Gevo, Inc. (NASDAQ:GEVO) is a growth-oriented, carbon abatement company on a mission to solve greenhouse gas emissions for sectors of the transportation industry that are not amenable to electrification or hydrogen. The company is focused on transforming renewable energy into energy-dense liquid hydrocarbons that can be used as renewable fuels, such as sustainable aviation fuel (SAF), with the potential to achieve a "net-zero" greenhouse gas (GHG) footprint.
Business Overview
Gevo's primary market focus is on SAF, as the company believes it is the most economically viable approach for carbon abatement. The company also has commercial opportunities for other renewable hydrocarbon products, such as renewable natural gas (RNG), hydrocarbons for gasoline blendstocks and diesel fuel, and ingredients for the chemical industry.
Financials
In 2023, Gevo reported annual revenue of $17.2 million, a significant increase from $1.18 million in the prior year. However, the company incurred a net loss of $66.2 million and had negative annual operating and free cash flows of $53.7 million and $108.2 million, respectively. These financial results reflect Gevo's ongoing investments in the development and commercialization of its proprietary technologies.
Gevo's Net-Zero Projects: Driving Sustainable Fuels
Gevo's "Net-Zero Projects" are a series of planned facilities designed to produce energy-dense liquid hydrocarbons using renewable energy and the company's proprietary technology. The initial Net-Zero Project, Net-Zero 1 (NZ1), is expected to be located in Lake Preston, South Dakota, and is currently designed to produce approximately 65 million gallons per year (MGPY) of total hydrocarbon volumes, including 60 MGPY of SAF.
The company has substantially completed the engineering design on NZ1 and is proceeding with detailed engineering and modularization design. Gevo expects to finance the construction of NZ1 at the subsidiary level using a combination of its own equity and third-party capital, including non-recourse debt. In the first quarter of 2024, the company spent approximately $17.0 million on NZ1, and it now projects a range of $90.0 million to $125.0 million to be spent on the project between January 2024 and the financial close, down from its previous guidance of $125.0 million to $175.0 million.
Gevo is also evaluating and performing early site development work at several other locations in the U.S. for potential future Net-Zero Projects, including both greenfield and brownfield (existing ethanol plant) sites. The company is prioritizing sites that offer attractive potential economics, opportunities to decarbonize, and shorter timelines to market.
Renewable Natural Gas (RNG) Project: Stable Production and Expanding Capacity
Gevo's RNG project in Northwest Iowa started up and began producing and injecting initial volumes of biogas in 2022, during the project's testing and ramp-up period. In 2023, the project achieved stable production levels and surpassed the annual production target of 310,000 million British thermal units (MMBtu). Additionally, the company completed an expansion to increase the project's annual design capacity from 355,000 MMBtu to 400,000 MMBtu.
Gevo's revenue from the RNG project stems from sales of RNG and the environmental attributes associated with its RNG sales, including attributes available from California's Low Carbon Fuel Standard (LCFS) program and the U.S. Environmental Protection Agency's Renewable Fuels Standard (RFS) program. In the first quarter of 2024, the RNG project generated $3.99 million in total operating revenue, including $0.22 million from RNG sales and $3.77 million from environmental attribute sales.
Verity: Ensuring Transparency and Traceability in Carbon Accounting
Gevo's wholly-owned subsidiary, Verity, is a carbon accounting technology startup focused on documenting and verifying the carbon intensity (CI) of Gevo's products and other supply chains. Verity aims to provide Gevo and its customers with the digital tools to accurately measure, report, and monetize carbon abatement across the entire supply chain, while preventing double-counting.
In the first quarter of 2024, Verity continued to increase its customer base at the farm and field level, initiating the first privately sponsored grower program in the Midwest for a biofuel client. Additionally, Verity signed a letter of intent with a provider of heavy-duty engine technology to develop carbon-counting solutions for the freight transportation sector.
Gevo expects Verity to generate its first revenue in 2024, with the potential for the business to grow as policies like the Section 40-B SAF tax credit and the future Section 45-Z credit drive increased demand for carbon accounting and traceability.
Inflation Reduction Act (IRA) and the Path Forward
The recent guidance on the Section 40-B SAF tax credit under the IRA is a positive development for Gevo. While the 40-B rule itself is not directly applicable to the company's plans, as it expires at the end of 2024, it sets important precedents for the Section 45-Z credit, which is expected to come into play in 2025 and beyond.
The 40-B guidance recognizes the carbon intensity reductions that Gevo has been advocating for, using the Argonne National Laboratory's GREET model to measure lifecycle emissions. It also includes provisions for carbon capture and sequestration (CCS) and climate-smart agricultural practices, both of which are integral to Gevo's Net-Zero Project designs.
According to Gevo's estimates, even without CCS or climate-smart agriculture, the company's proprietary NZ1 plant design could potentially achieve a CI score that would qualify for $1.50 to $1.75 per gallon of SAF production under the 40-B rule. This translates to potential revenue of $90 million to $105 million per year from the 60 MGPY of SAF expected to be produced at NZ1.
The company believes the 40-B guidance is a good starting point for the forthcoming Section 45-Z SAF tax credit, which is expected to further expand the recognition of climate-smart agricultural practices and carbon accounting solutions like Verity. Gevo is well-positioned to benefit from these policy developments, as they align with the company's focus on delivering low-carbon fuels and chemicals with a comprehensive approach to measuring and monetizing carbon abatement.
Liquidity
As of March 31, 2024, Gevo had $340.6 million in cash, restricted cash, and other liquid investments, providing a strong liquidity position to fund its ongoing operations and development projects. The company's restricted cash of $69.9 million collateralizes the letter of credit supporting the RNG project's bond financing.
During the first quarter of 2024, Gevo invested $17.5 million in capital projects, with $16.5 million allocated to the NZ1 project and $0.5 million each for the RNG business and a fractionation and hydrocarbon skid. The company also repurchased approximately 2.1 million shares of its common stock for $1.4 million under its previously announced $25 million stock repurchase program.
Gevo's management has stated that the company will continue to identify opportunities to defer development costs until after the financial close of the NZ1 project, in order to minimize capital requirements and preserve liquidity. The company's goal is to reach profitability and generate positive cash flows sooner, rather than relying on additional equity raises at the corporate level.
Risks and Challenges
Gevo faces several risks and challenges in executing its growth strategy, including:
- Successful development, engineering, financing, and construction of its Net-Zero Projects, which require significant capital investments.
- Ability to secure necessary offtake agreements, project financing, and regulatory approvals for its projects.
- Technological and operational challenges in scaling up its biofuel production processes to commercial levels.
- Volatility in commodity prices, such as the price of oil, which can impact the economic viability of its products.
- Regulatory and policy changes that could affect the incentives and market demand for low-carbon fuels.
- Competition from other renewable fuel and chemical producers, as well as traditional fossil fuel-based alternatives.
Gevo's management team is actively working to mitigate these risks and position the company for long-term success in the growing low-carbon fuels and chemicals market.
Conclusion
Gevo is a growth-oriented company at the forefront of transforming renewable energy into sustainable fuels and chemicals. The company's Net-Zero Projects, led by the NZ1 facility, have the potential to significantly contribute to the decarbonization of the transportation sector, particularly in the aviation industry. Gevo's wholly-owned Verity subsidiary further strengthens the company's position by providing comprehensive carbon accounting and traceability solutions.
While Gevo has faced financial challenges in the past, the company's strong liquidity position and strategic initiatives, such as the stock repurchase program and cost-saving measures, suggest a path towards profitability and positive cash flows. The recent policy developments, including the IRA's Section 40-B guidance, provide a favorable regulatory environment for Gevo's low-carbon fuel offerings and carbon accounting capabilities.
As Gevo continues to execute on its growth plans and navigate the evolving renewable energy landscape, the company's unique technology, integrated business model, and focus on sustainability position it as a compelling investment opportunity in the rapidly expanding low-carbon fuels and chemicals market.