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 R 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: Gevo is well-capitalized with a strong balance, so much so that it expects to pay off its entire outstanding secured debt balance of $12.7 million by the end of 2020. The company made the upbeat announcement in early November after reporting 2020 second-quarter financial results (ended September 30) showing it had $80.6 million in cash and cash equivalents -- compared to just $6.3 million in the prior-year quarter.  According to analysts, Gevo has also been working with Citigroup on a finance plan nearing $700 million and discussions with investors are ongoing about project financing with a close expected around mid-2021. Gevo says its intellectual property alone is worth around $412 million.  The company achieved the healthy financial runway despite widespread economic disruptions caused by the coronavirus (COVID-19) pandemic, which forced Gevo in March to stop ethanol and distiller grain production at its Minnesota facility.  Nevertheless, Gevo has been riding some positive momentum lately. It recently won the largest contract in its history after entering into a binding Renewable Hydrocarbons Purchase and Sale Agreement with Trafigura Trading LLC, one of the world’s leading independent commodity trading companies. The contract increases the company revenue pipeline to more than $1.5 billion. Under the 10-year deal, Gevo will deliver 48 million gallons/year (MPGY) of renewable hydrocarbons, the majority of which is expected to be low-carbon premium gasoline with a smaller portion of the volume for sustainable aviation fuel (SAF), starting in 2023. Trafigura hopes to supply SAF to both US and international customers interested in low-carbon jet fuel. In addition, Gevo last month began production of about 50,000 gallons of renewable isobutanol at its production facility in Luverne, Minnesota. Once the renewable isobutanol has been produced, Gevo will ship the isobutanol to the South Hampton facility for use in the production of renewable hydrocarbons during the first quarter of 2021.  Gevo said it plans to produce an additional 50,000 gallons of renewable isobutanol during the second quarter of 2021 for use at the South Hampton facility. It expects to periodically produce renewable isobutanol in this manner until a new, larger hydrocarbon production facility is financed and constructed. All told, Gevo has roughly $500 million worth of take-or-pay-offtake agreements in place with marquee names such as Delta Air Lines Inc for a combination of renewable jet fuel and renewable isooctane for gasoline. The deals have kept rolling in through 2020, with the company having contracted three dairies to provide manure that it will convert into pipeline quality biogas (renewable natural gas). Also, the company has been awarded part of The Queensland Waste to Biofutures (W2B) Fund to support the development of waste-to-biofutures projects in Australia's second-largest state. Gevo recently increased its footprint in India via a technology-licensing deal with bio-based technologies and engineering firm Praj Industries Ltd to commercialize low carbon SAF and renewable premium gasoline in the South Asian nation and neighboring countries. The company hopes to find customers in commercial aviation and the defense sector in India for its SAF product. It is currently working with the Indian Air Force on fuel tests.  Inflection points: Further news on renewables jet fuel and diesel adopters Progress in expansion of agri-energy plant at Luverne Advance SAF commercialization in South Asia More major capital financing expected in 2H 2021 What the broker says: In a note to clients on November 30, 2020, Noble Capital Markets increased its target price on Gevo to $2.50 per share, while maintaining its Outperform rating, following the company’s 122% stock-price surge so far in November that is “likely driven by hopes that some of the upcoming potential milestones will be announced shortly.” “We maintain our Outperform rating and believe the high risk/high reward profile remains attractive even after the surprising stock price run so far in November. Not only does the financial risk appear lower, the prospects for 2H2021 financial closing on at least the first project financing improves with the significant supply commitment from Trafigura. Additional supply commitments would bolster the project financing prospects,” the analysts at Noble Capital wrote. The brokerage firm pointed several potential milestones for Gevo over the next year: Paying off all or part of convertible debt of ~$13 million due late December 2020 Finalizing and acquiring rights to additional plant locations Identifying engineering firm performing the FEED work Expanding supply contract portfolio with new industry/financial partners Identifying project financing partners, including equity investors and debt financing Timing of process to select for construction manager Financial closing of the project financing that allows the initial construction/conversion project to start The analysts also noted that other large supply contracts are under discussion and the latest corporate presentation continues to indicate that up to $600 million of additional take-or-pay supply agreements are in negotiations; one involving renewable gasoline and one involving jet fuel. Noble Capital believes additional agreements would show that the interest in Gevo's renewable fuel concept is high and the addition of other industry partners would be positive. What the boss says: “We are focused on building our business for the long run. We continue to make and sell renewable premium gasoline and jet fuel. We’ve cut expenses, cut the burn. We are pleased to be working with Citigroup on our project financings. We are moving forward, and look forward to completing them,” CEO Patrick Gruber told investors in a recent update. Contact Sean at sean@proactiveinvestors.com