This week, Gevo (GEVO) reported its Q2 financial results, reaffirmed its guidance on production cost targets, lengthened out the timing on its production targets, and placed all the near-term chips on marine biofuels.
Market reaction was generally pretty hateful, with the stock dropping 33% today. Investors seem to have translating Gevo’s messaging thus:
Gevo says: We’re staking our near-term prospects on marine biofuels.
Investors hear: We’re underwater.
Gevo says: Timing delay in our isobutanol gallonage, took longer to get the fixes implemented, we’ll make up on the back side. May need more equipment.
Investors hear: Dilutive cap raise coming. Women and children into the lifeboats.
Seriously, 33%? You’d think that Gevo had announced that they burnt the Luverne plant to the ground.
Is Gevo rising from Davy Jones’ locker, or wrapped in fiscal chains and headed down inexorably into a watery grave. Let’s take the news, in order.
The financial results
This week, the Colorado-based firm reported a Q2 operational loss of $5.5M on revenues of $8.1M, compared to a $6.5M loss on sales of $8.89 for Q2 2015. Revenues dropped primarily with falling ethanol and distillers grains prices. Hydrocarbon revenues were $700K for the quarter, representing sales of jet fuel, isooctane and isooctene made at its plant in Silsbee, Texas.
Perhaps most importantly, Gevo affirmed that they remain on track to reach a production cost of $3.00-$3.50 per gallon for isobutanol by the end of the year aso long as corn doesn’t get more expensive. They expect to have a net market price of $3.50-$4.00 per gallon for isobutanol, so long as distiller’s grains do not lose value.
Bottom line there, isobutanol production will be somewhere between breakeven and a 33% margin by year-end.
The workload has been time-consuming to get there, this year.Additional distillation system equipment that was ordered after the March 2016 re-start, has pushed back the production ramp-up. And, the company still needs to optimize further and will continue those efforts into 2017.
Production rate, titre and yield
Good news for those who follow fermentation rate, titre and yield. Gevo says that the fermentation process is working well, and it has surpassed, on at least one production run, it’s 18,000-20,000 gallons per batch target, hitting just north of 20K gallons.
With the delayed ramp-up, Gevo says it will be able to produce 500K-650K gallons of isobutanol this year, and produced 80K gallons in Q2. Based on run-rate, the company expects to get a production capacity of 1.5 million gallons per year but said actual production levels will be lower until they have reached cost targets.
Interestingly, the company is signaling a shift of attention from “everything is about optimization” to “optimization plus capacity expansion.”
Let’s review that. Generally speaking, experts tell The Digest that an isobutanol plant should be able to yield about 80% of what an ethanol plant yields, in gallons. With one production train out of four at the 19M gallon Luverne facility devoted to isobutanol, the capacity for isobutanol, at a theoretical level, would be somewhere in the 3.5M gallon range, per year. If the industry’s math is right, there’s good room for optimization and expansion, still.
Some of that will depend on Gevo finding good markets for its fuels. Let’s move to that.
Alcohol-to-jet. The market that attracts the most attention right now is alcohol-to-jet,. When Alaska Airlines successfull demonstrated Gevo’s fuels in June with two flights originating in Seattle and flying to San Francisco International Airport and Ronald Reagan Washington National Airport, respectively Gevo’s stock shot up so quickly that the company was able to raise quite a bit of capital and cushion its cash position. The two Alaska Airlines flights utilized a 20 percent ATJ fuel blend.
With a cost of $3.00-$3.50 per gallon, however, Gevo’s ATJ is going to be purchased in very small quantities as a feedstock for hydrocarbon jet fuel production. It’ll be a showcase fuel, for the most part, we’re told. Producing from cellulosic sources will add something like $2.00 per gallon or more to the target price, because of credits available under the Renewable Fuel Standard. So, it’s significant that Gevo is working closely with the Northwest Advanced Renewables Alliance to produce isobutanol from cellulosic feedstocks, such as wood waste.
But as we have pointed out on that front here, the ATJ jet fuel market is going to be strangled by policies that offer two RINs for two gallons of ethanol but only one RIN for a resulting gallon of jet fuel. The path from isobutanol to jet doesn’t reduce the gallonage quite so drastically, but it’s still a factor.
Marine markets. Based strictly on costs and margin, the best bet for Gevo in the near-term, we’re told, are the marine markets. So it was big news in June that Gevo announced an agreement with Musket Corporation a fuel distribution division of Love’s and a conduit to the marine and off-road markets in the Southwest. Musket has taken delivery of its first railcar of isobutanol and is moving it through their distribution system.
Bottom line, boaters are not big fans of E10 ethanol blends because, for one, they can cause problems with fiberglass-based components found in older boats. Isobutanol blends offer compliance for the fuel blender with the Renewable Fuel Standard, and happier customers. We looked at the economics of this market and saw a potential value of $4.75 per gallon in this market, here.
The chemicals options
Let’s not forget that Gevo also produces ethanol in fact, 95% of its production in Q2 was that molecule. The biggest news there is an agreement with Clariant Corp to develop catalysts to enable Gevo’s Ethanol-To-Olefins technology.
This would be a path to tailored mixes of propylene, isobutylene and hydrogen, which are valuable as standalone molecules, or as feedstocks to produce downstream derivative products such as diesel fuel, chemical intermediates, and polymers. It’s early days the key will be the catalyst, but certainly thee are premium markets.
We’ve saved perhaps the best news for last. Gevo’s shored up its cash position, mightily. Five months ago, it was mooting a sale of the company owing to liquidity concerns.
Now, it’s been raising money by diluting shareholders, essentially, which is sub-optimal for the shareholders but a lifesaver for the company,. One industry expert told us that, had Gevo not gone public and given itself the opportunity to raise cash through dilution, it would have gone out of business or been sold. The company raised $9.5M in s share offering in June, $10.8M from exercise of warrants, $3.5M in a share offering in April and has $22M in the bank.
It’s burn rate target by year-end is $3.5-$4.5 million. Leaving Gevo with roughly 15 months of runway, based on its cash position today. Much, much better.
The Bottom Line
Gevo has to hit its targets, and there are a bunch of them. Rate, titre, yield, production cost, production volume, market price, burn rate. So, it’ll be busy in Boulder, Silsbee and Luverne this year, all right. But 2017 is shaping up to be a much prettier year for Gevo than perhaps any since 2012.
$1 per gallon margins on isobutanol production those take the company to breakeven on an EBITDA basis with roughly 14M gallons of production. Sooner, if the company picks up an R&D contract or two. That’s not entirely far down the track.