Gevo’s Gevolution

May 2, 2013 |

GevoHas Gevo whipped its problems, and whipped them good?

When a problem comes along, you must whip it
Before the cream sets out too long, you must whip it
When something’s goin’ wrong, you must whip it
Now whip it into shape
Shape it up, get straight
Go forward, move ahead
Try to detect it, it’s not too late
To whip it, whip it good.
Devo — “Whip It”

When last we took an in-depth look at Gevo, the company was beset by a swarm of motions, cross-motions and lawsuits in its long-running patent infringement drama, co-starring Butamax, “Bio’s Montagues and Capulets get it on, and on, and on“.

At the same time, Gevo had been forced by low yields induced by higher-than-desired levels of bacterial contamination in tis fermenters to switch back from isobutanol to ethanol production. Then, as the US drought caused corn prices to soar into the $8 range, Gevo all-but-halted production entirely as it improved its isobutanol process, shored up its cash position, and dealt with litigation.

The perfect storm of poor conditions in feedstock costs, processing yields and a cloudy picture on the “freedom to operate” front caused a number of investors to declare “there goes the neighborhood” and the stock has eventually run down into the sub-$2 range. Today, the company’s market cap is roughly the cost of acquiring and retrofitting its first commercial facility in Luverne, MN.

That was then, this is now.

The stock has not recovered much — but it’s remarkable the progress the company has made, all the same. Analysts are now expecting the company to bring its first production train up later this month with its improved isobutanol process, and moving towards full production on all four trains by year end.

Meanwhile, on the legal front, a Digest reader writes: “Gevo was very clear on their call last night that they had won on all counts and that Butamax had even greater legal risks.  I am sure Dupont disagrees, but the last time Dupont disagreed, they lost a $1 billion award to Monsanto.  And this is exactly the same legal team.”

Perhaps most remarkably, the company continues to enjoy strong support it continues to receive from key industry equity analysts at Piper Jaffray, Raymond James, and Canaccord Genuity — all of whom are rating the stock a buy. Piper Jaffray has a price target of $9 on the stock — more than five times its current value.

In a research note titled, “Less legal drain helps to regain (the focus on) the Train”, Canaccord Genuity analyst John Quealy writes: “While the Street continues to take a wait-and-see approach on the success of this speculative biorefinery business model, we find the technology and opportunity supporting a positive risk/reward long term.”

Looking at the legal front

Here’s what you need to know. Gevo has at this stage complete freedom to operate, and has been a consistent winner to date in the courts on patent infringement.

We asked a friend last week:

“From a legal strategy POV, why it is advantageous for a company like Butamax to sue now, before there is a product on the market?”

We heard back quickly.

“There is absolutely no reason to sue someone before they have a product on the market.  The reason you don’t sue someone before they have a product on the market is because there are no damages for you to recover.  The only reason to sue before there is a product on the market is to try to injure your competitor.  Butamax started this litigation fight in January 2011, years before Gevo could ever have a product on the market.”

Last word, we give to Piper Jaffray’s Ritzenthaler:

“Worst case scenario, in our view. Despite the negligible probability of a negative outcome for Gevo, a common inbound question is: what is the worst case scenario? We define a worst-case scenario as Gevo having to pay a royalty for use of some element of Butamax’s technology. If we assume an industry-standard licensing rate of 2% of revenues, our 2015 EBITDA estimate would be reduced by $25 million, resulting in a $12 stock using the same methodology – nearly 3x Monday’s closing price. In all reasonable likelihood, Gevo will emerge without any such strings attached.”

Looking at the production front

Cowen & Co’s Rob Stone writes, “Luverne is expected to begin limited production in one train in Q2, and be shipping by year end, with ramp pace hinged on corn/oil/isobutanol prices. The paraxylene pilot should also be operational by year end.

Raymond James’ Molchanov adds, “Finally, there is clarity. The plant is ready to start operating in single-train mode in May/June, and management made it clear that the entire facility (four fermenters and three GIFT systems) should be operational by year-end. We project full nameplate utilization (18 million gallons) by mid-2014.”

Looking at the financial front

In looking at the work-ups by the analysts, we see some different assumptions on timing, the expected price of isobutanol and the cost of inputs, but all analysts agree that a rapid expansion of revenues is expected throughout the 2013-15 period and beyond.

The consensus view? Revenues climbing from $14M this year to $99.4M in 2014, en route to $317.2M in 2014 — and analysts expect the company to reach break-even in 2015.

gevo-revs-050213

Looking at Gevo and Butamax’s relative progress

Butamax is inherently more opaque (as a private company), and comparisons are somewhat difficult to make. However, we understand that Butamax’s demo plant in Hull is about the same size as the demo plant Gevo did in Denver in 2008. Gevo has subsequently built a 1 Mgy demo plant in St. Joseph, MO and the 18 million gallon plant in Luverne.

By that measure, there’s some evidence that Gevo is something on the order of 1-2 years ahead of Butamax in commercialization — and Butamax has confirmed that it expects to go into commercial scale production some time next year.

On the customer front, both companies have signed up an impressive roster of plants for their early adopter conversion program. However, Gevo has a definitive deal for its Redfield, SD plant, whereas all the others for both companies are at this stage, so far as is publicly revealed, non-binding letters of intent.

In addition, Gevo has firm offtake agreements with SASOL and the US Air Force.  In addition, deals of a less definitive nature with Coca-Cola, Lanxess, Mansfield, Total and others.   All of which supports the view that Gevo is leading by a year or more.

The stakes

Well, there’s a lot on the line. From a fuel POV, we’ve pointed out before that a conversion of the US ethanol fleet to isobutanol is the surest low-cost, low-pain path towards meeting a target of 36 billion gallons of (ethanol equivalent) renewable fuel by 2022. The reason? Blend wall, baby. The US could use as much as 22.9 billion gallons of ethanol-equivalent by switching to isobutanol, before it reached a blend wall, owing to butanol’s higher energy density and blend restrictions.

By contrast, anything above 12 billion gallons of ethanol blended into the fuel supply in 2022 supposes moving beyond E10 blending to controversial business cases associated with E15 through E85.

The bottom line

devo-whipitOn all fronts, it appears that Gevo is, indeed, whipping its problems, and whipping them good.

Evolution or revolution — we’ll know more in a year, and certainly by 2015. But either way, there’s been significant Gevolution, and there’s a lot more reason to feel Gevolicious as we head towards the critical 2013-14 period for the company — when it will need to raise capital and move definitively and forever into commercial-scale production.

READ MORE from Raymond James analyst Pavel Molchanov, or Piper Jaffray analyst Mike Ritzenthaler.

 

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