2025 Stock Pick: Gevo, Inc. This company is a buy @ $2.80 per share
Sustainable aviation fuel (SAF) is the new buzzword for clean energy in airplanes. Companies in this space are expected to see meaningful growth.
In November 2023, the International Civil Aviation Organization (ICAO), a United Nations Agency, adopted a new ICAO Global Framework for Sustainable Aviation Fuels, by which ICAO and its member states have agreed to achieve a common goal to reduce CO2 emissions in international aviation by 5 percent by 20230.
What is sustainable aviation fuel?
SAF is a biofuel used to power an aircraft that has similar properties to conventional fuel but with a smaller carbon footprint. Depending on the feedstock and technologies used, SAF can reduce the greenhouse emissions quite significantly compared to conventional fuels.
With the mandate to increase reliance on SAF, there is a global drive to increase supply. Back in 2024, it was said that the global supply of SAF barely met 1 percent of the aviation industry’s total fuel requirement.
At present, Neste is said to be the world’s largest production facility for SAF fuel but many producers are in the running to ramp up supply, with the bulk of future production likely to come out from the US and Europe (see grey bubbles in the above diagram).
In the US, the current plan is to increase SAF production by 130 times in 2023 to 3 billion gallons per year in 2030, and then by another 12 times to 35 billion gallons per year by 2050.
Global SAF demand is primarily propelled by demand in Europe and in the US, broadly due to financial incentives and the proposed mandates for the blending of SAF at all EU airports.
Demand in the US is driven by corporate and state commitments as well as incentives, cap-and-trade systems to accelerate commercialization.
27 major airlines representing nearly 39% of global aviation fuel consumption have made SAF specific commitments. But only 17% of airline SAF commitments have been contracted.
What are the potential roadblocks to the deployment of SAF fuel?
Although there is strong demand for bio jet fuel, there are also potential headwinds that could hinder development.
First, feedstock availability poses a risk factor to the supply chain for biofuels as there are compounding factors such as seasonality, pests, diseases, climate, global trade and labor which are subject to change.
Second, current infrastructure is clearly lacking and insufficient, and if annual aviation fuel demand increases to 35 billion gallons by 205, fuel logistics may become a bottleneck constraining the growth of the industry.
Third, producers may meet social resistance to the building of SAF facilities due to negative environmental impact, and lack of involvement of resident and environmental justice advocates before a project is started.
Introducing Gevo, Inc. (GEVO)
GEVO is a small cap carbon abatement company that tries to decarbonize market sectors, sell renewable products and generate carbon abatement value through their plant design and business systems. They are involved in developing commercial projects to convert renewable energy into liquid hydrocarbons that be used as renewable fuels.
Net-Zero Project 1
GEVO plans to build a facility (NZ1) in Lake Preston, South Dakota to produce 65 million gallons per year (MGPY), which would help to fulfill their 350 MGPY SAF supply agreement. Additionally, NZ1 can produce ~1.3 billion pounds per year of high-value protein products and 30 million pounds per year of corn oil. NZ1 is estimated to cost around USD 90 million and USD 125 million in 2024.
In October 2024, the company received a loan guarantee facility (DOE Loan) of up to USD 1.6 billion to help finance NZ1.
The projected IRR for NZ1 is in the high teens, with financing from both debt and third-party equity investors.
Company Financials
Losses from operations increased USD 3.3 million in 3Q24 from 3Q23, due to the increase in costs from their NZ1 and other projects.
Liabilities declined from USD 650 million in 4Q23 to USD 603 million in 3Q24, while Total equity fell from USD 557 million to USD 504 million over the same period.
Portfolio Update
Regrettably, the portfolio trailed the S&P 500 Index and ended 2024 with a loss of 5.5%, on the back of exposures to TGT and HRTX.
To start off the new year, I’ve closed my positions in TGT and HRTX at a loss of 24% and 52% respectively, and deployed capital into GEVO.
The quant model is giving a buy signal for this ticker and I also think there is some more upside to the company’s stock price considering the growth potential of the SAF sector.
Disclaimer
Seven Fat Cows has a long position in GEVO. I am not a financial adviser. You should seek independent legal, financial, or other advice to check if the information from this website relates to your unique circumstances.