Friday, March 20, 2015

Velocys: the Skinny on Gas-to-Liquids

Velocys, PLc (VLS:  LSE) is in my sights after an article appearing in early March 2015 on Biofuels Digest described progress Emerging Fuels Technology (EFT) has made in perfecting the Fischer-Tropsch process to convert carbon-based feedstock to liquid fuel, otherwise called Gas-to-Liquids.  Fischer-Tropsch often referred to as FT for short is a series of chemical reactions to convert carbon monoxide and hydrogen into liquid hydrocarbons.  The reactions are triggered by a catalyst, usually cobalt or iron, and managed under high temperatures in a chamber or reactor.  That reactor has presented a big obstacle for many trying to implement FT in commercial gas-to-liquids plans.  Capital costs are high and maintenance of catalysts is complicated. 

Velocys' Austrian Biomass-to-Liquids Demonstration Plant
Velocys has developed what it calls ‘microchannel reactor’ technology for steam methane reformation to convert natural gas into a mixture of carbon monoxide (CO) and hydrogen (H).  The CO and H are then put through the conventional FT process that processes light oils and waxes that can be further refined into crude oil or sent through a third hydrocracking step that yields diesel or jet fuel.  Velocys also claims to have developed ‘super-active’ catalysts using a ‘matrix combustion’ preparation method.  Most importantly, the company is deploying its technology in smaller-scale systems. This 'skinny' approach is expected to at least partially resolve the twin problems of high capital and operational costs.  

Last year the company entered into a joint venture with Waste Management (WM:  NYSE) and NRG Energy (NRG:  NYSE) to build a series of gas-to-liquids  facilities in the U.S.  The first plant will be located in Oklahoma at Waste Management’s East Oak landfill.  Another of the venture partners, Ventech Engineers, is handling the project construction and commissioning, which is expected to take two years.

The joint venture with such accomplished partners in the waste and energy field has been strong validation of Velosys technology.  However, it is the sale of one of its small-scale FT reactors that impresses me.  The transaction generated $2 million in revenue that is being recognized over several quarters in 2014 and 2015.  The reactor will be used to produce crude oil from stranded natural gas that is otherwise wasted by ‘flaring’ it off at the well head.

Velocys reported GBP1.0 million (US$1.4 million) in sales in the first half of 2014, the last period disclosed by the company.  Revenue was off dramatically from the same period in the prior year when the company recognized GBP$1.7 million (US$2.5 million).  The company’s business remains choppy as it scores its first equipment sales and enters into its first projects.  The company has yet to establish consistent profitability, largely for the same ‘early stage’ circumstances.  Research and development costs still exceed revenue streams. 

To support operations, Velocys has traveled more than once to the capital markets.  Most recently the company raised GBP52 million (US$85 million) through the sale of 23.1 million shares of the company’s common stock.  The company had over GBP68 million on its balance sheet in October 2014.  Velocys will be using GBP3.4 million of US$5.0 million to invest in its joint venture with Waste Management and NRG Energy and the rest for additional development work.

Shares of VLS have trade off since an all-time high sent in mid-2014.  Some investors might consider the present price to growth potential to be particularly appealing.  The company is freshly fortified with capital and has been elevated by the endorsement of strong strategic partners and validation of recent customer orders.  Many might consider the stock a good value under these conditions.  However, I would add that note that there remains a considerable element of risk in Velocys since it does not yet have a fully operational gas-to-liquids plant that proves the economic viability of its systems even if its technologies appear sound.


Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.


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