is on track and is expected to be completed in December 2021. In May, Gevo and Total Cray Valley announced the successful completion of Phase 1 of their joint development agreement to upgrade fusel oils into renewable isoamylene. Fusel oils, made during the production of ethanol, equate to approximately 1 million tons of bio-based feedstock. The agreement, signed in 2020, is based on Gevo’s chemical-based catalytic processes that selectively convert low-value fusel oils into higher-value renewable chemicals such as isoprene, ketones, aldehydes or olefins, in this case isoamylene. Gevo also recently won the largest contract in its history after entering into a binding agreement with Trafigura Trading LLC, one of the world’s leading independent commodity trading companies. The contract increases the company’s revenue pipeline to more than $1.5 billion. Under the 10-year deal, Gevo will deliver 48 million MPGY of renewable hydrocarbons, the majority of which is expected to be low-carbon premium gasoline. On May 13, Gevo reported its first quarter of 2021 numbers, showing it had cash and equivalents of $525.3 million, up from $78.3 million during the previous quarter, after the company completed two equity financings at $8 per share in January. In June, the company made two key management appointments. It named long-time industry veteran Tony Wells as general manager/site leader for the Net-Zero 1 facility and appointed Kimberly Bowron as its Chief Human Resources Officer. Most recently, she was the director of human resources at TPC Group.  Inflection points: RNG production starting in 2022 Financing on Net-Zero 1 project closing in 2H 2022 Sustainable aviation fuel commercialization in South Asia What the broker says: Noble Capital maintained its 'Outperform' rating and $16 price target on Gevo in a note published on May 14, shortly after the company posted its first-quarter results. The Noble analysts noted that the company’s first-quarter EBITDA loss of $7.8 million was higher than expected due to early-stage project development expenses of $2.7 million. The firm revised its full-year 2021 EBITDA loss estimate increases to $39.8 million to include the ramping up of early-stage project costs, including FEED and other development costs. What gives the Noble analysts confidence in their rating and target is a recent 21-year green bond financing of $67.2 million for its renewable natural gas plant, which Gevo expects to come online in 2022 and deliver annual cash flow between $9 million and $16 million. “A pullback and profit-taking was expected after strong stock price performance early this year, but we are surprised to see the stock down 51% in 2Q2021 to date,” the analysts said. “While the RNG project should generate cash flow in 2H2022, operating losses might continue until the first Net-Zero plant is online in 2024." They added: “Nonetheless, we remain positive on the stock’s higher risk/high reward profile since we believe that 1Q2021 capital raises improve the funding fairway. Not only is the balance sheet strong, financial risk has moderated, the FEED engineering should be finalized by yearend, and the majority of equity funding for the first two Net Zero plants has been secured.” The Noble analysts also pointed to Gevo’s current portfolio, which includes 54 MGPY of signed contracts and 393 MGPY of contracts in development. Total revenue potential exceeds $10 billion, they added, and it projects no change in timing and a cost of $800 million for Net-Zero 1 project.  What the boss says: Commenting on the outlook for 2021, Gevo CEO Patrick Gruber told shareholders: “Net-Zero 1 is a first of a kind, off-the-grid type of plant where we are putting great effort into making Net-Zero 1 the most sustainable plant it can be." He added: “I’m glad we have the customers secured, Citigroup to help us with the debt financing, and that the economics of Net-Zero 1 are attractive at this stage. I’m also pleased that we are making progress on filling up production capacity at Net-Zero 2 as evidenced by the recent SAS contract. We are making great progress, fast.” Contact the author: patrick@proactiveinvestors.com Follow him on Twitter @PatrickMGraham