Company Overview
Gevo, Inc. (NASDAQ: GEVO) is a renewable chemicals and next generation biofuels company headquartered in Englewood, Colorado. The company’s technology combines synthetic biology, metabolic engineering, chemistry, and chemical engineering to produce isobutanol, ethanol, and related products from renewable feedstocks. The company also provides retrofitting services that allow existing ethanol plants to produce isobutanol.
Isobutanol can be sold as a specialty chemical for use in solvents, paints, coatings, or as a value-added gasoline blendstock. Furthermore, isobutanol can be used in the production of hydrocarbon fuels such as isooctane, isooctene, and alcohol-to-jet-fuel (ATJ). Gevo’s ethanol and isobutanol production facility (Agri-Energy Facility) is located in Luverne, Minnesota, and the company’s biorefinery for hydrocarbon products is located in Silsbee, Texas.
The company has two principal operating segments, Gevo, Inc. and Gevo Development / Agri-Energy. The Gevo, Inc. segment is responsible for research development activities, the production and sale of biojet fuel, and retrofitting. The Gevo, Inc. segment also develops, maintains, and protects the company’s intellectual property portfolio and provides general corporate oversight services. The Gevo Development / Agri-Energy segment is responsible for the operation of the Agri-Energy Facility and the production of ethanol and isobutanol.
Products
Gevo’s products consist primarily of ethanol, isobutanol, and various derivatives thereof. The company’s production process and end-markets are summarized below:
Source: Company Website
Gevo’s proprietary production process uses yeast biocatalysts to transform natural feedstocks such as grains, sugar cane, and molasses into isobutanol. Without additional modification, isobutanol has several direct applications:
- Gasoline Blendstocks: Fuel-grade isobutanol may be used as a high-energy content gasoline blendstock and oxygenate. Due to its low water solubility, isobutanol is particularly suitable for speciality fuels for watercraft, off-road vehicles, and small engines.
- Specialty Chemicals: Isobutanol may also be used as a solvent and chemical intermediary. High-purity and chemical-grade isobutanol provides a cost-effective and environmentally sensitive alternative to petroleum-based products.
In addition to use as a gasoline blendstock and a specialty chemical, isobutanol can be dehydrated to produce butenes which can be converted into various hydrocarbon products:
- Jet Fuel: Gevo has already successfully converted isobutanol into jet fuel blendstock, also known as alcohol to jet fuel (ATJ), which can be used as a blending component in standard Jet A-1 for commercial airline use. The company’s clients include Alaska Airlines, the U.S. Air Force, the U.S. Army, and the U.S. Navy.
- Other Hydrocarbon Fuels: Isobutanol may also be converted into isooctane, isooctene, and gasoline, which can directly replace petroleum-based hydrocarbon fuels without compromising performance. Using hydrocarbon fuels made from renewables allows Gevo’s customers to meet regulatory requirements for renewable content.
- Para-Xylene (PX): Gevo has also used isobutanol to create PX, polyester, and its derivatives, which are used in the beverage, food packaging, textile, and fibers markets.
- Butenes: Due to a reduction in the volume of available butenes, there is a potential market opportunity for isobutanol in their production. Isobutanol can be sold to isobutylene and n-butene chemical users for conversion into lubricants, methyl methacrylate, and rubber.
Gevo’s other potential sources of revenue include retrofitting existing ethanol production plants and licensing its proprietary Gevo Integrated Fermentation Technology (GIFT) platform for the production of isobutanol. While Gevo intends to maintain (and potentially expand) isobutanol production at its Luverne facility, the company expects that licensing is expected to be the key driver of isobutanol production growth going forward. The GIFT platform was designed to be compatible with all existing ethanol production facilities, which produce an aggregate 25 billion gallons per year.
Market Overview
There are many potential end-users for isobutanol and its associated products. The estimated market opportunity for each application, as determined by the company, is illustrated below:
Source: Company Website
The most compelling market opportunities for isobutanol are jet fuel, on-road gasoline blendstock, and PX, with annual volumes of 80 billion, 40 billion, and 17.5 billion respectively. However, it should be noted that there are well-established competitors in each area such as Shell and Exxon-Mobil. Furthermore, the company faces direct competition in renewable isobutanol production from Butamax.
Recent Developments
On April 20, 2017, Gevo announced that it had reached an agreement to exchange $16.5 million in senior secured convertible notes due June 23, 2017. The lender, WB Gevo, Ltd. (Whitebox), has agreed to exchange the 2017 notes for newly-created senior secured convertible notes due March 15, 2020.
The 2020 notes accrue interest at a rate of 12 percent per annum, with 10 percent payable in cash and two percent as payable-in-kind interest (i.e. interest that increases the principal balance of the notes). The 2020 notes are convertible into shares of common stock at the lesser of $1.196 per share or a 15 percent premium to the closing price on the date of the closing of the exchange agreement.
This agreement resolves a major source of uncertainty for the company. The 2017 notes were previously due March 15, 2017, but Whitebox agreed to extend the maturity date to June 23, 2017 to allow for restructuring. By extending the maturity date of these obligations, Gevo should have additional flexibility to grow its operations.
Full-Year Earnings Review
Total revenue for the year ended December 31, 2016 decreased 10 percent to $27.2 million, driven by lower ethanol sales. Cost of goods decreased less, causing the company’s gross margin to decline to negative 36 percent. Operating expenses also declined from $31.9 million for the year ended December 31, 2015, to $24.0 million for the year ended December 31, 2016. This was primarily attributable to a $7.7 million decrease in selling, general, and administrative expenses. Overall, the company’s net loss for the year ended December 31, 2016, increased slightly to $37.2 million. Cash used in operations for the year ended December 31, 2016, decreased 27 percent to $20.5 million.
With respect to the balance sheet, Gevo listed current assets of $33.3 million (including a cash balance of $27.9 million) and current liabilities of $34.7 million, yielding a working capital balance of negative $1.4 million. This is due primarily to the current portion of the 2017 notes which was listed at $25.8 million. As noted above, $16.5 million worth of principal was extended to March 15, 2020. Therefore, working capital is now likely positive. Gevo also disclosed in its 10-K that it made a $9.6 million prepayment on the 2017 notes in February 2017.
Stock Influences
- Changes in isobutanol production capacity;
- Changes in the company’s profitability;
- Significant new agreements with customers and/or suppliers; and
- Changes to the company’s capital structure.
Risk Factors
- The company has significant debt financing, and may require additional debt financing in the future which could hamper the company’s operations;
- The company has generated significant net losses in recent years, and may never achieve profitability;
- The company is subject to fluctuations in the price of corn and other commodities;
- The company’s primary growth strategy is retrofitting existing ethanol plants to produce isobutanol. However, the company may not be able to find sufficient development partners to execute this strategy.
Stock Performance
As of April 21, 2017, shares of Gevo closed at $1.05, declining seven percent for the day and yielding a market capitalization of $14.5 million. In the past year, the shares have traded as high as $27.20, but traded as low as $0.92 last month. As shown above the share price has followed a generally negative trend in the past 12 months, declining more than 80 percent. Over the same period, Gevo’s annualized daily volatility was 147 percent. Daily trading volume in the past year has been volatile, ranging from 50,000 to 7,500,000 shares with an average of 650,000.
Summary
Gevo’s recent agreement with its primary lender, Whitebox, brings much-needed certainty to the company’s balance sheet. The newly-issued notes should provide Gevo with the flexibility to continue growing its operations. While isobutanol is a compelling product with many potential applications, the company is currently generating negative earnings and cash flow, and it remains unclear whether the company will achieve profitability.
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