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Due to the energy crisis in the midst of the energy transition towards a cleaner world, sustainable fuels are by no means cheap
The rise in oil and gas prices has been compounded by the war in Ukraine Airline tickets are more expensive, but that doesn’t mean that flying could become much cheaper if aviation could replace petrol and diesel with alternative and more environmentally friendly fuels, which are also quite expensive.
With traditional hydrocarbons in short supply in the market due to OPEC’s hostile policies, there is a demand to process additional sustainable aviation fuel [SAF] as part of the greenhouse gas emissions reduction and carbon neutrality targets, also creates strong upward pressure on the price of this commodity.
What SAF can do for the environment and how to benefit from the higher prices on the markets
SAF is made from renewable resources, but that doesn’t mean the chemistry is really different from traditional fossil jet fuel, it’s actually very similar. But when SAF is used in place of traditional jet fuel, there is a significant reduction in carbon emissions over the fuel’s life cycle.
To capitalize on strong momentum in renewable jet fuel, as has been the case for several months with rising oil and gas prices, greater exposure to this commodity through its US-listed suppliers could prove profitable if they have strong growth prospects .
Gevo, Inc. (NASDAQ:GEVO) is currently working on projects to supply the aerospace industry with renewable fossil fuels.
With the goal of becoming a leader within a few years, the company focuses on projects that allow for very rapid business expansion.
If the growth strategy is successful, the stock price could potentially improve exponentially from $2.65 per share [as of this writing], which makes the investment opportunity seem very interesting today, albeit with significant risk. Investors also need to be aware of this.
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The stock’s recent price action suggests that the shares are performing more like the stock market than the commodities the company will offer.
SPDR S&P 500 ETF Trust (SPY) is used as a benchmark for the US equity market and jet fuel futures for sustainable aviation fuel.
Search for Alpha/Symbol/GEVO
The stock is driven by an elevated market volatility ratio, as evidenced by a monthly beta of 3.22 over the past 5 years, meaning a decline in the S&P 500 should send Gevo’s share price plummeting.
To get out of this peril, the stock needs to make significant strides in its pipeline to transform itself into a SAF market leader so it can track the commodity it aims to deliver.
A failure of the Gevo growth project increases the likelihood that the stock price will fall to even lower levels than the current one as more bearish sentiment emerges in the short-term due to the recession caused by the dovish stance of central banks.
Acquiring shares in Gevo is therefore a risky investment, but if the growth into a leading SAF market player continues steadily, the impact on the value of the stake could be very positive.
The chances of success are not slim, as Gevo could gain a better negotiating position with its customers, which would facilitate the financing of the US SAF supplier’s renewable fuel projects.
Gevo will seek to capitalize on airlines’ hasty recourse to multi-year SAF deals to hedge against the expected sharp rise in SAF price due to specific geopolitical conditions and global environmental protection plans, as mentioned at the beginning of the article.
What is Gevo, Inc. doing in the Basic Materials specialty chemicals industry?
Gevo, Inc. is an Englewood, Colorado-based renewable fuels operator with a mission to support the commercialization of gasoline and jet/diesel fuel while eliminating carbon emissions and working with sustainable technologies to reduce greenhouse gas emissions.
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The company has taken a significant step towards a leading position in the SAF market by signing an agreement to sell financeable fuel with American Airlines (AAL) last July, which has been added to Gevo’s portfolio.
This is practically a milestone as US airline will receive Gevo’s annual shipment of 100 million gallons of SAF. With a main fleet of 865 aircraft operating passenger and cargo air transport services through major US hubs and relevant gateways for foreign partners, AAL is such a customer that it will be much easier for Gevo to obtain lender approvals for project financing.
Gevo’s portfolio is growing by more than 40% to currently 350 million gallons or more of SAF delivering to aircraft operators annually for a minimum period of 5 years.
The agreements can guarantee funds estimated at over $2 billion per year, or approximately $11 billion or more over the next 5 years, to support the increase of SAF’s renewable fuel production capacity to what is a leading worthy of the company.
Since early 2021, Gevo has been developing an energy-dense form of liquid hydrocarbons from renewable energy sources on 245 acres in South Dakota near Lake Preston. This project is called the Net Zero 1 Project.
The property is surrounded by abundant sustainable corn and a high demand for protein feed. It is served by rail transport and has significant potential for generating energy from renewable sources.
The Net-Zero 1 project expects net-zero emissions of CO2 and other greenhouse gases over the life of the company’s fuel production, including burning the fuel not only in an engine but also in the boiler.
Net-Zero 1 is expected to deliver more than 60 million gallons of jet fuel and gasoline from renewable sources each year.
Once Gevo has completed some initial engineering activities and project planning, it will be able to determine capital costs with greater accuracy than a preliminary Net-Zero 1 estimate of $700-$800 million.
Gevo says it has enough cash to fund Net-Zero entirely through equity investments, but other funding solutions are being explored. While the Net Zero Projects 2, 3 etc. in the region are being evaluated for acquisition and future development as the Company wins additional fundable contracts to supply SAF and hydrocarbon fuel.
Other projects include Gevo’s current commitments to increase production of renewable natural gas from dairy fertilizer. Renewable Natural Gas [RNG] is intended for the Californian market.
In addition to SAF and RNG, the sustainable projects also include renewable fuels and diesel as well as isooctane and isobutanol. Plus isobutylene, ethanol, animal feed and animal protein.
Thanks to a strategic alliance partnership with Axens North America, Inc., an international expert in hydrocarbon and alternative fuel management, Gevo can also participate in the commercial development of ethanol-to-jet and sustainable aviation fuel technologies.
Financial position: No real risk of major financial problems ahead
As of June 30, 2022, the balance sheet showed cash and short-term investments of $470 million, well above total debt of approximately $92 million.
Gevo has an Altman Z-Score of 2.77, meaning the company is still in a gray area from a financial perspective, but not far from safe areas. The score does not rule out the risk of bankruptcy, although it currently seems unlikely.
Stock Valuation: Stocks are also worth considering from a purely technical point of view
Shares are changing hands at $2.65 for a market cap of $646.88 million and a 52-week range of $2.18 to $7.93 as of this writing. This stock price doesn’t look expensive at all, as shown by some comparisons below with certain technical indicators.
Search for Alpha/Symbol/GEVO
The stock price is currently low compared to recent valuations as it is 50% below the 52-week range median of $5.055. Additionally, this stock price is well below the long-term trend of the 200-day moving average of $3.67, as illustrated in the chart below.
Search for Alpha/Symbol/GEVO
The 14-day relative strength index of 40.06 shows stocks are far from oversold levels despite falling sharply over the past year.
As such, the stock price still has room for another decline from last month’s peak of $3.72 on Aug. 12, just days after second-quarter 2022 results reported the deal with AAL. However, the stock price appears to have stabilized as it trades sideways in the $2.9-$2.5 interval.
So technically, the stock doesn’t look expensive and is worth considering given the strong upside potential, although the investment risk isn’t low.
Wall Street recommendation and price target
On Wall Street, the stock has 2 strong buy ratings and one buy rating.
Search for Alpha/Symbol/GEVO/Ratings/Sell-Side-Ratings
The average price target of $12.33 implies growth of 367% from current levels.
Search for Alpha/Symbol/GEVO/Ratings/Sell-Side-Ratings
Conclusion – Compared to the strong growth potential, the company offers an amazing investment opportunity
The company aims to become a leading provider of fossil fuels produced from renewable sources and with minimal environmental impact. The Company is expanding its contract portfolio for the future supply of sustainable jet fuel, building on the Company’s success in financing energy projects.
In a highly competitive scenario where energy guzzlers are putting significant pressure on sustainable fossil fuel demand to avoid the impact of rising prices, it will be interesting to see if Gevo’s bargaining position strengthens.
In this case, the impact on the stock price, mediated by a greater capacity to finance renewable energy projects, promises to be very positive. A recent agreement with American Airlines Inc. increases the success rate of financing projects aimed at commercializing renewable fuels in the airline industry.
Added to this are the direct effects on the share price from the increase in commodity prices on the futures markets.
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