Shares of biofuel maker Gevo Inc (NASDAQ:GEVO) are rocketing for a second consecutive trading day in the wake of the Environmental Protection Agency’s approval of the ethanol-free gasoline additive isobutanol at a 16% blend level in gas for on-road use in automobiles.
Investors are keeping their foot on the gas pedal, driving Gevo shares up almost fourfold to US$12.70 Monday — and the surge isn't over yet, with the stock adding another 71% to US$21.99 in midday trade today, easily blowing past a 52-week high of US$14.80.
The EPA’s decision to give the go-ahead for the higher level of isobutanol marks a turning point for the Englewood, Colorado-based Gevo, which focuses on the production of isobutanol as well as related biofuels at its fermentation plant in Luverne, Minnesota.
Previous to this change, the EPA had signed off on isobutanol for on-road use up to just a 12.5% blend.
“It’s going to take decades for the vehicular fleet to fully electrify, but in the meantime companies that can produce cleaner combustible fuels will continue to benefit,” said Jim Collins, a stock picker and head of Portfolio Guru LLC.
The sea-change in Gevo’s stock performance since the week’s start suggests that investors are willing to rally behind the company, which is making considerable headway in driving down its costs.
Gevo regains compliance with Nasdaq listing requirements
A letter from Nasdaq notifying Gevo that it is again in compliance with minimum stock-price listing requirements is also contributing to investors’ euphoria.
At the start of this month, Gevo announced a 1-for-20 reverse stock split, which pared back the number of its shares to about 1.3 million from 25.8 million. This had the intended effect of lifting the share price to a level that satisfies the exchange's listing threshold.
Meanwhile, a number of positives about Gevo are pushing investors to take another look at the loss-making company, which traded as high as US$127,860 in April 2011.
While large-scale plants will take time to build and generate cash, Gevo now has a “clear pathway to turn profitable by addressing low carbon fuels,” according to a new company report from Traders News Source, an equity research and corporate access firm.
Another competitive advantage is that Gevo is one of the few biofuel producers that have operating experience gained from a commercial production facility. “This data and expertise are competitive advantages for the company as it discusses offtake arrangements with potential customers and strategic partners,” according to the Traders News Source's analysis.
Gevo’s management intends to focus first on ethanol as well as isobutanol production by improving its production facility in Luverne, Minnesota. “We can see a path to profitability without building a large isobutanol and hydrocarbons plant,” said CEO Patrick Gruber, last month while announcing Gevo’s first-quarter results. “We have not abandoned our long-term goal of building large-scale plants, but they take time to build out and generate cash.”
“We think that we can get to cash positive sooner rather than later, independent of building out a large isobutanol plant,” he added.
First-quarter results show how the picture is improving
In the year’s opening three months, Gevo’s net loss came to US$2.5mln, down from a net loss of US$5.9mln in the same quarter last year. Increased ethanol production at the Luverne plant drove revenues to US$8.2mln in the first quarter compared with US$5.6mln in the year-ago period
Gevo’s cash position at the close of March amounted to US$7mln and the principal face value of its outstanding debt was US$16.7mln.
Gevo’s CEO Gruber attributed the narrowing in the quarterly loss to a drive to pare down costs. “Our plan to drive down costs across the entire company has been working and the numbers in our financials reflect our efforts,” Gruber said.
This week, the EPA approved the higher level of isobutanol in response to a request from Butamax Advanced Biofuels LLC, a Delaware-based biofuels group, which is a joint venture between DuPont and BP PLC (NYSE:BP). The EPA’s move showcases the value of embracing the push to lower greenhouse gases and reduce carbon levels in fuels at a time when electric cars are still not ubiquitous.
“The EPA’s decision shows the value of lowering carbon intensity in transportation fuels,” said Portfolio Guru's Jim Collins. “Butamax was able to win an allowance for higher levels of isobutanol not only because it possesses chemical advantages versus ethanol, but also because the company is producing that compound from renewable feedstocks such as corn starch.”
As well as producing isobutanol, animal feed, corn oil and ethanol at its fermentation plant in Luverne, Gevo has also come up with a way to produce hydrocarbon products from renewable alcohols. At a second biorefinery in Silsbee, Texas, which is run in partnership with South Hampton Resources, it produces renewable jet fuel, isooctane and paraxylene.
--Adds effects of reverse stock split--