Analysts at Noble Capital have maintained an ‘Outperform’ rating and $16 price target on Gevo Inc (NASDAQ:GEVO), noting that the company has impressive current and potential supply contracts reflecting the high demand for renewable fuels.
In a note to clients, the analysts drew attention to Gevo's just signed “take-or-pay” agreement with Delta Air Lines (NYSE:DAL) Inc to supply 75 million gallons of sustainable aviation fuel (SAF) per year for seven years.
Based on current assumptions, including those around future pricing of commodities, Gevo estimates that the agreement should generate about $2.8 billion of revenue, inclusive of the value from environmental benefits.
The agreement replaces the existing agreement signed with Delta in 2019 to purchase 10 million gallons per year and bolsters Delta's commitment to incorporating SAF into its operations.
“Also, a member of the oneworld Alliance has committed to buy 30 MGPY, which represents potential revenue of $800 million,” said the analysts at Noble Capital. “While the two commitments move the contracted FSA portfolio to 194 MGPY from 99 MGPY, or potential revenue of approximately $8 billion, other potential large commitments from CVX (up to 150 MGPY) and others remains on the horizon.”
Englewood, Colorado-based Gevo’s development pipeline remains “very high at more than 1,500 MGPY,” reflecting a revenue potential in excess of $30 billion, noted Noble.
“The upsizing of Delta Air Lines (NYSE:DAL) and additions of Kolmar and an unnamed airline are positives,” added the analysts.
The report also talked about how the large contracts would keep Gevo’s plants humming.
“Net Zero plant design remains 60 MGPY with ethanol as feedstock. Development cost in the $900 million range with potential annual EBITDA in the $150-$200 million range,” said the analysts. "The Kolmar, DAL and unnamed airline contracts fill up a significant portion (approximately 83%) of three plants. The locations of additional Net Zero plants have yet to be determined, but co-locating one or more with Net Zero 1 in South Dakota might leverage plant infrastructure.”
Since Gevo had $476 million in cash at the end of the fourth quarter of 2021, and the scheduled financial closing of Net Zero One is only in the 1Q of 2023, the analysts said they don't believe that added capital is necessary right now.
Noble maintained its price target of $16 a share for Gevo, which currently trades around $4.62 on the tech-laden Nasdaq.
Contact the author Uttara Choudhury at uttara@proactiveinvestors.com
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