Aemetis Is My Top Growth Stock Of 2023

Summary

• Aemetis is a biofuels company focused on low, no and negative carbon intensity biofuels from agricultural waste products in California.
• Aemetis has added roughly $7 billion in contracts from major airlines for jet fuel and a large national truck stop chain for renewable natural gas.
• Favorable financing and tax incentives should make Aemetis one of the highest margin refineries in America.
• Recent buyouts of biofuels companies suggest that Aemetis could be worth several billion dollars in a few years, despite trading at a market cap of about $140 million right now.
• Several large institutional investors have started to take significant positions in Aemetis of 5% or higher, including, BlackRock, AllianceBernstein, GMO and Encompass.
• Looking for more investing ideas like this one? Get them exclusively at Margin of Safety Investing. Learn More »

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Today, I am offering Aemetis (NASDAQ:AMTX) as my Growth Stock Of The Year in 2023. Aemetis is a biofuels company focused on low, no and negative carbon intensity biofuels from dairy and orchard agricultural waste products in California, carbon capture and biodiesel in India.

The biofuels industry is growing rapidly thanks to a need for low carbon intensity fuels. Biofuels firms have already seen a first wave of buyouts by larger fossil fuels companies trying to gain traction in a government subsidized industry.

Aemetis has contracts in place to generate over $1.5 billion in revenue for full year 2026 and generate around $500 million in profits against a current share count approaching 35 million. The current market cap of the company is down 70% from highs and rests at only about $140 million.

A simple analysis of the math (done below) suggests that Aemetis shares could be a potential 10-bagger or better at rational valuations. If there is a FOMO rally and/or takeover, share appreciation over the next several years could be even higher. Even more importantly than potential gains, is that the company comes with a significant margin of safety.

I rate Aemetis a strong buy for appropriate investors.

Get To Know Aemetis

I'm not a fan of regurgitation, or cheerleading, rather, I will share my thoughts on what the market is missing with Aemetis. That approach has offered the most value over my nearly 3 decades of investing.

I am also a believer in what Warren Buffett and Jimmy Rogers have said about investing: do the reading. So, with that in mind, please start your due diligence with the presentations at the Aemetis investor relations webpage:

Download Aemetis Company Presentation

Download Aemetis Investor Presentation

Download Aemetis Carbon Capture Presentation

And, this recent report from Stonegate Capital Partners:

Stonegate Capital Partners Aemetis Research Report

A year ago I interviewed the CEO of Aemetis, Eric McAfee. I encourage you to give it a listen. I found the story compelling then. With a year of significant business achievements and a lower stock price, I find Aemetis a more compelling story now than a year ago.

Here is an image from the Aemetis website that summarizes their business of refining low carbon to carbon negative biofuels from feedstock that would otherwise be pollution generating waste. They describe this as a "circular bioeconomy" model.

Aemetis Virtuous Low Carbon Biofuels Cycle (Aemetis)

What you can see is that Aemetis is not like other biofuel companies that you have watched for years. Aemetis is not reliant on growing feedstock that could otherwise be food.

Rather, Aemetis is taking agricultural waste that would otherwise put methane and CO2 into the air and refining it to replace fossil fuels. In addition, when their carbon capture site is ready, they will in many use cases be carbon negative.

Aemetis Fundamentals

Aemetis operates in four businesses:

• Low carbon ethanol
• Sustainable Aviation Fuel (referred to as SAF) & Renewable Diesel
• Renewable Natural Gas (referred to as RNG)
• Carbon Capture & Sequestration

Aemetis 4 Lines Of Business (Aemetis)

Further, the company is broken up into domestic business in California and international business in India.

The company has gone through a long transformation since its inception in 2006. It has had to navigate multiple market conditions, shocks and energy transition developments to build the current company.

Third Eye Capital is the company's senior lender and a significant equity holder. A year ago Aemetis and Third Eye Capital negotiated a $100 million credit facility (of which about $40 million is still available) at prime plus 6%, which is very reasonable for a company at this phase of its capex phase.

Third Eye's warrants include entitlement to buy 50k shares at $10.20 and 250k shares at $20. Those warrant tranches are from the March 2022 credit agreement which recapitalized much of Aemetis debt and access to $100 in revolving credit facilities.

In the past two years, Aemetis has moved rapidly on its business model.

• Purchase and approval for the new Riverbank facility which will produce jet fuel and renewable diesel, as well as, be the site for carbon capture and sequestration - this facility is where much of the company's debt is tied to.
• Aemetis now has 7 dairy digesters for producing renewable natural gas running, with 10 more under development and over 45 more projected by 2026 (I expect that number to dramatically increase as there are over 1000 target dairy farms in California).

The company growth rate for 2023 is projected to be over 28% and was a shade over 37% the trailing 12 months which is mostly due to the law of small numbers. 3rd quarter 2022 growth over 3rd quarter 2021 was 44%.

Aemetis is not yet profitable owing largely to paying down $80 million debt the past year. As you will see in coming sections, it is likely that the company will continue paying down debt in 2023 and, in fact, could be a debt free company with significant free cash flow in the next few years.

Debt Threat

Under a traditional SWOT analysis, we would find the most pressing threat to the company. In the case of Aemetis, it is debt. Here is what their debt load looks like:

Aemetis Debt Load (Aemetis)

The two large subsets of debt are that to Third Eye and their term loans which are largely subsidized by U.S. government programs, i.e. low rates, easy financing.

It is unlikely the government will reverse course on the loans tied to government programs designed to incentivize biofuel and carbon capture businesses. Indeed, if that were to happen, it would hurt everyone from the "small guys" to the "big guys" like Chevron (CVX), Exxon (XOM) and Occidental Petroleum (OXY) which is 20% owned by Berkshire Hathaway (BRK.B). I am willing to risk that political earthquake not happening.

The Third Eye notes rely on Third Eye continuing to work favorably with Aemetis to repay debt as they have the past decade. It is important to note that Third Eye really gets "paid" when the share price rises.

From the Stonegate report:

Debt level and interest expense could limit cash flows - The Company currently owes approximately $55M to Third Eye Capital with a maturity in April 2023. Notably, Aemetis has repaid $80M worth of debt since the beginning of 2021. The current interest rate will continue to hamper cash flow, cash position, and stock price. Aemetis may not be able to repay the principal at that time. If the Company is unable to refinance, it will have to sell assets to pay off the balance of the loan.

That paragraph contains two important ideas.

1. Their is a rapidly impending large debt maturity.
2. Aemetis has been rapidly paying down debt.

These items are central to the catalyst equation for the share price appreciating in 2023 and beyond.

The April 1, 2023 debt maturity are also what shorts are pointing to as a danger sign.

I am not afraid of the debt maturity for a number of reasons:

1. I believe Third Eye will continue to work favorably with Aemetis.
2. I believe that Aemetis has significant assets which could be sold to actually make the company debt free and still maintain a highly profitable business.

I believe the next debt refinancing, likely in Q1 2023, will be a significant catalyst for the stock to rise. But, wait, there's more.

I believe the market will start to more fully understand the value of Aemetis businesses and assets.

Biofuels Demand

According to the IEA, growth rates for biodiesel in the U.S. are projected to be above 10% through 2030. In Europe and Asia biodiesel growth rates will be higher as both search for energy security and Asia has much of the economic growth in the world.

I point out the growth rate because, clearly, most of the global economy is not growing double digits.

In addition, as noted by the EIA, the U.S. there has developed a refining shortage in the past 3 years.

U.S. Refining Capacity ((EIA))

Globally, refining shortages are pervasive in most of the world - though China has extra capacity right now.

In general, new refining is very profitable because it is scarce.

Aemetis represents new refining capacity.

Aemetis Ethanol

When people here biofuel they instinctively think ethanol. And yes, Aemetis has that, but it is not the source of their future growth. Rather, think of it as baseline revenue for the near term.

Their Keyes, CA plant is a 65 million gallon per year facility, but is subject to fluctuating feedstock prices, i.e. corn. The plant also supplies dairies with over 400,000 tons of feed annually and is partner in a business supplying CO2 for the beverage, food and industrial sectors.

The company is currently installing a 1.5MW solar microgrid built by oil major TotalEnergies (TTE) which will increase their tax credits by reducing their own natural gas use by 90% while reducing their energy costs.

Aemetis Biogas

Aemetis is in the process of building out a large biogas network that will capture methane from California dairy farms. To date, Aemetis has 7 digesters running, 3 under construction and about 30 under contract per the earnings call with a planned 66 planned by 2026.

What's super interesting is that demand is outstripping their ability to keep up on building. Between parts and labor, there is a backlog. More interesting is that there are over 1000 dairies that could provide more demand.

Here's who wants the RNG...

Aemetis has a contract with Trillium Energy, which is a member of the Love's group, to sell RNG. Love's operates over 600 Love's Travel Stops & Country Stores in 42 states.

Aemetis Signs Six-Year Agreement With Trillium to Supply Dairy Renewable Natural Gas

What is important to note, is that Aemetis has essentially sold out their planned capacity during the construction phase.

This demand is not isolated...

If you read the opening of CEO Eric McAfee's remarks in his Q3 2023 earnings call you will start to understand the value of Aemetis business.

Aemetis bought out a preferred equity in Q3 and took the non-cash charge to facilitate a future transaction. What does that mean?

It means the company is considering monetizing the biogas unit soon. Here's the first thing McAfee talked about in his earnings call comments:

The unitholder redemption charge is a noncash accounting entry that was taken in Q3 2022 related to an agreement that was reached between Aemetis and the biogas preferred equity investor to repurchase 100% of the outstanding preferred equity in Aemetis Biogas. The motivation for the expected redemption of the preferred equity by Aemetis includes several factors, including biogas industry transactions at high valuations that increased the value of the Aemetis Biogas preferred units as well as a discussion of whether a spin out of the subsidiary into a SPAC, IPO or sale should be considered.

As most of you know, OPAL went public at a pre-money valuation of about $1.2 billion last year. And recently, Archaea was sold for $4.1 billion to BP, which included $800 million of Archaea debt. We believe these transactions are interesting comparables to Aemetis Biogas, especially considering the dairy renewable natural gas generates an estimated 10x more California Low Carbon Fuel Standard credits compared to the landfill renewable gas primarily produced by both OPAL and Archaea...

The takeaway here is that Aemetis has a very valuable asset in hand. What is the value? It appears that Aemetis biogas unit is worth at least as much as OPAL and then adjusted upwards for the additional tax credits that Aemetis qualifies for that OPAL doesn't.

The preferred shareholder would get the first $55 million as the "$55 million charge was not paid in cash, but represents an expected future transaction..."

My anticipation is that a sale is made in 2023 for north of $1.2 billion net cash and debt assumption, adjusted for expected tax incentives and other factors. It is possible Aemetis could also simply take a partner and keep a portion of the common equity which they now own 100% of.

Such a transaction would relieve Aemetis of having to build out the rest of the digester network and very importantly be a significant liquidity event that could leave them debt free and with a large pile of cash. If they opt to retain some common equity, they would likely also benefit from continuing to operate the gas cleanup and compression facility located at their Keyes plant.

Aemetis SAF

Aemetis planned Riverbank facility, financed and to break ground in 2023, will produce Sustainable Aviation Fuel. Here is how demand looks.

At the end of 2021, Aemetis was projecting, and as was mentioned in my interview with McAfee, $5 billion in contracts. They are at $7 billion.

Aemetis Finalizes $7 billion of Supply Contracts for 100% of Riverbank Plant Production of Sustainable Aviation Fuel and Renewable Diesel for up to 10 years

Notable SAF contracts:

• Delta (DAL)
• Jet Blue Airlines
• American Airlines
• Alaska Airlines
• British Airways
• Finnair
• Iberia
• Japan Airlines
• Qantas

They have sold out the capacity of the planned plant.

Aemetis I believe can do fine continuing to finance this project with current means, but I believe they will do the biogas M&A of some sort. But, there's more liquidity available in India.

Aemetis India

Aemetis operates a paid for biofuels refinery in Kakinada, India on the east coast of the country, i.e. the China and Southeast Asia side. I point out the side of the nation the refinery is on because at one point supplying to that region was on the table.

Supplying biofuels to SE Asia could be on the table again at some point, but does not appear to be currently. I mention it for back of the mind awareness.

The India plant has capacity for 50m gallons of biodiesel which is among the largest biodiesel refiners in India.

The Indian government's policies are key to the success of this plant as both the rule makers, but also the primary purchaser of the biofuels.

Deliveries have recently started based on local market conditions, namely, the Indian government incentivizing biofuels to replace diesel and buying through oil marketing companies [OMCs].

Recently, largely in response to the global energy squeeze globally due Russia's unprovoked invasion of the Ukraine, India incentivized biofuels production and became a buyer of biofuels to replace diesel.

In the September/October bidding period, India government OMCs ordered 360 million gallons of biofuels, an annualized demand of 2 billion gallons. That is substantially more than Aemetis can supply and near capacity for the Indian biofuels refining system.

In other words, the government bought out biofuels capacity. I expect that or similar demand for some time.

The India biofuels policy set has been in the works under Modi since when he came into power. The time to implementation was likely a reflection of the still burdensome India bureaucracy.

I do not expect this policy to be undone, as India is pushing for more carbon reduction and energy security, though nothing is certain.

Margins on the most recent purchases, came in at a shade over 20% which, according to S&P, is on the high-end of U.S. and global margins historically.

The plant also produces glycerin. All product lines included, Kakinada can produce $150m to $200m revenues annually for profits in the $30-40m range. It can also be expand its capacity to raise those numbers.

Here's the interesting item that Aemetis stock bears ignore. The India facility is paid for. When it was built it cost about $22 million.

The Kakinada plant has several upgrades, including a recent expansion to 50m gallon/year capacity and to accommodate the collection of feedstock from ag waste in the surrounding area.

In studying several refinery projects built by biofuels refinery leader Praj Industries, which built the Aemetis facility in India, to build a similar refinery today would cost north of a $100 million and take about 2-3 years if everything went smoothly.

With 70% of the refining capacity in India being government owned, it is not out of the question, that for energy security issues, or just domestic politics that India would want to buy the facility.

So, I asked CEO McAfee what he thought it could be sold for.

My own analysis was $400m to $600m based on a buyout by an oil major or the Indian government itself. I based my analysis on the recent biofuel refinery purchases globally based on capacity.

Here was McAfee's reply:

"India plant is an IPO candidate at a $900 million valuation on the India Sensex public market."

I asked another source if that sounded like a typo? He did not.

Aemetis Carbon Capture

The company has technology and the appropriate geologic formations to do carbon capture and sequestration at both their Keyes and Riverbank facilities.

I am assigning no value to those now. Why?

Simply put, it is several years out and we do not know what the environment will be then. I think it is likely there will very significant value. But, for now, I'll simply welcome it if it comes. A happy surprise in waiting.

Aemetis Technically Oversold

While many dismiss technical analysis, it is a part of my process for buying a stock. The full process includes these 4-steps:

1. Recognizing and projecting secular trends.
2. Assessing government and central bank policy.
3. Analyzing industry and company fundamentals.
4. Using technical and quant analysis to understand price trends.

In step 4 I am mostly concerned with rates of change, divergences of price to other indicators and money flows. The money flows have been particularly important in my analysis over the decades, as it tells me where the big money is going and at what prices.

In short, money flows help me "follow the big money."

Here is what Aemetis charts look like going back to when it was admitted to NASDAQ which signifies the modern company. The first is based on a monthly time series which helps me see where the major support levels are.

Aemetis monthly technicals (Kirk Spano)

The price action since early 2021 is horrific. The various indicators demonstrate the stock is nearly oversold.

Of particular interest to me is the volume profile on the far left which suggests heavy selling is over and if the stock is to recover, then it will be stronger, typically bigger (think institutional and some family offices), hands that accumulate at those prices.

If those bigger hands come in, and some already have at higher prices, then it indicates we are looking at deep value pricing which is what "big money" patiently wait to buy in my experience, i.e. real value.

About the only time that big buyers get cover for buying is when retail traders are throwing in the towel. So, if they come, there's value and a likely price floor at that level.

Here is the weekly time frame which is more useful for finding spots for us to invest once we identify value.

Aemetis weekly technicals (Kirk Spano)

Source: TradingView Chart

What we see here is the weekly RSI is nearly fully oversold and the Elliott Wave Oscillator has started to flatten out which is often indicative of a reversal in price.

If I'm right and the company presents a value with potential upside catalysts, then right now is a good time to start accumulating shares and selling cash-secured puts for those who use options.

We first got involved with Aemetis by selling puts in August 2021. Those largely expired. We sold puts on the next dip and those mostly got put to us with a net cost of $8 to $9 after accounting for received option premium. We have been accumulating heavily recently.

Aemetis Short Interest

Approximately 20% of Aemetis shares are held short.

I think this is potential rocket biofuel for a short squeeze.

Institutional Interest A Potential Catalyst

In the bullet points I mentioned 4 significant institutional owners of at least 5% of Aemetis shares.

• Blackrock
• AllianceBernstein
• GMO
• Encompass.

I think it is extremely likely we see much more institutional interest in coming months.

Option Activity A Signal?

I have recently had puts assigned to me ahead of expiration. My experience usually means that bears and traders are losing confidence in their trade.

In addition, I tried to buy certain Aemetis calls last week and could not get a good price, i.e. they calls are expensive.

Both of those factors often, in my experience, signal a turning point in share price.

Aemetis Rated A Strong Buy

I believe Aemetis is significantly undervalued against its projections for revenues and profits. In addition, I believe their projections are at the conservative edge and most surprises will be to the upside.

To summarize my thesis:

1. I believe that the debt issues will resolve and become more certain, which becomes a catalyst for share price appreciation. Frankly, I think the shorts argument is cow dung.
2. I think that institutional interest will continue to increase.
3. At some point in the next few years, hedge funds, then retail, will pile into this stock taking it to a fair value over $3 billion market cap - at which time it might be acquired.

I have recently made additions to my Aemetis stock position and rate it a strong buy for growth accounts. I have Aemetis stock a rare small cap double position of about 6-8% total net asset value in appropriate accounts.

In more conservative accounts, I have been selling cash-secured puts (as discussed above) to generate income and add shares at lower net costs than the share price quoted on option selling days (strike minus premium lower than quoted price on given day of trade).

As readers and listeners know, I rarely pound the table for a stock, and usually don't make my conviction stocks public at all. I am making an exception, well, because Seeking Alpha is having a contest.

And, at the prodding of many followers, I will be offering 2 free picks a month going forward, one growth and one dividend. Aemetis is the first growth pick. I will put out a top dividend stock for 2023 next weekend.

Editor's Note: This article was submitted as part of Seeking Alpha’s Top 2023 Pick competition, which runs through December 25. This competition is open to all users and contributors; click here to find out more and submit your article today!

Disclosure: I/we have a beneficial long position in the shares of AMTX either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.