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 it is doing:

Gevo kicked off 2021 by announcing to shareholders and other potential investors that it has about $535 million in cash and no significant debt.

The money will help the company launch its Net Zero Projects to produce energy-dense liquid hydrocarbons using renewable energy and Gevo’s proprietary technology. 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 of liquid hydrocarbons (jet fuel and renewable gasoline) that when burned, should have a “net-zero” greenhouse gas footprint. In addition, the Net-Zero 1 plant is expected to produce at least 350,000,000 lbs per year of high-protein animal feed. 

Gevo, which is working with Citigroup, said preliminary capital estimates for Net-Zero 1 are $700 million-$800 million (including on-site renewable energy generation). The company is in the process of completing front-end engineering and project planning to determine capital costs for Net-Zero 1 with more precision.

In addition, the company plans to begin the construction of its first RNG (renewable natural gas) project in 2021. It will produce RNG by using anaerobic digesters to convert manure from dairy cows into RNG, with production expected to begin in 2022. Gevo plans to sell most of the gas to the RNG market in California and use some of the bio-gas generated from this project at its renewable hydrocarbons plant, for example, at Lake Preston. 

For its first major deal of the new year, Gevo in February struck an expanded fuel sales agreement with Scandinavian Airlines System (SAS). Under the deal now valued at $100 million, SAS will increase its minimum purchase obligation for Gevo’s sustainable aviation fuel (SAF) by 5 million gallons annually.  Gevo expects to supply SAS with SAF starting in 2024, from its Net-Zero 2 Project for the use and distribution in low carbon fuel regions of the US. Gevo and SAS signed the original agreement in October 2019. 

In addition to SAS, Gevo has closed several other fuel-supply contracts – with Delta Air Lines Inc as well as a deal to supply its SAF to the aviation industry in the Pacific Northwest, by way of its customer and global fuel supplier, Avfuel Corporation.

Gevo also won recently 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 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 SAF, starting in 2023. Trafigura hopes to supply SAF to both US and international customers interested in low-carbon jet fuel.

Looking outside the US, 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.

And 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 is currently working with the Indian Air Force on fuel tests.

What the broker says:

Analysts at Noble Capital on February 23 reiterated their ‘Outperform’ rating on Gevo, a day after Scandinavian Airlines agreed to purchase more SAF from Gevo. 

The Noble analysts also issued a $16 price target on Gevo’s stock, which trades around $11 a share on the Nasdaq. 

“We believe the high risk/high reward profile remains attractive even though profit-taking after strong stock price moves of 323% in 4Q2020 and 165% this year should be expected,” the analysts wrote.

“Not only is the balance sheet debt-free, financial risk has moderated, the FEED engineering firm has been identified, and the majority of equity for the first two Net Zero plants has been secured. Other milestones/catalysts are on the horizon, and the prospects for 1H2022 financial closing on the first two Net-Zero plants have improved.”

Noble’s analysts noted other potential bullish catalysts — friendly green energy legislation, higher carbon prices, and a heightened focus on ESG (environmental, social and governance) investing “where GEVO screens well.”

Inflection points:

• Begin construction on first RNG project in 2021
• Expect RNG production to begin in 2022
• Anticipate financing on Net-Zero 1 project to close in 2H 2022
• Advance SAF commercialization in South Asia

What the boss says:

“With this amendment, SAS has significantly increased the amount of SAF that it is willing to purchase from Gevo,” CEO Patrick Gruber said in the recent SAS contract statement. “This amendment is evidence of the strong and growing demand for Gevo’s renewable hydrocarbon products. We expect to ink additional offtake agreements later this year.”

Gruber added: “SAS have a vision and plan that they are executing, even in spite of the global pandemic. This additional volume will help Gevo grow its business and hopefully accelerate making real Gevo’s Net-Zero 2 plant.” 

Contact the author: [email protected]

Follow him on Twitter @PatrickMGraham

Story by ProactiveInvestors