With Chevron Partnership on the Horizon, Is Gevo (GEVO) a Buy?

GEVO (GEVO) is a renewable fuels technology and development company, engaged in the research and production of innovative biofuels. Its mission is to transform the renewable energy industry by developing biofuels that can serve as a replacement for traditional fossil fuels. 

The company produces and sells isobutanol, biocatalysts, ethanol, bio-jet fuel, low-carbon methane, and related products, using renewable energies and proprietary technologies.

Recently, investors have responded positively to the partnership between Chevron U.S.A. Inc. and GEVO to produce sustainable aviation fuels. This announcement has propelled the stock by nearly 30%. With this partnership in sight, let’s take a look at GEVO’s financials and see if the recent partnership announcement creates a buying opportunity.

GEVO’s stock price surged 63% year-to-date, outperforming its benchmark, the iShares Global Clean Energy ETF (ICLN), which dipped 20% year-to-date.

The renewable fuel specialist enters partnership with big energy name, increasing its value proposition in the long-term

GEVO and Chevron U.S.A. Inc., a subsidiary of Chevron Corp (CVX), have recently signed a letter of intent (LOI) that would see the two companies partner to increase the supply of sustainable aviation fuel (SAF). The proposed deal is still subject to regular approvals and is expected to commence only in 2025. 

Under the proposed deal, Chevron is expected to invest in the development of one or more production facilities that would be operated by Gevo, using its proprietary technology to produce SAF and renewable blending components for motor gasoline. The deal also anticipates the issuance of warrants to Chevron to purchase up to 15 million shares of the common stock of GEVO, not lower than $8.50 per share.

Given the LOI and GEVO’s current off-take agreements with Delta Airlines, Trafigura, Haltermann Carless, Air Total, and SAS, the renewable specialist is already approaching a potential combined off-take of 250 million gallons per year of advanced hydrocarbon products, which include Sustainable Aviation Fuel (SAF). 

While these developments should contribute to improving GEVO’s financials in the medium and long term, its fundamental picture remains insufficient. 

Poor short term fundamentals should apply additional downward pressure on GEVO’s stock

GEVO’s strong stock performance since the beginning of the year is uncorrelated with its fundamentals. While the company’s net sales have declined from $24.5m in 2019 to $5.54 m in 2020, the biofuel company is expected to post a top-line of only $1.34m in 2021, corresponding to a decline of 75.8% year-on-year. 

In addition, the company continues to lose money and this loss is expected to accelerate in the next year. GEVO’s net income is expected to reach a negative $59m in 2021 and should bottom in 2022 to -$60m, which is not pretty for investors looking to enter this stock.

The company is, however, expected to have a net cash position of $157m at the end of 2021, but its net debt should surge significantly in the next two years, reaching a whopping $1.28b in 2022 and topping at $2.63b in 2023. On a more positive note, the company continues to invest massively to develop certain activities and GEVO’s CAPEX is expected to jump from $74.1m in 2021 to $1.36b in 2022, which explains the rapid net debt advance.

With that being said, GEVO is currently trading at a relatively cheap 2021e P/B ratio of 2.63x, nevertheless its 2022e EV/Revenue is expected to reach a huge ratio of 609x.

Take Away

Though GEVO looks like a promising long-term investment, I believe investors should stay away for the time being.  The surge in GEVO on Thursday of last week was purely based on speculative buying, which is evident by the more than 20% pullback we’ve seen since then.  Personally, I will keep this stock on my radar but only look to buy shares when the company starts delivering more consistent financial results.