Gevo: Unanticipated Positive Developments Will Shape Q2 Results

Jul. 24, 2014 8:31 AM ETGevo, Inc. (GEVO)CORN75 Comments
Dallas Salazar profile picture
Dallas Salazar
5.23K Followers

Summary

  • GEVO's recent 8K in which it announced a motion granted "to stay the patent litigation action brought by Butamax Advanced Biofuels, LLC" materially impacts cash burn for Q2.
  • GEVO has been buying corn since mid-May and making ethanol since late-May.
  • GEVO did experience rail car and shipping issues for a short period but found other ways to move product from its plant.

Disclosure:

If you are unfamiliar with GEVO I would recommend doing a significant amount of research into the company before considering a long position. The company has experienced high levels of volatility historically and is currently at a point in its development that could be described as binary. There is considerable risk in initiating a long position that is not normal to investing in most stocks and this is name that should be considered only after careful consideration of those risks. The company, in a recent 10-K, admitted that financial operating conditions (at the time) raised doubt about the company's ability to continue doing business.

Who is GEVO?

"Gevo, Inc. (GEVO), a renewable chemicals and biofuels company, focuses primarily on the production and sale of isobutanol and related products from renewable feedstocks. Isobutanol is a four-carbon alcohol, which is used as a specialty chemical in the production of solvents, paints, and coatings or as a value-added gasoline blendstock. The company produces and separates its renewable isobutanol through the Gevo Integrated Fermentation Technology platform. It also produces and sells ethanol and related products." (SOURCE: Yahoo! Finance Stock Summary GEVO)

Recent Events

Legal:

On July 14th, 2014 GEVO issued an 8-K outlining a motion granted to stay the patent litigation action brought by Butamax Advanced Biofuels, LLC (a joint venture between BP and DuPont) in a bizarre trickle down ruling stemming from a much larger court case being presented to the Supreme Court by Teva Pharmaceuticals. In the simplest explanation and in the most convenient terms, I myself had to have the moving pieces of this litigation explained to me by a professor of law at the University of Texas, Teva is protesting the ability for a separate court to make a ruling on an already ruled on matter. Typically, this can only happen if there was "clear error" of some sort but patent trolls and those looking to litigate their competitors into submission have found a too convenient loophole in the legal process in which "de novo" review of the case by a court of appeals will rule on the evidence and arguments presented as if it were doing this for the first time.

This obviously has large costs associated with it and diverts the attention of management and other members of the c-suite. It also can have the effect of delaying business deals and other monetization activities, which in GEVO's case means the delaying of commitments from Letters of Intent to actual contractual obligations. GEVO, without the benefit of having a larger partner to lean on, has had to fight off the frivolous litigation of Butamax with its own resources both monetary and intellectually based. The motion granted will materially change the amount of cash burn at GEVO that will be reported during the Q2 announcement and on the full year.

Cash conservation is arguably the key concern for investors currently as the company recently had to agree to a deal with structural arbitragist WhiteBox Advisors LLC to raise the funds necessary to make it to year end. This should extend GEVO's projected operations, to what extent remains to be seen as GEVO management has never given exact legal costs but has always referred to them as being "material", and I am projecting bring the company's Q2 cash burn at or close to $9 million. This would be a very positive development. This projection of ~$9 million could in fact be much lower as a result of exactly how large the legal cash savings are and as a result of aggregate ethanol margins over the course of the quarter.

Margins:

Speaking of cash burn, GEVO switched from "train based" operations to "side by side" operations (detailed in great length in previous articles) to help utilize the full assets of its up to that point worthless plant. A source in close proximity to the Luverne plant has reported that GEVO has been buying corn as early as mid-May and actually producing either Isobutanol or Ethanol as early as late May. I recently spoke with GEVO CFO Mike Willis (comments detailed in quotations) about the companies corn purchase schedule and he was tight with information but did say they are purchasing "as we go" and by this same sources reports GEVO has also been selling as its goes. Railcar activity has been consistent since mid-May with zero interruption outside of a "short window" in which flooding at the plant prevented rail cars from coming and going. During this time GEVO switched to transportation by truck, which is clearly more expensive and presses on net margins, but has since and continued to ship by rail car.

Two very important notes about the purchasing corn "as we go" and the selling refined product (either Isobutanol or Ethanol) as it goes:

(1) corn has consistently trended lower and lower on all durations since roughly about 90 days ago - prior to building its corn inventory GEVO was a net seller at much higher prices. This has allowed GEVO to build its inventory at extremely low prices and establish a low COGS from the feedstock. See a chart of Teucrium Corn ETF (CORN) for an example of this trend line. The corn purchasing schedule has also allowed GEVO to take advantage of the spot pricing that seems to get lower and lower each day, including a bit of extra spread created by purchase agreements the company has with local sellers.

(2) selling refined product as it goes, regardless of which product, has allowed GEVO to enjoy wider and wider margins which will be important to the top and bottom lines at Q2 announcement and even more important to slowing total cash burn. Cash flow from operations should reach levels at Q2 not seen since the plant was "operational" during 2012. GEVO has been able to capitalize on wider and wider margins by sheer luck of purchasing and selling schedule.

A change of direction:

Shortly after the side by side conversion, I spoke with CFO Mike Willis about any benefits this demonstration could bring to the company outside of the extra cash and the expressed benefits detailed on the Q1CC. He had told me that the company decided that a quicker route to monetization might be to demonstrate using both technologies and in the short term instead of selling a complete retrofit of facilities selling the idea of the side by side - especially with ethanol margins where they are. Presumably this assumption and change of direction came from a potential licensee or several of them (Gruber alluded to this a bit on the prior CC). Of course the licensee would still want the capability to produce Isobutanol for the current and future end markets and consistency of high margins that exist but the front end CAPEX and the breakeven points move much closer doing a partial retrofit than a full retrofit. GEVO of course didn't really have a choice at the time they made this decision to side by side but it has since worked out that ethanol margins have remained high and that the company has been able to demonstrate the technology at the same time. This is part of the reason I have been speculating that GEVO will be able to announce its first monetization of LOI in Q3, the idea that the CAPEX conversation for the licensee just became a lot easier. This is something I'll hope to get more guidance on after Q2 announcements.

Is the plant EBITDA positive?:

Finally, and this is pure speculation (what isn't with GEVO!) but consider this - the entire time GEVO was planning and miserably failing at executing its train based strategy the plan was to get the plant to EBITDA positive by the end of Q2/14 (right now). This plan milestone was to be realized by having all three GIFT systems and all 4 fermenters running at what would equate to full speed. Clearly this plan did not bear the fruits of its labors. Or did it?

The plant being EBITDA positive or EBITDA breakeven hung on this theory that if the plant was running at full speed, based on the margins that could be achieved selling the Isobutanol being produced, that the plant could reach the milestone. That's why the initiation and ramp up of the fermenters was such a highly watched sequence of events and the stock jumped with each PR. Currently, GEVO is selling ethanol at margins comparable or greater than the margins that it was expecting to get at the time it was giving plant EBITDA positive guidance selling Isobutanol . Knowing that GEVO is successfully producing Isobutanol in limited quantities and that it is successfully (according to my source) producing ethanol in full scale quantities (using the "side by side" split) this equates to plant running at full speed with full capacity. If my theory is right, and this theory is based on rail car traffic, corn purchases, and distiller grains sales, the plant should be very close to EBITDA positive.

Again, I could be completely wrong but what if I'm right?

Where's the trade?

There really isn't a trade here for me. I've been long this stock for well over a year from way above and I've been absolutely smoked for my efforts. I'm down big and have added embarrassment to my capital losses with my long-time well established bullishness the company.

For me, the trade is to go down with the ship or fight through the rough seas to landfall. I'm hoping GEVO can take advantage of what appears to be the ball finally bouncing its way and finally turn the corner on what has been a long, strange, face-ripping trip.

For somebody considering a long position I would recommend small ownership if any at this point. GEVO is essentially a lotto ticket. You're either going to end up with none of your money or a whole lot more than you invested. If you're OK with that, this might be a great binary option to add to your portfolio. If you're not OK with that I recommend you take front row seat and learn as you go with GEVO. One good thing I can say is GEVO moves fast and furious through the financial engineering processes and can help give an education as to exactly how hard it is to go bankrupt to anybody unfamiliar. GEVO gives the equivalent of a fantasy football owner getting to spend a year in the general managers office, and there's value in that too.

In either case, I wish everybody the best. I hope I don't captain the USS GEVO to the bottom of Davey Jones' locker. Good luck to all.

Disclosure: The author is long GEVO. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.

This article was written by

Dallas Salazar profile picture
5.23K Followers
Dallas Salazar is the CEO an Austin-based consulting firm that specializes in private company lifecycle management, up to and including taking companies public, and in helping consult publicly traded companies. Mr. Salazar is also a venture investor in a portfolio of energy and commodity startups, including startups extracting oil, natural gas, helium, and carbon dioxide, as well as engaged in the business of large scale carbon sequestration. Mr. Salazar has recently had large exits in Comstock Resources, Eclipse Resources, Torchlight Energy, as well as numerous privately held natural resource and commodity extraction ventures.

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