Aemetis: Negative Carbon at the Pump

Renewable fuels producer Aemetis (AMTX:  Nasdaq) recently revealed a ten-year agreement to supply 450 million gallons of renewable diesel per year to a travel stop customer.  Aemetis produces a drop-in fuel that can be substituted for conventional petroleum diesel fuel in pipe and truck distribution.  Diesel truck drivers can travel as many as 3.6 billion miles in their heavy cargo trucks using the Aemetis supply.  

The announcement stands out in the renewable energy field.  It signals a shift in how investors will be looking at the renewable fuel industry and potentially ushers in a different investor set.  It is clear the buyer, who knows its driving customers better than anyone, believes a renewable fuel product will be well received.  Negative carbon at the pump is no longer a concept bandied about by scientists.  It is a consumer preference at the pump.

The revenue value of the supply agreement is near $3 billion.  It is a large number.  Investors have been accustomed to talk of large numbers when it comes to renewable fuels.  However, until recently the discussion has usually been in terms of capital requirements to develop the technology or build out production capacity.  Now, Aemetis has not only reached commercial reality, the long-struggling developer has achieved high volume sales.

The supply contact gives Aemetis a new, higher profile in the transportation fuel industry.  The company already claims aviation fuel contracts with a total value of $2.1 billion.  Aemetis has also been given a boost by California’s legislation to require methane capture from dairy waste.  With over 1.7 million cows at 1,200 dairies in the state, California is #1 in milk, cheese AND methane greenhouse gases.  

With state government regulators at their backs, dairy owners are all to happy to sign up for the 25-year agreements to supply cow poo and make room for Aemetis equipment on their farms.  Aemetis currently has seventeen diaries under contract to produce 450,000 MMBTU of renewable natural gas.  

The $5 billion-plus supply contracts provide strong support for the company’s plans to expand its Riverbank, California production facility.  Aemetis took over parts of the Riverbank Army Ammunition Plant, which has been under development for commercial purposes since the U.S. Army transferred its munitions activity to a new site in 2005.   At Riverbank Aemetis will be using the catalyst supply and proprietary equipment of the Axens subsidiary of IFP Group.  The Axens ‘vegan renewable hydroprocessing technology’ is expected to help Aemetis achieve ultra-low to zero carbon intensity renewable diesel from non-edible vegetable oil and cellulosic hydrogen.  

To build out the Riverbank project, Aemetis received a $17 million grant from the California Energy Commission (CEC) and the California Alternative Energy and Advanced Transportation Financing Authority (CAEAFTA).  The grant will help stretch the company’s cash kitty, which was $6.4 million at the end of September 2021.  Nonetheless, management has already signaled the need to raise capital to pay for construction and initial operations at the Riverbank facility. 

Restructuring existing debt, which totaled $128 million at the end of September 2021, and selling common stock are both on the table.  The company also has a mechanism in place called its EB-5 Phase II funding, which allows for the issuance of as much as $50 million in notes similar to those the company already has outstanding.  Aemetis is burning about $6.5 million in cash each quarter to support operations, so financing must be very much on the minds of leadership.

Aemetis has yet to achieve profitability, a situation which is not unexpected given the nascent stage of renewable fuels.  However, with the prospects of strong selling volume at hand, shareholders may begin to think about at least achieving breakeven.  They might have a wait ahead.

The company reported $49.9 million in total sales in the September 2021 quarter.  Unfortunately, the gross profit margin flipped to the negative for the quarter, even after the Aemetis had achieved gross profitability in the previous quarters.  Lower ethanol sales volumes and higher corn feedstock costs set up a perfect storm in the recent quarter.  The company also experienced production issues at this India plant. 

Will the $5 billion in new sales contracts over the next ten years give Aemetis enough volume to cover fixed costs?  Aemetis management had previously guided for $1 billion in annual sales by 2025, which is expected to generate $325 million in cash earnings.  It is not clear whether this forecast included the volumes now pledged to the travel stop customer.

Nonetheless, it is clear that the Aemetis story is very much about the Riverbank project and its most recently signed supply agreements.  Capital availability and management’s execution skills may be the factors on which the outcome turns.  Large supply agreements may be management’s strongest validation, especially since certainty in throughput placement is the best part of the tale as far as investors are concerned. 

Aemetis shares have retreated from a 52-week high near $23.00 per share set in early November 2021.  Even under the strong volumes that followed the company’s supply agreement news, the shares struggled against a line of volume-related resistance at the $15.00 price level.  There is another similar but stronger ceiling to push through at the $19.00 price level.  For those shareholders who look to a technical signal to help with trading decisions, AMTX looks technically attractive for a bull case position.   The shares are registering as oversold by both the relative strength index and the commodity channel index.

      

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.