Category: Energy

 

Dividends and the Appeal of Energy Stocks

 

Energy stocks have had a tough 2020.  The Energy Select Sector SPDR (XLE) is down 46% in 2020 versus a 5% increase in the S&P 500 Composite Index.  The decline has meant that many energy stocks now offer dividend yields above 5%, an attractive rate compared to low bond yields.  Energy stocks have always been a volatile group subject to the cyclicality associated with energy price booms and busts.  Clearly, we are in the middle of a bust cycle with West Texas Intermediate (WTI) oil prices having fallen 40% year to date.  The cure to a bust cycle comes when producers stop drilling so that supply and demand realign, and energy prices rise.  For energy companies able to withstand short-term cash flow issues, management will often maintain existing dividend levels in anticipation of improving cash flow.  That seems to be the case for energy companies like Chevron and Exxon Mobil, which have maintained their dividend and currently have dividend yields of 6% and 9%, respectively.  Other energy companies such as Royal Dutch Shell and BP Amoco have decided to cut their dividend and put that capital into developing renewable assets and other non-energy investments.

The different paths taken by the major oil companies has profound implications for investors.  If the drop in energy prices is part of a normal boom/bust cycle created over drilling, high-dividend-yielding energy stocks are attractive investments.  Many of the high-yield energy companies have ample liquidity and strong balance sheets that will allow them to maintain dividend levels for many years of low energy prices. The high yield, combined with the prospect of a rising stock price associated with the end of the bust cycle, could provide investors with large total returns. If, on the other hand, lower energy prices reflect a fundamental shift in oil prices, these stocks may ultimately be forced to throw in the towel and cut the dividend.  Those companies will be behind their competitors in shifting their attention towards other investments.

 

The case for energy stocks

• Supply is responding.  Drilling in the United States, which is the largest producer of oil, has screeched to a halt.  Baker Hughes reports that there were 254 rigs drilling in the United States as of September 11, 2020.  That is down from 886 rigs from a year ago.  The Energy (EIA) reports that U.S. crude oil production is down to 10,000 barrels per day from a level of 13,000 BPD at the beginning of the year.
• Bankruptcies are increasing.  Drilling that was lost due to companies reducing capital expenditures will return if oil prices improve.  Drilling associated with companies that have declared bankruptcy will not return quickly.  Haynes and Boone report a steady increase in the number of energy company bankruptcies since 2019 in response to lower energy prices.
• Demand will respond when the pandemic passes.  Part of the loss of energy demand is associated with weak global economic conditions due to COVID – 19.  As the spread of the virus abates through the development of a vaccine, it is reasonable to believe that the demand for oil will return.
• High returns can be made in a declining
  industry.  Charles Sizemore, chief investment officer of Sizemore Capital Management, compared the industry to the tobacco industry of 20 to 30 years ago.  Tobacco stocks provided strong returns to investors even as the industry shrank as the larger players maintained their dividends and acquired smaller players.

 

The case against energy stocks

• Demand is fundamentally changing.  Unlike past energy price cycles, this bust cycle is being caused by a fundamental shift in consumer habits that do not favor oil.  The growth in renewable energy has decreased the demand for oil to power generators.  The growth in electric vehicles could represent a similar shift away from oil demand to produce gasoline.  Business airline travel and daily commuting may never be the same as the world shifts towards video conferencing and away from in-person sales.
• Supply is fundamentally changing.  The cost of producing oil has become less expensive due to technological improvements in drilling and extraction.  OPEC and its allies realize that the shale boom in the United States will not go away at oil prices above $50/BBL and has increased production even though it knows that will drive oil prices lower.  Saudi Arabia has shown a new willingness to punish its allies that do not comply with production reduction targets.

 

Conclusion

As is usually the case, the truth probably lies somewhere in the middle.  There have been fundamental changes in both the supply and demand sides of the energy equation.  At the same time, temporary, abnormal events have amplified the impact of fundamental changes on energy pricing.  We anticipate improved oil prices but do not hold out much hope for a return to the days of oil prices above $60 per BBL.

 

Suggested Content:

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American Energy Dominance Relying on Immaculate Areas?

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Natural
Gas Storage Imbalances and Higher Prices

 

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Each event in our popular Virtual Road Shows Series has a maximum capacity of 100 investors online. To take part, listen to and perhaps get your questions answered, see which virtual investor meeting intrigues you here.

 

Source:

https://www.inquirer.com/business/dividends-yields-10-year-treasury-etf-vanguard-pimco-20200309.html, Erin Arvedlund, March 9, 2020

https://finance.yahoo.com/news/big-oil-goes-looking-career-040154761.html, Javier Blas, Bloomberg, September 14, 2020

https://money.usnews.com/investing/stock-market-news/slideshows/the-best-energy-stocks-to-buy-this-year, Ellen Chang, U.S. News, August 4, 2020

https://www.haynesboone.com/-/media/Files/Energy_Bankruptcy_Reports/Oil_Patch_Bankruptcy_Monitor, Haynes and Boone, August 31, 2020

 

Monday, September 14, 2020

Gevo, Inc. (GEVO)

Virtual Roadshow Should Highlight Improved Visibility

Gevo Inc is a renewable chemicals and biofuels company engaged in the development and commercialization of alternatives to petroleum-based products based on isobutanol produced from renewable feedstocks. Its operating segments are the Gevo segment and the Gevo Development/Agri-Energy segment. By its segments, it is involved in research and development activities related to the future production of isobutanol, including the development of its biocatalysts, the production and sale of biojet fuel, its Retrofit process and the next generation of chemicals and biofuels that will be based on its isobutanol technology. Gevo Development/Agri-Energy is the key revenue generating segment which involves the operation of the Luverne Facility and production of ethanol, isobutanol and related products.

Poe Fratt, Senior Research Analyst, Noble Capital Markets, Inc.

Refer to the full report for the price target, fundamental analysis, and rating.

Join today’s virtual roadshow with Gevo, Inc. (GEVO) @ 3:30PM EST. You can register for free at register.gotowebinar.com to hear from Pat Gruber, CEO. The interview should reinforce the recent business update that indicated that recent capital raises have reduced uncertainty and progress continues in moving forward on designing and financing the renewable fuel projects.


Current cash of ~$81 million creates near-term funding visibility.  Recent capital raises of $46 million from an equity offering and $16 million from warrant exercises have enhanced funding visibility. The added cash boost creates more visibility in funding the critical design and engineering work, including permitting, necessary to fully develop the initial three production plants to project …

This Company Sponsored Research is provided by Noble Capital Markets, Inc., a FINRA and S.E.C. registered broker-dealer (B/D).

*Analyst certification and important disclosures included in the full report. NOTE: investment decisions should not be based upon the content of this research summary.  Proper due diligence is required before making any investment decision. 

 

Excess Oil Inventory May Take Even Longer to Work Off

 

West Texas Intermediate oil prices fell 8% on Tuesday, dropping from $39 per barrel to $36.30/BBL.  Tuesday’s close was the lowest oil price close in three months.  The decline caps off a difficult ten-day period that started with oil prices entering the month of September at $42.76/BBL.  There is not a single reason for the decline but a series of announcements that point to oil supply increasing and demand rising at a slower rate than previously thought.

Inventories are rising. The American Petroleum Institute reported on Tuesday that U.S. crude stockpiles unexpectedly rose last week.  The country’s crude stockpiles rose by 3 million barrels in the week ending September 4, almost twice that expected by analysts.  The rise was the first increase in seven weeks. The higher inventories were confirmed on Thursday when the U.S. Energy Information Administration indicated that U.S. commercial crude inventories increased by 2.0 million.  Analysts had expected a 1.0 million decrease.  The EIA reports that inventories are running 14% above the trailing five-year average for this time of year.  The inventory buildup comes at an unfortunate time, with the summer driving season coming to an end.

OPEC is getting tired of production cuts.  On September 5, Saudi Arabia lowered its official selling price for October.  Remember that OPEC and allies agreed to a 9.7 million barrel per day cut to supply on May 1.  The reductions were decreased by almost 1 million bpd in June and another 1 million in August.  OPEC and allies meet on September 17 to discuss a continuation of production cuts. Saudi Arabia’s willingness to accept lower oil prices in October may be a sign that it is tiring of cutting production.  If true, the outcome of the next OPEC meeting may result in increased supply at a time when demand is becoming more uncertain.

The future of oil demand for vehicles may be coming into question. GM announced a 10-year alliance with Nikola Corp to build an electric truck. The alliance puts them in direct competition with Tesla and shows that the major car manufacturers do not plan to sit idle as Tesla attempts to gain market share.  GM is not alone among major auto manufacturers in announcing plans to develop electric vehicles.  Announcements like these may be a sign that the age of electric vehicles may be coming sooner than previously anticipated.

A global economic recovery coming from a Covid-19 vaccine may be further away. Countries in all parts of the world are reporting increased cases of Covid-19 as they prepare for an expected second wave of cases coming this fall.  On September 8, AstraZeneca announced that a vaccine study had been put on hold due to a suspected serious reaction in one of the participants.  The halt of a vaccine study is raising new questions about the ability of countries to open their economies.

China may be done restocking its inventories. China has been increasing oil imports through the summer.  The increase stopped in August, with China importing 11.23 bpd versus 12.13 bpd in July.  Warren Patterson, global head of commodities at ING, indicates that China restocked inventories and that Chinese buying appears to be absent from the market at the moment.

Oil prices turned negative in April after the market was hit by a double shot of OPEC production increases and pandemic-induced demand destruction.  Higher oil prices recovered over the summer due to OPEC production cuts and signs that economies were reopening.  Recent data seems to indicate that the optimism of the summer was misplaced.  With storage levels lower than in the spring, it’s unlikely that the market will see the oil price drop witnessed in April.  Instead, there could be a prolonged period of low prices as the market works off excess inventory slowly.

Take-Away

Not one, but a series of events, announcements, and seasonal norms caused oil prices to drop. There are a number of trends on the horizon that are also concerning in a world sitting near inventory capacity.

Suggested Reading:

Is American Energy Dominance Relying on Immaculate Areas?

More Frequent Travel Could Be the Actual Aftermath of the Pandemic

Natural Gas Storage Imbalances and Higher Prices

 

 

Sources:

https://www.cnbc.com/2020/09/08/oil-drops-to-multi-month-low-on-demand-fears.html?__twitter_impression=true&recirc=taboo, Pippa Stevens, CNBC, September 8, 2020

https://www.cnbc.com/2020/09/10/oil-markets-coronavirus-pandemic.html, Reuters, September 9, 2020

https://finance.yahoo.com/news/crude-oil-adjusting-weakening-fundamentals-115438419.html, Oke Hansen, FX Empire, September 10, 2020

https://www.marketwatch.com/story/oil-down-sharply-as-us-driving-season-comes-to-end-2020-09-08, Myra P. Saefong and William Watts, MarketWatch, September 8, 2020

https://www.foxbusiness.com/markets/oil-prices-tank-as-demand-drop-nears, Jonathan Garber, FoxBusiness, September 8, 2020

https://oilprice.com/Energy/Crude-Oil/Surprise-Crude-Build-Forces-Oil-Prices-Lower.html, Irina Slav, OilPrice.com, September 10, 2020

 

 

Drilling Into Unexploited Areas Brings an Arduous Debate

 

On September 1, 2020, the Trump Administration revised regulations governing the oil and gas drilling across more than 190 million acres of U.S. forest land.  The states most affected by increased drilling would be Colorado, Montana, Nevada, New Mexico, and Utah. The administration has hinted that it intends to push to open the door for drilling off the coasts of Florida and California if they win the November election.  Drilling off the coasts of Florida and California has been banned since 1969 following an oil spill off the coast of Santa Barbara. Earlier, on August 17, 2020, the administration announced plans to open 1.5 million acres of the Arctic National Wildlife Refuge (ANWR) to oil and gas drilling. Environmentalists derided the decisions claiming drilling will disrupt and harm wildlife.  The administration claims the impact will be minimal, and the steps taken are necessary to assure the nation’s energy dominance.  Is opening this land to drilling minimal and necessary, or will allowing drilling be harmful to the environment and unnecessary?

 

 

Source: Department of Energy (DOE)

Arguments For (Opening Drilling is Necessary and Minimally Invasive)

The impact will be minimal. The area being opened in Alaska represents only 1.56 million acres out of a refuge that is 19.3 million acres.  That is less than 1% of the property.  A similar argument can be made for opening drilling off the coasts.  A constitutional amendment bans oil drilling in state waters, meaning proposed drilling must be roughly 3 miles off the Atlantic coast and 10 miles into the gulf.  That means any drilling rigs are unlikely to be visible from shore.  As far as the National Forest System goes, only 2.7% of the 193 million acres are currently leased for drilling, and new rules are unlikely to change that percentage by much.

 

 

The moves will boost the economy and create energy jobs.  The ANWR land sits on an estimated 7.7 to 11.8 billion barrels of oil. There are 3.6 billion barrels of oil below the Florida Coast and 10 billion barrels off the coast of California.  Proponents say increased Alaskan production could generate $1.1 billion over the next decade, helping the Alaskan economy, which is dependent on the energy industry for one-third of its jobs.  Opening U.S. Forest land could add 1,500 new wells.  The federal government would receive 12.5 percent of the royalties from oil and gas sold from wells on U.S. Forest land.

 

Arguments Against (Opening Drilling Is Unnecessary and Harmful)

It does not take much to disrupt wildlife. Oil spills from tanker accidents or pipeline breaks can be devastating. The impact on plants and animals can last for decades.  The noise and dust from road traffic needed to build and service power lines and drilling pads will disrupt animal migration patterns.  Drilling requires large amounts of water, sometimes in areas of limited water supply.

 

 

Source: Wikipedia, Arctic Refuge drilling controversy

Drilling in these areas is not economical anyways. Technological advances in drilling in shale formations have meant that domestic energy companies can produce oil and gas at lower costs. Lower costs combined with decreased demand resulting from a renewable energy push have led the United States to become a net exporter of energy.  The areas being opened to drilling are more costly to drill and do not have an existing infrastructure in place to move oil and gas to refineries or storage.  Opening land to drilling is unlikely to create the economic boom forecasted by proponents in the foreseeable future.

Summary

Opening areas to drilling has become a hot topic.  Opponents claim such moves will be disastrous to wildlife, while proponents say the moves simply address an overregulated environment. Most likely, the impact on either the environment or the economy will be muted, and the steps taken by the government will be largely symbolic. 

 

Sources:

https://www.houstonchronicle.com/business/energy/article/Trump-moves-to-open-up-drilling-in-national-15528688.php, James Osborne, Houston Chronicle, September 1, 2020

https://www.fool.com/investing/2020/08/17/trump-administration-to-approve-oil-drilling-in-al/, Mathew DiLallo, The Motley Fool, August 17, 2020

https://blogs.ei.columbia.edu/2017/12/06/arctic-national-wildlife-refuge-drilling-oil-impact-wildlife/, Sarah Fecht, State of the Planet, December 6, 2017

https://www.politico.com/news/2020/06/10/interior-drilling-florida-waters-november-election-310595, Ben Lefebvre, Politico, June 10, 2020

https://www.tampabay.com/news/environment/2020/08/29/oil-drilling-off-floridas-coast-looms-on-the-horizon-this-election-season/, Zachary T. Sampson, Tampa Bay Times, August 29, 2020

https://www.nrdc.org/experts/josh-axelrod/rule-speed-oil-drilling-national-forests-released, Joshua Axelrod & Samuel Eisenberg, NRDC, August 31, 2020

https://upload.wikimedia.org/wikipedia/commons/8/81/Northern_Alaska_National_Wildlife_Range_%28ANWR%29%2C_Coastal_Plain_1002_Area_%2841004364390%29.png, Our Daily Planet, December 01, 2019

 

Suggested Readings:

Hurricane Laura Shut Down Gulf Production with Barely Any Impact on Prices

Natural Gas Has a Sizeable Energy Role that is Waning

Eliminating the Con-Fusion

 

Barely an Impact on Oil Prices Despite Laura’s Wrath

Hurricane Laura ripped through the Gulf of Mexico this week forcing oil platforms to shut down.  The Category 4 storm caused 84% of the production in the Gulf to go offline after reaching sustained winds of 150 miles per hour.  Laura hit land on Wednesday night in the Lake Charles area, the heart of the domestic refinery business.  Over 45% of total U.S. petroleum refining capacity is located along the Gulf Coast. One would expect oil prices to rise on drop in supply.  Instead, oil price hovered in the $42 to $43 range.  The benign impact on oil prices reflects changing dynamics in the U.S. energy industry.

The Gulf is Less Important Due to Permian Basin Oil Production. Twenty years ago, production in the Gulf of Mexico represented almost one-third of domestic production.  The boom in production in shale plays such as the Permian Basin have greatly decreased the country’s reliance on the Gulf of Mexico for oil.  Now, the Gulf of Mexico represents only 17% of U.S. crude oil production.

 

Oil Inventories Were High. Petroleum product inventories were higher than normal before Hurricane Laura shut down oil refineries.  The EIA reports that U.S. commercial crude oil inventories are about 15% higher than the five-year average for this time of year.  The increase reflects a dramatic decrease in demand since the pandemic. Patrick De Haan, head of petroleum analysis at GasBuddy, estimates that gasoline demand, for example, is down 15% due to the effects of COVID-19.  We are beginning to see a reduction in supply and an increase in demand, but it may take at least a year to work down excess inventory. The temporary drop in production due to Hurricane Laura can easily be met by oil in inventory.

Producers Have Gotten Better at Restoring Production Quickly.  In the past, a major hurricane resulted in a major disruption in production.  The chart below shows the sudden drop off in production during Hurricanes Katrina and Rita in 2005 and Hurricanes Gustav and Ike in 2008.  However, note the limited impact of Hurricane Barry last year.  The smaller reduction in production may reflect the fact that Hurricane Barry was less severe than the earlier hurricanes.  However, it also reflects the fact that hurricane forecasts have improved allowing producers to prepare for the hurricane and return to production sooner.

 

 

Refineries Outside the Gulf Were Running Below Capacity.  Because of a drop in oil prices and oil demand following the economic impact of COVID-19, domestic oil production has decreased.  Lower production has meant that domestic refineries are running below capacity.  U.S. refineries were operating at 82% of capacity on August 21, 2020 according to the U.S. Energy Information Administration.  Refineries that are not shut down due to Hurricane Laura should be able to increase production and offset lost production in the Gulf.

 

Sources:

https://finance.yahoo.com/news/oil-gas-prices-slip-hurricane-115423327.html, Jonathan Garber, Fox Business, August 27, 2020

https://finance.yahoo.com/news/oil-industry-shuts-platforms-rigs-214017121.html, Cathy Bussewitz, Associated Press, August 26, 2020

https://www.marketwatch.com/story/oil-prices-edge-lower-shrugging-off-hurricane-lauras-landfall-2020-08-27, Myra P. Saefong and William Watts, MarketWatch, August 27, 2020

https://www.marketwatch.com/story/hurricane-laura-may-do-little-to-disturb-relative-calm-in-summer-gasoline-prices-2020-08-27, Myra P, Saefong, MarketWatch, August 27, 2020

https://www.wwno.org/post/hurricane-barry-caused-biggest-gulf-oil-drop-more-decade, Travis Lux, WWNO, October 9, 2020

https://www.eia.gov/petroleum/supply/weekly/pdf/highlights.pdf, EIA, August 21, 2020

 

Suggested Reading

OPEC Forecasts Lower Demand as Output Cuts Taper

Canadian Oil Production Drops To the Lowest Level Since 2016

Unexpected Lower Oil Inventories are a Dent in the Upward Trend

 

Main image source: The Weather Channel, 11:00 am CST, August 27, 2020

Wednesday, August 26, 2020

Gevo, Inc. (GEVO)

ATM Offering and Warrant Exercises Add Almost $60 Million.

Gevo Inc is a renewable chemicals and biofuels company engaged in the development and commercialization of alternatives to petroleum-based products based on isobutanol produced from renewable feedstocks. Its operating segments are the Gevo segment and the Gevo Development/Agri-Energy segment. By its segments, it is involved in research and development activities related to the future production of isobutanol, including the development of its biocatalysts, the production and sale of biojet fuel, its Retrofit process and the next generation of chemicals and biofuels that will be based on its isobutanol technology. Gevo Development/Agri-Energy is the key revenue generating segment which involves the operation of the Luverne Facility and production of ethanol, isobutanol and related products.

Poe Fratt, Senior Research Analyst, Noble Capital Markets, Inc.

Refer to the full report for the price target, fundamental analysis, and rating.

Existing ATM program tapped to issue 38.5 million shares at $1.30/share netting $46.1 million. Combined with existing cash of $21.1 million on August 20th per the prospectus, pro forma cash increases to ~$67.2 million, or slightly higher than expected.


Series A Warrant exercises further boost cash. On August 20th, Series 2020-A Warrants were exercised and 22.97 million shares were issued. Gross proceeds of $13.8 million should move pro forma cash into the $80 million range. Remaining Series 2020-A Warrants to issue …








Click to get the full report

This Company Sponsored Research is provided by Noble Capital Markets, Inc., a FINRA and S.E.C. registered broker-dealer (B/D).

*Analyst
certification and important disclosures included in the full report. 
NOTE: investment decisions should not be based upon the content of
this research summary.  Proper due diligence is required before
making any investment decision. 

Monday, August 24, 2020

Gevo, Inc. (GEVO)

ATM Offering of $50 million Removes Funding Overhang.

Gevo Inc is a renewable chemicals and biofuels company engaged in the development and commercialization of alternatives to petroleum-based products based on isobutanol produced from renewable feedstocks. Its operating segments are the Gevo segment and the Gevo Development/Agri-Energy segment. By its segments, it is involved in research and development activities related to the future production of isobutanol, including the development of its biocatalysts, the production and sale of biojet fuel, its Retrofit process and the next generation of chemicals and biofuels that will be based on its isobutanol technology. Gevo Development/Agri-Energy is the key revenue generating segment which involves the operation of the Luverne Facility and production of ethanol, isobutanol and related products.

Poe Fratt, Senior Research Analyst, Noble Capital Markets, Inc.

Refer to the full report for the price target, fundamental analysis, and rating.

Equity offering adds $50 million and tempers near-term funding overhang. After the strong stock price move on Thursday, the existing ATM program was tapped to issue 38.5 million shares at $1.30/share, or a 29% discount. While the total share count increases to 89.8 million, pro forma cash increases to ~$69 million.


Likely warrant exercises could add ~$18 million and further temper near-term funding overhang. As we highlighted last week, the strong stock price move likely pushed many warrants holders to exercise early. If true, the warrant overhang would decline and pro forma cash would …








Click to get the full report

This Company Sponsored Research is provided by Noble Capital Markets, Inc., a FINRA and S.E.C. registered broker-dealer (B/D).

*Analyst
certification and important disclosures included in the full report. 
NOTE: investment decisions should not be based upon the content of
this research summary.  Proper due diligence is required before
making any investment decision. 

Friday, August 21, 2020

Gevo, Inc. (GEVO)

Supply Portfolio Doubles and Industry Player Added

Gevo Inc is a renewable chemicals and biofuels company engaged in the development and commercialization of alternatives to petroleum-based products based on isobutanol produced from renewable feedstocks. Its operating segments are the Gevo segment and the Gevo Development/Agri-Energy segment. By its segments, it is involved in research and development activities related to the future production of isobutanol, including the development of its biocatalysts, the production and sale of biojet fuel, its Retrofit process and the next generation of chemicals and biofuels that will be based on its isobutanol technology. Gevo Development/Agri-Energy is the key revenue generating segment which involves the operation of the Luverne Facility and production of ethanol, isobutanol and related products.

Poe Fratt, Senior Research Analyst, Noble Capital Markets, Inc.

Refer to the full report for the price target, fundamental analysis, and rating.

Largest contract signed to date. Addition of major industry player adds credibility to renewable fuel concept. Yesterday morning, Gevo announced that a supply agreement for 25 million gallons/year (MPGY) was signed with a subsidiaryof Trafigura Group. The contract is the largest in Gevo’s history to date. Not only does the supply portfolio more than double to 42 MPGY, it moves the revenue potential above $1.5 billion. Trafigura’s leading position as a global commodity trader validates the technology and business strategy.


Licensing strategy also moving forward.  Earlier, a license agreement with Praj Industries Ltd. was signed to develop renewable transportation fuels in India. The collaboration is driven by carbon emission targets and national strategic goals, including …








Click to get the full report

This Company Sponsored Research is provided by Noble Capital Markets, Inc., a FINRA and S.E.C. registered broker-dealer (B/D).

*Analyst
certification and important disclosures included in the full report. 
NOTE: investment decisions should not be based upon the content of
this research summary.  Proper due diligence is required before
making any investment decision. 

 

Gevo Exceeds $1.5B in Long-Term Revenue Contracts with Signing of Trafigura

 

ENGLEWOOD, Colo., Aug. 20, 2020 (GLOBE NEWSWIRE) — Gevo, Inc. (NASDAQ: GEVO) announced today that it has entered into a binding Renewable Hydrocarbons Purchase and Sale Agreement, dated August 17, 2020 (the “Agreement”) with Trafigura Trading LLC, a wholly-owned subsidiary of Trafigura Group Pte Ltd (“Trafigura”). The Agreement is a long term, take or pay contract and is the largest contract in Gevo’s history. Trafigura is one of the world’s leading independent commodity trading companies with over $171B and over $54B in revenue and assets, respectively. Under this contract Trafigura is expected to take delivery of 25MPGY of renewable hydrocarbons, the majority of which is expected to be low-carbon premium gasoline with a smaller portion of the volume for sustainable aviation fuel (“SAF”), starting in 2023.

This commitment will support Trafigura’s efforts to develop the market for low-carbon fuels including low-carbon premium gasoline. The Agreement will also enable Trafigura to supply SAF to both US and international customers whose interest is growing in low-carbon jet fuel.

“This is our largest single contract to date, and with it, brings Gevo to over $1.5B of revenue in long term contracts when added to the other contracts we have in place. As drop-in fuels, Gevo’s renewable, very high-octane gasoline and SAF are a perfect fit with Trafigura’s existing fuels business and will allow them to integrate these low-carbon options seamlessly into their supply chains. We expect that our low-carbon fuels will enable certain of Trafigura’s customers to substantially lower their carbon footprint,” said Patrick Gruber, Chief Executive Officer of Gevo.

“Today’s agreement is a natural fit between our companies that will help drive the expansion of our renewable fuels product offering. We look forward to continuing to make a positive impact on the transition towards a low carbon economy,” said Robert Kreider, Head of the Strategic Management and Development Group, North America for Trafigura.

Having produced SAF and other hydrocarbons for nearly a decade, Gevo has a unique business system as it integrates sustainable agriculture and biorefining to produce SAF and low-carbon premium gasoline. For every gallon of low-carbon premium gasoline or SAF produced, Gevo produces about ten pounds of protein for the food chain, delivering substantially all of the nutritional value of corn to the food chain. The farmers who supply Gevo on average are capturing carbon, building up their soil with regenerative agriculture techniques. Utilizing a low-carbon ecosystem is vital to Gevo. Gevo began to use ISCC+ and Roundtable on Sustainable Biomaterials (RSB) certified corn for its Luverne, Minnesota facility while displacing fossil-derived power and heat with wind turbines and the upcoming implementation of biogas from dairy manure generated nearby. The execution of this circularity is unique and Gevos’ SAF is expected to have greenhouse gas profile reduction of 70% compared to the fossil-based jet fuel alternative. Eventually, it may be possible through soil carbon sequestration to completely decarbonize jet fuel through the use of Gevo’s SAF.

The Agreement is subject to certain conditions precedent, including Gevo acquiring a production facility to produce the renewable hydrocarbon products contemplated by the Agreement and closing a financing transaction for sufficient funds to acquire and retrofit the production facility contemplated by the Agreement. A copy of the Agreement between Trafigura and Gevo has been filed with the U.S. Securities and Exchange Commission on Form 8-K.

About Gevo

Gevo is commercializing the next generation of gasoline, jet fuel and diesel fuel with the potential to achieve zero carbon emissions, addressing the market need of reducing greenhouse gas emissions with sustainable alternatives. Gevo uses low-carbon renewable resource-based carbohydrates as raw materials and is in an advanced state of developing renewable electricity and renewable natural gas for use in production processes, resulting in low-carbon fuels with substantially reduced carbon intensity (the level of greenhouse gas emissions compared to standard petroleum fossil-based fuels across their lifecycle). Gevo’s products perform as well or better than traditional fossil-based fuels in infrastructure and engines, but with substantially reduced greenhouse gas emissions. In addition to addressing the problems of fuels, Gevo’s technology also enables certain plastics, such as polyester, to be made with more sustainable ingredients. Gevo’s ability to penetrate the growing low-carbon fuels market depends on the price of oil and the value of abating carbon emissions that would otherwise increase greenhouse gas emissions. Gevo believes that its proven, patented technology enabling the use of a variety of low-carbon sustainable feedstocks to produce price-competitive low carbon products such as gasoline components, jet fuel, and diesel fuel yields the potential to generate project and corporate returns that justify the build-out of a multi-billion-dollar business. Learn more at www.gevo.com.

Trafigura

Founded in 1993, Trafigura is one of the largest physical commodities trading groups in the world. Trafigura sources, stores, transports and delivers a range of raw materials (including oil and refined products and metals and minerals) to clients around the world. The trading business is supported by industrial and financial assets, including a majority ownership of global zinc and lead producer Nyrstar which has mining, smelting and other operations located in Europe, Americas and Australia; a significant shareholding in global oil products storage and distribution company Puma Energy; global terminals, warehousing and logistics operator Impala Terminals; Trafigura’s Mining Group; and Galena Asset Management. The Company is owned by around 700 of its 8,000 employees who work in 80 offices in 41 countries around the world. Trafigura has achieved substantial growth over recent years, growing revenue from USD12 billion in 2003 to USD171.5 billion in 2019. The Group has been connecting its customers to the global economy for more than two decades, growing prosperity by advancing trade. Visit: www.trafigura.com

Forward-Looking Statements

Certain statements in this press release may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements relate to a variety of matters, including, without limitation, statements related to the Agreement with Trafigura, Gevo’s ability to produce the products required by the Agreement, Gevo’s ability to raise the capital necessary to acquire and retrofit the production facility contemplated by the Agreement, Gevo’s ability to realize the full amount of the revenues under its agreements and other statements that are not purely statements of historical fact. These forward-looking statements are made on the basis of the current beliefs, expectations and assumptions of the management of Gevo and are subject to significant risks and uncertainty. Investors are cautioned not to place undue reliance on any such forward-looking statements. All such forward-looking statements speak only as of the date they are made, and Gevo undertakes no obligation to update or revise these statements, whether as a result of new information, future events or otherwise. Although Gevo believes that the expectations reflected in these forward-looking statements are reasonable, these statements involve many risks and uncertainties that may cause actual results to differ materially from what may be expressed or implied in these forward-looking statements. For a further discussion of risks and uncertainties that could cause actual results to differ from those expressed in these forward-looking statements, as well as risks relating to the business of Gevo in general, see the risk disclosures in the Annual Report on Form 10-K of Gevo for the year ended December 31, 2019 and in subsequent reports on Forms 10-Q and 8-K and other filings made with the U.S. Securities and Exchange Commission by Gevo.

Gevo Investor and Media Contact
720-647-9605

IR@gevo.com

Trafigura Media Contact
+41 (0) 22 592 4528
media@trafigura.com

 

 

Natural Gas Fell Hard Through Spring – Are We Seeing the Turnaround?

 

Natural gas in storage ended the winter heating season near historical averages.  Then COVID-19 hit, and the demand for gas went away.  The result is that natural gas in storage for the lower 48 states is now higher than it has been for five years at this time of year.  The chart below shows that gas storage levels relative to trailing five-year averages, minimums, and maximums.

 

 

People tend to think of natural gas as a fuel used primarily for space heating.  With more people staying at home, it would reason that natural gas demand would be near historical levels if not higher.  In recent years, however, natural gas consumption has changed.  While gas demand among residential and commercial customers (the primary users of natural gas for space heating) has been steady, demand for natural gas to fuel electricity generations has grown.  Electricity generation now represents the largest use of natural gas.

 

 

In fact, the residential and commercial sectors, which tend to be associated with space heating, accounted for only 36% of U.S. natural gas demand, according to the Natural Gas Supply Association.  Twenty years ago, residential and commercial users consumed roughly half of natural gas consumption.  The implications are clear.  Natural gas demand has become more economically sensitive over time and is being hurt by the economic slowdown caused by COVID-19.

 

 

As one might expect, there is a direct correlation between natural gas in storage and natural gas prices.  As storage levels have risen in recent months, natural gas prices have fallen.  Natural gas prices began the winter around $2.75 per mcf and fell steadily to a level under $1.50 per mcf by June.

 

 

There is good news for natural gas prices.  The drop in natural gas prices has led to a response from drillers.  The number of rigs drilling for natural gas has dropped dramatically this spring.  As of August 24, 2020, there were only 69 natural gas rigs drilling.  That represents a 59% decline from a year ago.

 

 

The response has been a surge in natural gas prices in the last two weeks.  Once below $1.50 per mcf, the upcoming September futures contract is now above $2.40 per mcf.  The contract has risen $0.65 in the month of August alone.  Clearly, investors anticipate that the natural gas storage numbers are about to correct to more normal levels.

 Suggested  Content:

GEVO Chairman Interview

OPEC Forecast Lower Demand as Output Cuts Taper

Energy Sector in Rapidly Growing Indonesia

Expect Today’s Nuclear Technologies to Provide an Important Role in the Future of Energy

 

Each event in our popular Virtual Road Shows Series has maximum capacity of 100 investors online. To take part, listen to and perhaps get your questions answered, see which virtual investor meeting intrigues you here.

 

Sources:

https://crudeoilfacilitators.blogspot.com/2019/08/us-natural-gas-demand-is-at-record-and.html, Scott DiSavino and Stephanie Kelly, Reuters, August 8, 2019

https://www.bicmagazine.com/industry/natgas-lng/u-s-henry-hub-natural-gas-spot-prices-reached-record-lows-in/, BIC Magazine, July 13, 2020

https://www.eia.gov/naturalgas/weekly/#tabs-rigs-2, EIA, August 12, 2020

 

Falling Renewable Costs Could Strand Up to $1 Trillion of Natural Gas Assets

 

Ten years ago, the American Gas Association declared natural gas to be the bridge to a clean energy future.  Natural gas is the cleanest burning of all carbon-based fuels.  With new environmental restrictions pushing coal and oil out of the picture and renewable energy sources not yet economically competitive, natural gas was in a good position to fill the gap.  Projections around 2015 show that analysts expected coal consumption to fall dramatically, with natural gas consumption soaring to replace coal’s place.

 

 

Fast forward five years, and we see that coal has indeed lost market share.  Coal consumption has fallen from 40% ten years ago to a current level of 11%.  Natural gas has picked up much of this market share, rising from 25% to 32%.  However, renewable energy sources, notably wind and solar, have grown faster than anticipated and now represent 11% of all energy consumption, a level equal to coal.

 

 

The change in consumption patterns can best be explained by looking at electric generation sources.  Coal, which once accounted for half of all power production, now represents only 24%.  Natural gas, on the other hand, has increased from a 25% market share to 37% of all power generated.  However, this trend shows signs of ending.  The chart below from the U.S. Energy Information Administration shows that analysts expect coal and nuclear to continue to decline, but that it will be renewable energy, not natural gas, that grabs market share in the next few years.  Forecasts even call for natural gas’s market share to show a decline.

 

 

The case for natural gas as a key component of power generation is simple.  In addition to being more economically friendly than other carbon fuels, natural gas works well in smaller, simple-cycle, turbine power plants that can economically serve peak power demand.  These plants may only run a few hours a day but can be started up and shut down at little cost, unlike traditional baseload plants.  This is important because renewable wind and solar plants are inconsistent and do not serve peak power demand well.

 

 

Still, investing in new natural gas power plants is risky.  A gas power plant will produce electricity for decades.  Natural gas pipeline and storage units last even longer.  If renewable energy continues to become more cost-effective as it grows and the ability to store energy improves, natural gas assets could become stranded. Sean Kidney, CEO of the Climate Bonds Initiate, claims, “The window to do gas unabated has closed.” A report by Rethink Energy estimates that investments in natural gas power generation could lead to $1 trillion in losses by 2050, a scary thought for regulated utilities that are granted limited returns on their investments.

We expect natural gas to remain an important energy source for the foreseeable future.  Energy plant investors typically want to invest in multiple energy sources and not rely on one energy source.  The energy source that is cheapest today may not be the cheapest tomorrow—technology changes,  environmental regulations change, the cost of production changes.  That said, signs are beginning to point towards a diminished role for natural gas going forward.

 

Suggested Reading:

 

Virtual Power Plants and Tesla Car Batteries

 EIA Reports the Largest Weekly U.S. Crude Decline

Exploration
and Production Second Quarter Review and Outlook

 

Each event in our popular Virtual Road Shows Series has maximum capacity of 100 investors online. To take part, listen to and perhaps get your questions answered, see which virtual investor meeting intrigues you here.

 

Sources:

https://www.earthisland.org/journal/index.php/magazine/entry/natural_gas_a_bridge_to_nowhere/, Jennifer Krill, Earth Island Journal, Spring 2015

https://ourworld.unu.edu/en/us-natural-gas-revolution-is-a-bridge-to-nowhere, Belinda Waymouth, Our World, September 24, 2014

https://www.power-technology.com/features/bridge-to-nowhere-does-natural-gas-energy-have-a-future/, Heidi Vella, Power Technology, July 6, 2020

https://www.petroleum-economist.com/articles/low-carbon-energy/energy-transition/2020/gas-a-bridge-to-nowhere, Beatrice Bedeschi, Petroleum Economist, February 13, 2020

https://energyinnovation.org/wp-content/uploads/2020/03/Natural-Gas_A-Bridge-to-Climate-Breakdown.pdf, Lila Holzman, Mike O’Boyle and Daniel Stewart, As You Sow, March 2020

https://www.eia.gov/energyexplained/us-energy-facts/, U.S. Energy Information Administration, June 2020

Photo: Photographer,Michael Lewinski, Harquahala Natural Gas Generating Facility, Tonopah, AZ

 

Tuesday, August 18, 2020

Energy Services of America (ESOA)

In Line Quarter. Signs of Recovery Ahead.

Energy Services of America Corporation is engaged in providing contracting services for energy-related companies. The company is primarily engaged in the construction, replacement, and repair of natural gas pipelines and storage facilities for utility companies and private natural gas companies. It services the gas, petroleum, power, chemical and automotive industries, and does incidental work such as water and sewer projects. Energy Service’s other services include liquid pipeline construction, pump station construction, production facility construction, water and sewer pipeline installations, various maintenance and repair services and other services related to pipeline construction.

Poe Fratt, Senior Research Analyst, Noble Capital Markets, Inc.

Refer to the full report for the price target, fundamental analysis, and rating.

Fiscal 3Q2020 (June) Quarter in line with expectations. Higher revenue was offset higher operating costs so gross profit of $2.8 million and adjusted EBITDA of $1.4 million were in line.


Fine-tuning FY2020 EBITDA. We are moving our FY2020 EBITDA estimate to $3.4 million from $3.5 million to reflect fiscal 3Q2020 operating results and more moderate gross margin assumptions due to project cancellations/delays.


Uncertain outlook and lower backlog, but signs of recovery.  Backlog dropped to was $69.8 million in 3Q2020 from $92.1 million in 2Q2020 due to the shifts in project timing. Current bidding activity continues and adding projects seems likely, but the COVID-19 uncertainty and low energy prices remain concerning and project might …










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This Company Sponsored Research is provided by Noble Capital Markets, Inc., a FINRA and S.E.C. registered broker-dealer (B/D).

*Analyst
certification and important disclosures included in the full report. 
NOTE: investment decisions should not be based upon the content of
this research summary.  Proper due diligence is required before
making any investment decision. 

 

Expect Today’s Nuclear Technologies to Provide an Important Role in the Future of Energy

The International Thermal Experimental Reactor (ITER) Project is the first large-scale nuclear fusion project and is being financed by the European Union, United Kingdom, China, India, Russia, Japan, South Korea, and the United States. The $25 billion project entered its five-year assembly phase in July and aims to produce sustainable fusion energy on a commercial scale. Unlike nuclear fission, a technology used for conventional nuclear reactors, nuclear fusion produces four times as much energy without the risk of meltdowns and little waste.  

Nuclear Fusion Versus Fission

Fusion plants can be fueled by hydrogen and do not rely on radioactive materials. The illustration below, sourced from an infographic sourced from the Office of Nuclear Energy, summarizes some key differences.

Source: U.S. Department of Energy

Despite many years of research, making nuclear fusion commercially viable has been a technical challenge given the difficulty in reliably generating enough energy from the reactions.

Shrinking the Carbon-Free Footprint

The ITER project has inspired private enterprises, both large and small, to explore fusion generation technology on a smaller scale. Last week, Chevron Corp. announced an investment in Zap Energy Inc., joining Italy’s ENI and Norway’s Equinor who have also announced investments in nuclear fusion startups to reduce their carbon footprint. Meanwhile, conventional nuclear technology is advancing to overcome its chief objections, namely, preventing the risk of a meltdown and solutions to reduce or dispose of the radioactive spent fuel. Policymakers are reviewing the feasibility of microreactors and small modular reactors that can generate 20 megawatts to 300 megawatts of electricity. Large scale nuclear reactors can generate 300 megawatts to 1,000 megawatts of power. Nuclear is a carbon free source of electricity and, in terms of power density as measured by watts per square meter, has a smaller footprint than some renewables, including wind farms. According to the Nuclear Energy Institute, wind farms require up to 360 times as much land area to produce the same amount of electricity as a nuclear facility, while solar photovoltaic facilities require up to 75 times the land area.

The Take-Away

The nuclear power industry offers significant potential for innovation and could be a critical part of the solution to curb carbon dioxide emissions and global warming. Big ideas, like the International Thermal Experimental Reactor, may help in advancing nuclear technology as private enterprise grasps for pragmatic solutions for both nuclear fission and fusion. Public policy is also crucial to leveling the playing field. For example, coal-fired and natural gas-fired generation facilities that emit greenhouse gases are not penalized, while nuclear power facilities are not rewarded for producing carbon-free electricity.  A carbon tax, that puts a price on emissions, or a cap-and-trade program are ideas that may help level the playing field among alternative sources of power generation. Rather than going all in on renewables, the public interest may be better served by exploring alternatives and promoting innovation among all sources of energy.  

 

Suggested Reading:

Carbon-Free
Nuclear Energy Expectations Through 2050

Is M&A Picking up
in Energy Sector

Exploration and
Production Second Quarter Review and Outlook

Each event in our popular Virtual Road Shows Series has maximum capacity of 100 investors online. To take part, listen to and perhaps get your questions answered, see which virtual investor meeting intrigues you here.

 

Sources:

ITER,
The World’s Largest Nuclear Fusion Project: A Big Step Forward, Forbes, Ariel Cohen, August 7, 2020.

World’s
Largest Nuclear Fusion Project Begins Assembly in France, The Guardian, Damian Carrington, July 28, 2020.

A
Giant Fusion Reactor Hotter than the Sun to Provide Unlimited Clean Energy
Without Waste Marks Milestone, Good News Network, Andy Corbley, August 10, 2020.

ITER: World’s
Largest Nuclear Fusion Project Begins Assembly, BBC, Paul Rincon, July 28, 2020.

Fission
and Fusion: What is the Difference, Infographic, Office of Nuclear Energy, U.S. Department of Energy, May 7, 2018.

INFOGRAPHIC:
The Flexibility of Nuclear, Office of Nuclear Energy, U.S. Department of Energy.

Land
Needs for Wind, Solar Dwarf Nuclear Plant’s Footprint, Nuclear Energy Institute, July 9, 2015.

2019 Advanced
Nuclear Map: Getting to Zero Emissions by 2050, Third Way, John Milko, Jackie Kempfner and Todd Allen, October 17, 2019.

Oil
Major Chevron Invests in Nuclear Fusion Startup Zap Energy, Reuters, August 12, 2020.

Picture: ITER Site, tokamak building