Gevo, the panicked investor, and the aviation fuels opportunity

September 30, 2011 |

30 billion gallons of aviation fuels demand, and Gevo’s got a technology to produce it, using retrofitted ethanol plants, and a path to fueling planes at parity with conventional jet fuel prices. Game-changer?

When it comes to Gevo, the investing public can be safely divided, like Caesar’s Gaul, into three parts. There is the broad collection of “don’t knows” who generally have avoided clean tech stocks as a too-new, too-broad category that they don’t yet understand.

Then there’s the group of investors who bought in when Gevo was flying high in the immediate post-IPO after market, and are wondering why the stock has cratered from a high of $26 to under $6 today, when nothing has changed in the company’s outlook except that they are moving farther along in executing the plan and de-risking the company.

(It’s not dissimilar to the feeling that Americans have when traveling to Europe after, say, a ten-year absence and are amazed that the dollar buys so little any more.)

Finally, there are the group of investors who generally buy stocks like Gevo on a levelized program, investing a fixed amount each month, and are wondering why the stock is so cheap, when nothing has changed in the company’s outlook except that they are moving farther along in executing the plan and de-risking the company.

(It’s not dissimilar to the feeling that Europeans have when traveling to the US after, say, a ten-year absence and wonder why the euro buys so much these days.)

Why are investors panicking, generally, on the new class of advanced biofuels stocks?  Impossible to say, except to the extent that a general feeling of investor dread has settled over the market, prompting a pull-back from newfangled technologies.

For all classes of investors, and for the community of stakeholders surrounding the company, there is an interesting phenomenon that the Digest has been watching, and that is the opportunities with alcohol-based jet fuels.

If it’s a distant opportunity for Gevo, it’s simply because the company has, essentially, sold out its off take from its first two plants into the lucrative isobutanol market. Taking advantage of the new opportunities in what are called ATJ fuels will take come more capital investment in retrofitting corn ethanol plants.

But here’s the thing.

The renewable jet fuel long-term opportunity, and short-term problem

There’s the aviation industry – not the only sector in the world crying out for affordable, sustainable biofuels, but certainly the emerging sector whose needs are the best available combination of acute, aggregated and organized.

The aviation industry has stiff emissions-reducing goals, no commercial-scale solar planes on the horizon, weak balance sheets that can’t afford more expensive fuels, customers who believe in sustainability, and an existing fleet that can run on two types of fuels: fossil fuels, which cost too much and have too many emissions; first-generation aviation biofuels, which are generally made from oil stocks such as algae, jatropha, salicornia or camelina and are not yet available at scale.

Jatropha is recovering slowly from the failures of jatropha 1.0, but jatropha 2.0 and crops like camelina will take some time to appear at scale. For one thing, there’s the need, for example, to bulk up seed for camelina as well as contract with the growers. With jatropha, it takes several years to mature the small jatropha tree into an oilseed producing monster.

So, the HRJ fuels are coming, and they work great. But airlines – not to mention the US Navy and Air Force, would like fuels in volume, sooner. In fact, if sustainable biofuels were available at parity with conventional fuels and at scale today, there’s a ready market of 30 billion gallons ready for quick off take arrangements.

At $2.95 per gallon (today), that’s a new market of $88 billion, which is not nothing even in terms of the massive scale of the global energy business.

The 2010s – glory years for alcohol jet fuels?

What’s an airline to do in the years while HRJ aviation fuels are scaling up?

Well, that’s where Gevo and ATJ fuels come in.

The fuels are expected to be certified by around 2013 – and testing is now just getting underway for that. In fact, the Air Force contracted this month with Gevo to supply a quantity of renewable ATJ fuel for testing purposes. The contract, worth a possible total of $600,000, provides that Gevo will supply the USAF with up to 11,000 gallons of ‘alcohol-to-jet’ (ATJ) based jet fuel, which will be used to support engine testing and a feasibility flight demonstration using an A-10 aircraft. The fuel will be shipped to Wright-Patterson Air Force Base, where the Air Force will finish lab testing and begin engine testing. DLA has the option to order up to an additional 4,000 gallons at the end of the contract.

And it is participating (to the tune of $5 million) in the windfall from a USDA grant to the Northwest Advanced Renewables Alliance (NARA), a consortium led by Washington State University (WSU), focused on the development of biojet fuel from woody biomass and forest product residues.

The ATJ fuel is scheduled to be produced from isobutanol at Gevo’s hydrocarbon processing demonstration plant in Silsbee, Texas, in partnership with South Hampton Resources. The company plans to begin shipping product to the USAF in the first quarter of 2012.

Gevo’s path to scale is fast. Its current feedstock of choice, corn starch, is already efficiently aggregated. What Gevo does is acquire an existing ethanol plant (or make a suitable JV arrangement) retrofit the plant over a nine-month period in which the plant is completely offline for around a month, for a cost of somewhere between 44 and 90 cents per gallon of ethanol capacity.

A 100 million gallon ethanol plant will produce 76 million gallons of isobutanol, and to that is added a standard oil refining industry unit (well, custom-designed to fit an isobutanol plant, but standard in its process), which converts isobutanol, in a few steps, to a renewable jet fuel.

Whether Gevo will ship ethanol to Texas for upgrading to jet fuel on a consolidated basis, or upgrade on site – that remains to be seen. With the upgrade cost at around the cost of a biobutanol retrofit, the Digest expects that ultimately Gevo would retrofit large-scale biobutanol plants, if it has sufficient contracts.

Doing the math

Gevo’s current math? Based on the guidance they are giving regarding their costs, they are within “a buck or two today” of the current renewable jet fuel prices, and believe that the RIN values will cover the difference by the time they are bringing certified jet fuels to market.

You see, airlines are not obligated parties under the Renewable Fuel Standard. So, when Gevo produces a transport fuel (and, in the process, generate a RIN credit for every gallon), that RIN can be separated from the wet gallon and sold in the open market (to, say, an obligated transportation fuel blender).

So where does that leave us? Well, we look at the US ethanol fleet with its 13-14 billion gallons of capacity. Should there be a sudden flood of capital into Gevo’s coffers, there’s no theoretical reason why US ethanol production could not be converted over a year or two to the production of renewable jet fuel. The current fleet could produce 10.6 billion gallons of isobutanol – perhaps 9 billion gallons of jet fuel. That’s scale, in this decade, at everyday low (i.e. parity) prices, and a $30-ish billion new market sector for whomever takes it on.

And now, sports fans, the chilling barriers

There are barriers, for sure.

The most obvious is that current ethanol plant owners have, er, other plans besides selling out to the Gang from Denver (though, existing ethanol producers, generally, do not have the technology to take on this opportunity themselves. But they could take it on with, say, a license for the Butamax technology).

And there’s the question of how many plants can be converted at one time. Not to mention that question of the $6B-$14B or so in cash needed to make such a conversion. Plus, there are the tempting opportunities that Gevo has to saturate the higher-margin isobutanol and renewable chemicals market, first.

Not to mention the competition that might be posed by, say, Butamax, which has the same retrofit model and also produces isobutanol that can also be upgraded to renewable jet fuel. Or companies like ZeaChem, Byogy, Terrabon and LanzaTech that are entering the field and see big opportunities as they build greenfield capacity using MSW, poplar or steel mill off-gases.

Not to mention the certification path, the uncertainties over the price of corn starch, the opportunities for companies like Gevo to move from starch to cellulosic fermentation over the remainder of the decade (which is their path, but will take more time), competing uses for ethanol, and the question of the extent to which the public will embrace a jet fuel made from cattle and pig feed in this era of “food vs fuel”.

So, look not for a gold rush, but situational expansion.

The panicked investor

Still, it explains why the leveled buyers are sitting on a large mountain of happy when they look at Gevo’s stock price. They think they are getting a steal, and hoping to buy a lot more from panicked investors who are not exactly sure why they bought Gevo in the first place, and are prepared to dump the stock at under $6. Like some portion of the 566,000 shares that changed hands yesterday.

Reminding us of the old market saw that the real players are those who know how to make crushing amounts of money in a down market. Stirring a panic among investors in stocks like Solazyme, Gevo, Codexis and Amyris may well be the new strategy.

What do you think?

Note: The author, Jim Lane, reluctantly, sadly, and against the advice of his loved ones, does not, for reasons of editorial integrity, invest in renewable energy stocks.

Category: Fuels

Thank you for visting the Digest.