A Stake in the Future of Aviation Fuel

During the first two weeks in November 2021, the United Nations held the 26^th Climate Change Conference (COP26) in Glasgow, Scotland.  The United Kingdom teamed up with Italy to host the conference against the back drop of Glasgow’s often overcast skies and gusty wind.  Likely the more than 25,000 delegates from 200 countries  -  not to mention as many as 100,000 protestors  - did not pay much attention to Glasgow’s famously foul weather.  Nor should investors get too caught up in day-to-day weather when the climate of the future is at stake.

Nonetheless, some activists did start a fuss over one COP26 detail  -  the number of aircraft used by those who attend the conference.  One image in the local press identified 400 private jets flying into the Glasgow airport, only later to be shamefully admit the image was of aircraft at the New Orlean’s airport taken years earlier.   Forbe’s reporters counted 50 private jets landing in the first four days of the conference.  No matter the number, those private jets ferried in the famous and powerful using fossil fuels in conventional combustion engines  -  the very culprits that have been identified as climate killers. 

Indeed, aviation accounts for as much as 2.5% of carbon dioxide emissions, one of the principal greenhouse gases that contributes to climate change.  However, when the International Council on Clean Transportation counted other greenhouse gases and water vapors in the analysis, the aviation sector was found responsible for as much as 4.9% of gases leading to global warming.  No matter how the cake is layered, aviation is among the top greenhouse gas emitters.

Yet air travel in general and private jets in particular appear to be a taboo topic when considering climate change.  A responsible discussion of air travel requires the admission that the climate crisis cannot be addressed unless humans change their avaricious ways.  The wealthy and politically connected who travel on private jets may be avoiding any discussion that questions their comfortable positions  -  climate problem solving can begin somewhere else with some other guy’s bad habits!

The recalcitrance of politicians and business moguls, has not stopped the aviation fuel developers.  As Glasgow prepared to open its doors to the world’s environmentalists, two U.S. companies moved forward with one solution for aviation’s greenhouse gas problem.  Ethanol fuel developer Gevo, Inc. (GEVO:  Nasdaq) signed a memorandum of understanding with agriculture commodities producer Archer-Daniels-Midland Company (ADM:  NYSE) aimed at producing renewable aviation fuel.

For some years Gevo has been perfecting ethanol and isobutanol production from corn.  Gevo has also been working on transforming these two alcohols into synthetic paraffinic kerosene, which can be used as a sustainable aviation fuel.  The company wants to marry up its proprietary technology with ADM’s exceptional production capacity.  ADM’s dry mills in the Midwest produce as much as 900 million gallons of ethanol.  Using Gevo’s technology the duo estimates ADM can produce 500 million gallons of sustainable aviation fuel.

The agreement with ADM is the most recent in a series of relationships that Gevo has strung together to support its plans for a ‘drop in’ jet fuel.  In early October 2021, Gevo expanded its strategic alliance with privately-held Axens North America, Inc.  Axens has expertise in converting olefins such as ethylene and propylene to gasoline, jet fuel and diesel.  In September 2021, Gevo recruited Chevron Corporation (CVX:  NYSE) to help build and operate a facility to process corn for sustainable aviation fuel.  Chevron announced plans to test a batch of Gevo’s sustainable fuel in Delta Air Lines craft in Los Angeles.

Why are these companies so quick to sign up with Gevo, a company that has yet to produce a profit from its corn-to-alcohol technology?  The big shots may be slow to publicly admit aviation fuel needs a reset to save the climate, but the Biden Administration has quietly been working on a target of producing 3 billion gallons of sustainable fuel annually by 2030.  Biden included a Sustainable Aviation Fuel tax credit in the Build Back Better Agenda that adjusts the aviation fuel economics.

It is clear Gevo leadership is not waiting for the alignment of political stars to bring its renewable fuel to the aviation market.  The company now has key partnerships that facilitate market success:  access to technology through Axens, access to production capacity through ADM, and access to end-users through Chevron.

Gevo has successfully sold its technologies and products, reporting $1.2 million in total revenue in the twelve months ending September 2021.  However, profits elude the company.  The Gevo team still spends heavily on product development, using $33.5 million in cash resources to support activities in that same period.  Fortunately, leadership has been successful in convincing investors to support its plans and still had $301.4 million in cash in the bank at the end of September 2021.  Gevo has avoided debt, favoring sales of common stock keep the coffers loaded.  Shares outstanding are just over 200 million.

Gevo share prices has been moving in recent months.  The entrance of Chevron to Gevo’s team may have been one of the catalysts that moved the shares up to a line of volume-related price support/resistance at the $7.75 price level.  After a brief retracement, the shares have recently tried this impediment again and then back down again.  Unproven by profits, but Gevo’s new friends suggest the company appears more likely than not to be a part of the renewable aviation fuel sector.  A period of price weakness may be just the right time to snap up a stake in the future of aviation fuel.   

 

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.