Is GEVO Stock The Future of Sustainable Aviation Fuel?
Video: A review of Gevo's fundamentals and recent news events.
Transcript
In this video, we’re going to review the stock Gevo, which currently trades at around a $500 million market cap. They’re poised to become a large producer of sustainable aviation fuel in the next few years. We’ll discuss the company’s fundamentals and the market at large.
So, to understand Gevo, we must first understand the sustainable aviation fuel market. SAF is a substitute for traditional jet fuel used to fuel commercial airplanes. Because the fuel is produced through the usage of ethanol or other non-petroleum based means, it has a significantly lower emissions profile.
Because battery or hydrogen-powered aviation isn’t viable and probably won’t be for some time, if ever, that leaves SAF as the only scalable alternative for avoiding CO2 emissions in this industry.
As things currently stand, SAF tends to trade around double the price per gallon of traditional jet fuel. So, why would airlines go out of their way to use a drastically more expensive fuel?
Well, many of the airlines have made climate commitments over the next few decades to lower their carbon footprints, but beyond that… the airline industry is the only sector with an industry-specific emissions reduction market. That market is called CORSIA.
CORSIA stands for the Carbon Offsetting and Reduction Scheme for International Aviation.
The International Civil Aviation Organization (or ICAO) enforces the rules behind CORSIA, which is separated into three phases.
A pilot phase was conducted from 2021 to 2023, and since January 1st, 2024, we’ve entered the first phase, which runs from 2024 to 2026. These two phases were voluntary, meaning that participants needed to volunteer to offset their emissions.
The second phase runs from 2027 to 2035, and that will be mandatory for all participants except for small islands and less developed countries.
As things stand now, CORSIA has 126 participating countries, 54 of which are small islands or developing nations. So, by 2027, 72 countries would be required to have airlines operating in their countries offset their emissions.
Barring any major technological innovations, there are only two ways that an airline can offset its carbon emissions. Carbon credits or SAF.
The best pricing data we have for CORSIA eligible carbon credits is from Abaxx Technologies’ commodity exchange, which is a stock that I own. They have a CORSIA Phase One futures contract that trades for around $25 right now. So, that means those carbon credits are priced at $25 per ton of CO2.
By contrast, SAF costs at least a few hundred dollars per metric ton of CO2. Gevo is estimating the SAF they produce will cost around $450 per metric ton. So, if the airlines can, they’re probably going to opt for buying carbon credits.
But with that said, the supply of carbon credits eligible for CORSIA is pretty low. The criteria is pretty stringent, so the main way companies are going to offset their emissions here will probably be through SAF. Those prices will probably converge over time anyway, as companies buy up as many carbon credits as they can, and conversely, technology improving will lower SAF pricing over time…
With that explanation out of the way, we know why these airlines would decide to buy SAF. It’s because they’re going to be obligated to do so over the next decade and beyond.
This puts potential suppliers like Gevo in a great position since airlines will essentially be forced to buy SAF while supply is pretty limited right now. With that said, there are plenty of companies working on scaling this technology… just in this summary from Google AI alone.
Now, diving into Gevo’s fundamentals here, most of this video is going to be focused on SAF since that is going to be their main market vertical. But Gevo is also involved in renewable natural gas, specialty chemicals and plastics, as well as carbon tracking in the supply chain.
So briefly going over each of these areas…
In RNG they have a plant operational in northwest Iowa that they completed in 2022. That RNG they’re producing is sold into the California Low Carbon Fuel Standard program in collaboration with BP.
Most of the revenue here will come from environmental LCFS carbon credits and potential tax credits from the government, not from selling the gas itself. So, there is potential for revenues to increase substantially from this plant, but it’s largely out of Gevo’s control. In Q2, revenues from the plant were just $4.3 million, with 4.2 of that coming from LCFS credits.
Those LCFS prices have collapsed pretty substantially since the plant went into operation.
Next up is Chemicals and Plastics. The United States recently granted Gevo their patent for a process to convert ethanol straight to higher carbon olefins that can be used to produce SAF for airplanes. Essentially meaning that Gevo can create SAF in less steps than the traditional process, which would reduce the cost of the fuel.
In addition to that, this process can be used to make chemicals like propylene in a more sustainable way, which can be used to create plastics. Gevo has licensed out this technology to LG Chem, for them to further develop the process on the chemicals and plastics side.
Lastly, Gevo has developed a carbon tracking SaaS company called Verity. This distributed ledger technology is designed to track the carbon emissions from end to end of the supply chain. This allows companies to better define the carbon intensity of their businesses and their products, particularly in the agricultural industry.
So, these various business lines can help reduce Gevo’s cash burn as they work on scaling their business, but they probably won’t be significant profit drivers.
Going back to this company’s focus, SAF, Gevo has tested its technology at two separate demo facilities.
In Luverne, Minnesota, Gevo bought Agri-Energy’s ethanol plant and converted it to create isobutanol using Gevo’s proprietary technology. And that plant has been operating since May 2012. So, that facility has been used to create isobutanol, among other products. The Luverne facility is currently on care and maintenance as they’re working on building a commercial plant.
Additionally, at their second facility in Silsbee Texas that was operated in cooperation with South Hampton Resources, Gevo successfully tested their technology to convert that isobutanol into SAF, isooctane, isooctene, and para-xylene. That plant produced 100,000 gallons per year of SAF.
So, through these operations Gevo has proven they can convert food feedstocks like corn into isobutanol, which can then be turned into SAF.
Now, their first commercial facility is going to be built in Lake Preston, South Dakota. That will be the Net-Zero 1 plant, which will target the production of net-zero emission SAF, animal feed, renewable diesel, and bio-naphtha. This will be done with direct wind and green hydrogen power generation on site, carbon capture and storage, as well as carbon traceability via their Verity carbon tracking platform.
It’s worth noting the company originally planned to build this facility as early as 2024, but it’s already been delayed for two years now. Most likely being built in 24 to 36 months… which will put them in 2027 or 2028 for a completion date. They’re waiting on receiving a $950 million loan from the DOE to build the plant, which they seem confident they’ll receive in the next few months.
If they can receive that loan, that should allow them to avoid any dilution as far as financing is concerned hopefully. The plant was expected to cost around $700 to $800 million to build. So, that loan is pretty crucial here.
Gevo hasn’t included any projections for the economics of the plant in their recent presentations, I feel like that’s on purpose since there’s quite a few unknowns:
Where the funding for the plant will come from
How many government subsidies or tax credits they’ll receive
Among other factors.
But in their Q3 2022 financial results they did note that their 375 million dollars per year of SAF supply agreements at the time would approximately generate them $2.3 billion per year in revenue and $1.5 billion in EBITDA.
These are old projections, but scaling that down to the 65 million gallons per year that Net-Zero 1 will produce… that would equate to around $400 million in revenue and $260 million in EBITDA. I don’t have any updated numbers on that, I’m not going to go through every conference call they’ve had to see if they mention the economics anywhere when this video is taking long enough to make as it is.
Gevo has contracted demand for 350 million gallons per year of SAF, which is more than 5x the expected capacity of Net-Zero 1. This is in agreements with many of the major airlines. So, there is certainly no shortage of demand for their product. That won’t be an issue.
Another thing to consider is that this plant is going to be an ethanol to jet plant… not an isobutanol plant, which is the main technology that Gevo has been testing.
As far as I’m aware, the technology that Gevo is using in this facility is actually being licensed from Axens, who have been involved in scaling other ETJ plants already. That actually derisks the plant since the technology has already been scaled in the past. If Gevo was scaling up its own technology in its first plant, then that would be more risky since it would be a pretty novel technology.
Synergistically, Gevo recently acquired the assets of Red Trail Energy in North Dakota for $210 million in an all cash deal. This provides Gevo with a source for a portion of the ethanol it’ll use for the Net-Zero 1 plant. It also has carbon capture assets, and expects to turn Gevo adjusted EBITDA positive in 2025.
That’ll help the company reduce cash burn, but as the late Charlie Munger said, adjusted EBITDA is another term for bullshit earnings. So, of course, the main focus of investors is really on the progression of Net-Zero 1.
As of June 30th, Gevo had $245 million in cash and another $68 million in restricted cash. So, at this point the company is probably at around $100 million in cash or less, including the recent $17 million they netted from inflation reduction act tax credits from their RNG operations.
So, they have to be pretty confident they’re going to get that DOE loan if they want to avoid dilution here. The cash situation is starting to get tight.
They don’t have much debt, only $25 million in current liabilities and $95 million in total.
There isn’t much point to looking at their operations statement from Q2 right now since it’ll change dramatically with the construction of Net-Zero 1 and that ethanol acquisition. But they’re currently burning around $20 million per quarter.
So, moving onto the management team, they were about as experienced as you could hope for in what was a pretty novel industry when they started out in the mid 2000s.
Although there has been plenty of churn since this company has been around since 2005.
Patrick Gruber, the CEO, has been involved at Gevo since 2007. Both he and Chris Ryan, the COO, previously worked at Cargill before co-founding NatureWorks, which was a joint venture between Cargill and Dow Chemical. They held a variety of roles, working their way up to executive positions there.
At NatureWorks, they were involved in the development and commercialization of a new bio-based polymer technology from lab-scale production to the completion of a $300 million commercial facility. So, that is prior experience of going through a similar process to what they’re doing with the Net-Zero 1 project now
Gevo’s Chief Innovation Officer held several VP executive positions at Archer Daniels Midland.
And Damien Perriman, the Chief Business Development Officer was the head of the specialty products business at Genomatica for 13 years, scaling production and sales of various personal care and cosmetics items. He also has some experience working for Dow Chemical.
So, a good amount of experience in the chemicals and agriculture industries.
In total, management owns about 5% of Gevo, so there are some decent insider ownership levels as well.
Given that little to go off of in terms of financial projections, it’s difficult to say what valuation Gevo might get in the future…
With that said, Gevo did get Peak Value IP to assess the value of Gevo’s intellectual property back in 2020, and they found that their patents were valued at $412 million.
Since their market cap is only around $500 million right now, you’re essentially getting everything else the company has for free. It’s upside potential and the existing equipment, plants, and other assets.
Because Gevo has had funding issues and delays with its first large-scale project, the company is trading at a pretty attractive valuation here. Most of the companies in the green investing industries can’t say the same.
While Gevo is probably in a better position than many of the companies I’ve reviewed on this channel, it’s still one I’m going to avoid for the time being.
It shares many of the same problems that the standard LNG, carbon capture, or nuclear developers have, among other industries.
Gevo’s first major project will hopefully be built in 2027, but will probably take longer than that. In the meantime, the stock is probably going to be pretty dead in the water. That’s an opportunity cost within itself.
And they’re reliant on debt financing that might or might not fall into place, and if there’s project delays then the financial situation can get dicey fast.
There are several licensing opportunities with their existing patent portfolio with isobutanol and other chemical or plastic verticals… several asset light business lines, so it’s an interesting company. But I probably wouldn’t be a buyer unless they found themselves at a similar valuation in a few years as development had progressed.
I don’t consider every capital-intensive company immediately untouchable… every situation is different, but most of them are tough to justify.
It’s not that these large-scale projects are destined to fail, but our goal as investors should be to maximize our chances of success and our upside, while minimizing the chances of failure.
The problem with micro and small cap companies building out large scale projects is that it often doesn’t take much going wrong for a company to end up in a bad situation, especially financially. The upside is often there, but the downside can be significant. Which is an easy way to lose all of your investment. That’s happened to many investors in the electric vehicle industry, for example.
This isn’t to say that capital-light businesses are guaranteed to succeed either, but it’s obvious how companies that don’t require hundreds of millions, or even billions of dollars of capex investment will have a better likelihood of succeeding. But anyway, I’ll hold off on Gevo, at least for the next few years.