AY-YI YI-YA AAAY, Gevo just can’t stop dancin’

So, feel the bioeconomy backbeat and let the music flow. AY-YI YI-YA AAAY, Gevo just can’t stop dancin’.

(Whoops, that was Becky G‘s Can’t Stop Dancin’, not Gevo’s.)

But there’s something so cool in that technology that we can’t take our eyes off the company and its progress, even though looking at the balance sheet can feel like watching a car crash in slow motion. This week, Gevo executed a series of moves including signing up its first direct customer for hydrocarbons for the proposed expansion of its Luverne, Minnesota plant. The highlight was a five-year offtake agreement with Haltermann Carless, ETS Racing Fuels and EOS.

Let’s look into that.

In the first phase, HCS will purchase $2-$3 million worth of isooctane produced at Gevo’s demonstration hydrocarbons plant located in Silsbee, Texas. This first phase is expected to commence in 2017 and would continue until completion of Gevo’s future, large-scale commercial hydrocarbon plant, which is likely to be built at Gevo’s existing isobutanol production facility located in Luverne, Minnesota.

In the second phase, HCS will agree to purchase approximately 300,000 to 400,000 gallons of isooctane per year under a five-year offtake agreement. Gevo would supply this isooctane from its first large-scale commercial hydrocarbons facility, which is likely to be built at Gevo’s existing isobutanol production facility located in Luverne, Minnesota.

The LOI establishes a selling price that is expected to allow for an appropriate level of return on the capital required to build out Gevo’s existing production facility in Luverne, Minnesota.

What’s HCS up to? They’ll market and distribute Gevo’s products globally on a non-exclusive basis, and the intent of the two companies is to establish further offtake arrangements for other products such as Gevo’s alcohol-to-jet fuel, also known as ATJ, and its isobutanol.

Reaction from the principals

“Haltermann Carless and HCS will serve as a major and substantial offtaker of Gevo’s renewable isooctane from Gevo’s demonstration plant and a vital offtaker from Gevo’s first commercial hydrocarbon plant.  Gevo and HCS agree to evaluate options to make the partnership most impactful and provide maximum credibility for Gevo’s next generation technology,” said Henrik Krüpper, Chief Sales Officer and member of the HCS Group GmbH’s Executive Committee.

“We are very pleased to establish this commercial relationship with HCS Holding, which is world renowned in the industry for the high quality of its performance fuels. We expect that they will be an important customer and partner for Gevo,” said Dr. Patrick Gruber, Gevo’s Chief Executive Officer.

“When we produce ATJ, we also produce other products such as isooctane and isooctene. We believe that a binding offtake agreement with HCS Holding is one more piece of the puzzle to validate our case for expanding the Luverne plant,” continued Dr. Gruber.

The Ritual Massacre of the Shareholders

And, there has also been the advanced bioeconomy’s annual ritual of the Reorganization of the Debt and the Massacre of the Shareholders.

These rituals are such a fixture nowadays at some of the most extravagantly interesting technology companies that you’d think there’d be a painting of the scene by Correggio hanging in the Louvre, adjacent to the Assumption of the Virgin.

Imagine: The frightened shareholders in the tumbrils, the sad but determined executive team with a hang-dog “well, we have to do something” look, the debt-holder looking like Calvin Coolidge saying “well, they hired the money, didn’t they?”, while somewhere in the background a thousand points of light representing flared natural gas in the Bakken dump wisps of CO2 into the heavens, and an Angel of the Lord weeps in heaven, holding a tablet inscribed “how renewable fuels could save the planet”.

Back to reality, Gevo raised $11.87 million in a 6.25 million share offering, and given that the company recently executed a 1-20 stock split, it’s like more than 120 million of the old shares suddenly flooded the market.

$1.78 million of the proceeds go immediately to Whitebox, a senior debt holder, and the company will be paying down another $8 million in debt between now and mid-June, which means that, at the end of the day, the entire share offering was essentially a means by which Gevo converted roughly $10 million in debt to equity, as it moves to reduce its current $28 million debt load with Whitebox and begin to assemble a balance sheet that supports expansion of the company’s Luverne plant to make ATJ renewable jet fuel and hydrocarbons for the likes of HCS.

The Gevo dilemma

Of course, the question that hangs over the enterprise is that — now that Gevo has developed a stable technology for making isobutanol and has proven it out at Luverne, and developed a demo-scale technology for making renewable hydrocarbons at its Silsbee, Texas plant — how is it going to finance a business plan? That is, finance the construction of an expanded plant that can make enough molecules at enough scale to a) make a difference in the world and b) rescue Gevo from the financial trough into which it has fallen.

Since money is unlikely to fall from the sky like manna from heaven, the likely solution is an offtaker who steps forward out of the desire for the product.

We suspect the inflection point might be renewable jet fuel.

After all, airlines have seen enough pressure on their sustainability goals from regulators, have seen enough shaking heads when it comes to the prospects for a solar plane any time in the next 50 years, and enough companies that can produce jet fuel decide to make renewable diesel. Airlines and the companies in their supply chain have figured out that there’s little hope that, on the numbers, anyone is going to be supplying jet fuel so long as the California Low Carbon Fuel Standard offers big support for diesel and nothing for jet.

And they have also calculated that the technology case for making $3 renewable jet fuel is pretty good right now, and it might be time to lock in some long-term supply contracts and some long-term feedstock contracts.

Yes, airlines are enjoying low fuel prices now, but someone has to ask how long the public will permit concentrated amounts of CO2 to be vented at 35,000 feet, where it can do some damage — without extracting a carbon fee for skyfill.

After all, everyone pays for landfill. Just try and dump some garbage without paying a municipal fee. Landfill fees didn’t arrive with the Garden of Eden — someone thought them up when the public got good and tired of free and open dumping.

When a carbon fee arrives for skyfill — and there’s no certainty of it but history argues that it will — those airlines that have access to renewable fuels will have such a built-in price advantage that it’s quite difficult to see how the other airlines will ever be able to afford new jets — which cause balance-sheet woes for very large enterprises, in their own right, enough to make the Reorganization of the Debt and the Massacre of the Shareholders a ritual that a lot of companies might want to send a representative to the Louvre one day to see.

Gevo’s sufferings might be a harbinger of the suffering meted out to a lot of companies who bet against the public appetite for making polluters pay, once they can really smell the garbage wafting across every nostril back in town.