This ad is a little bit less relevant now than it was when DeHaemer and his copywriters first wrote up the ad, presumably a few months ago, but the ad is circulating heavily and I’m getting questions about it today — and it is, in truth, an interesting idea that I thought you might like to discuss — so we’re getting an answer out for you now.
The tease is all about “gas to liquids” — which has been a popular area for investor hype for a decade or more, and has been aggressively pushed by Sean Brodrick at the Oxford Club for a little over six months as a “gasoline without oil” idea.
That spiel was touting Sasol (SSL), the giant South African energy company that has pioneered large-scale gas-to-liquid and coal-to-liquid plants out of political and economic necessity, and the ads are still running now even though that “real gas without oil for $1.71 a gallon” sounds a lot less dramatic now, with gas right around $2 a gallon, than it did back in July when gas was pushing $4. (And given that economic reality now, it’s no surprise that Sasol has put the brakes on their massive Louisiana facility that was being teased in the ad — they haven’t scrapped it, but they’re taking their time.)
But this ad (and teaser target) is different — DeHaemer isn’t touting Sasol, he’s talking about a (much) smaller gas-to-liquids company that does something a little different. Here’s a little taste from the ad:
“The Air Force alone spends roughly $10 BILLION on jet fuel PER YEAR.
“That’s why the Air Force is betting on a revolutionary kind of fuel to change that…
“It’s NOT oil, ethanol, algae, or natural gas.
“The goal of this initiative? To wean itself off expensive foreign oil producers who supply half of the military’s fuel supply.
“The Air Force hopes this fuel will make up its entire supply by 2030.
“It’s already been tested in the B-52 bomber planes… with excellent results.
“‘We’re seeing very little difference in the plane’s performance,’ says the Air Force’s lead engineer, Chris Stroh.
“And now it’s getting ready to replace traditional gasoline here in America.”
That quote from the Air Force Engineer is from back in 2006, when the Air Force was first testing synthetic fuel — and yes, at the time they were testing a fuel made by a gas-to-liquids company called Syntroleum, but that company is no longer independent. They were bought out/rescued by Renewable Energy Group (REGI) last year, and that’s not the company being teased, either (REGI is primarily a biodiesel company, I don’t know much about that business but it doesn’t look like it’s very likely to grow without a big government push).
So what is the stock being teased? Stick with us and we’ll get some answers (assuming, of course, that you don’t want to cough up $499 to subscribe to Crisis & Opportunity and get DeHaemer’s actual report). More from the ad:
“I’ve discovered one company that’s not only exploiting this new fuel technology but also revolutionizing it…
“It’s trading for around $3 a share right now. But I don’t expect this hidden gem to remain under wraps much longer….
“What I’m telling you isn’t conjecture or wishful thinking… this fuel is already PROVEN.
“Two international airline fleets are using it right now to help power their jetliners.
“It’s being produced at facilities around the world. There’s a mammoth plant in Qatar that’s producing 140,000 barrels of this fuel per day.
“And now the development of new facilities is underway here in the United States…
“For instance, a large-scale $14 billion plant is being developed right now in Louisiana, and it’s set to produce 96,000 barrels of this new liquid fuel per day… enough to fuel over 10 million automobiles.
“In short, this is the REAL fuel of the future for America’s military… for our nation’s airlines… and for our nation’s automobiles.”
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Yes, Qatar is a leader in gas-to-liquids — because they have so very much natural gas, and liquids and refined fuels are much cheaper and more profitable to ship and sell than is liquefied natural gas. Their biggest plant, Pear, is a partnership with Shell. And that $14 billion Louisiana plant is the Sasol one whose development is currently in “slow motion” as they put off big investment decisions because of weak commodity pricing. So neither of those is directly related to the company being teased by DeHaemer, though they apparently use similar technologies (no one “owns” the Fischer–Tropsch process for liquefaction of gas or solid fuels, which is what the Nazis and apartheid-era South Africans relied on for turning some of their abundant coal into a transportation fuel… though some technologies perfecting or tweaking that process are no doubt proprietary or patented).
Here’s how DeHaemer further describes the process:
“The process breaks down the natural gas and converts it into a mixture of hydrogen and carbon monoxide.
“This mixture is called ‘syngas.’ It then combines the “syngas” with a catalyst to create a chemical reaction.
“The reaction produces a liquid that can be refined into precious diesel gasoline… for an unheard of $66 a barrel!”
So you can see what I mean when I say this ad is somewhat “less relevant” with oil at $50 a barrel than it might have been when it was first written — but heck, they’re still sending the tease out to tempt us, so we’ll still solve it for you. And yes, the cost of that natural gas feedstock has come down substantially, too, though much less sharply than crude oil (since July 1, US oil is down 54% and US natural gas is down about 34%).
But then he gets to the part that made this a little bit interesting, even if the energy economics have changed:
“Large-scale GTL plants like this are expensive to build. They run in the tens of billions of dollars. They’re tough to get permits for. And they can take five to six years to build.
“Because they’re so huge, they also require a significant amount of natural gas to be profitable.
“So they can only be built in areas where huge volumes of natural gas and pipelines are present….
“Small-scale plants can convert this “stranded” gas into several hundred billion barrels of fuel — enough to supply the world’s energy needs for the next 25 years!
“The potential for this technology is STAGGERING… and so are the riches to be made.
“That’s why I’ve set my sights on this tiny company with a patented process for creating these small GTL plants…
“Its process is protected by 894 patents!
“This company has already won several contracts in the United States to help build small-scale GTL plants in gas-rich regions of Ohio, Pennsylvania, and Oklahoma…
“And the Department of Energy has teamed up with it to build a plant that converts waste gas into diesel.”
So that makes it sound a little bit more attractive — if you don’t have to have a concentrated pipeline hub, or a $14 billion investment, might these projects work in the shale gas regions? I guess that’s the idea.
Some more clues:
“The company is also involved in deals with two offshore firms that are using the technology to exploit huge fields of ‘stranded’ gas…. multi-billion dollar juggernaut Waste Management recently partnered up with this small $3 company to build several GTL plants.”
And a few more places we might see these projects:
“These plants will be built in China, Canada, the United Kingdom, and the United States.
“British Airways has signed on, too…
“The airliner has joined up with this company to build a plant that turns landfill waste into jet fuel. The plant will be the first of its kind in Europe.”
OK — so that’s enough of our clueification… how about we toss all that into the Mighty, Mighty Thinkolator and see what comes out the other end? Ready?
Me, too. Answer: this is Velocys (VLS in London, OXFCF on the pink sheets). It’s very illiquid on the pink sheets, so if you decide you like it and can’t trade in London, make sure to place orders only when both London and NY are open to give you a fair shot at getting a decent price — and, of course, only use limit orders based on the London price and the current exchange rate (I use xe.com for currency conversion, and the LSE site for London stock details… and remember that London trading is in pence, not pounds).
Formerly named Oxford Catalysts, Velocys is indeed focused on small-scale GTL (in the neighborhood of 1,000 barrels per day of output, versus 100,000 or more for the largest plants like the planned Sasol one in Louisiana) … here’s how they describe themselves:
“Velocys is the company at the forefront of smaller scale gas-to-liquids (GTL) that turns natural gas into premium liquid products such as diesel and jet fuel. Smaller scale GTL adds value to shale gas and makes stranded or flared gas economic – an untapped market of up to 25 million barrels per day.
“Velocys technology, protected by over 900 patents, is specifically designed for smaller scales, combining super-active catalysts with intensified reactor systems. The Company’s standardised modular plants are easier to ship and faster to install, at lower risk, even in the most remote or challenging locations. Together with world-class partners, Velocys works flexibly to unlock gas resources of 15,000 to 150,000 mmbtu per day, allowing more companies to take advantage of more opportunities.”
This is essentially a technology company that’s trying to transition to commercialization — they have a big patent portfolio, which is apparently standing up in court to at least some degree (they’ve recently won an injunction against one offender), but they’re very early on in seeing their technology actually in commercial use. They have a successful demonstration project, but they are pinning their hopes on a few “in development” projects with early partners to create a “real world” business case that will help them grow the business much more quickly.
The initial project is a joint venture with Waste Management and NRG Energy for a methane/natural gas refinery, and there are also fairly advanced plans for a biomass refinery with Red Rock Biofuels in Oregon (timber waste) and a small natural gas GTL plant in Ohio that Velocys bought (by buying Pinto Energy, the company that was trying to develop it), and a second waste-to-fuel refinery in London being proposed by partner Solena.
From what I can tell, the outside projects are each expected, by Velocys, to generate somewhere in the neighborhood of $15-30 million in revenue during construction (1-2 years) and something like 1.5-2X that much in ongoing revenue over the subsequent decade or two (total, not per year). Velocys supplies the reactor and the catalysts and licenses their technology, it appears, but are not doing the manufacturing — their key partner seems to be Ventech, a private engineering and construction firm. The only one that seems to have announced the “final investment decision” is the joint venture with Waste Management.
They raised some cash late last year, so they should have roughly $100 million in cash — they won’t be reporting until sometime in March, but they’ve had very limited revenue so far and it’s almost completely unpredictable (from selling small reactors, as they did in the first part of last year, to signing new deals), and many of their projects will require investment (like their wholly owned Ohio project, if they choose to proceed with it, and the joint venture with Waste Management et al., which includes a commitment of $5 million from Velocys).
At current exchange rates, the market cap is now about $320 million and they have about $100 million in cash. It’s hard to see a world in which these projects are rushed into existence, given the current pressure faced by most energy companies and the uncertainty in pricing, but it is a small company so a few projects would have a big impact. I have a hard time envisioning more than $30 million in revenue for them on an annual basis before 2017 at the earliest, assuming that the project pipeline continues to proceed and build (even if it builds slowly), and they’ve generally had expenses of $20-30 million a year over the past few years so I wouldn’t necessarily expect the finances to improve mightily… but the good thing about being a junior partner or technology supplier to these projects is that your business is nicely scalable — their R&D and operating costs wouldn’t double (I hope) if they got twice as many orders or ten times as many orders following the early years of these projects that are designed to prove the commercial viability of the technology, process and design.
So that’s the long-term possibility — that if these plants are popular and get developed in lots of areas to use “stranded” natural gas, then Velocys could move up dramatically over time. My guess is that we’ll see a lot of opportunity to buy the stock before that happens, since I think these investments are likely to move more slowly than optimists might hope over the next couple years, but that’s just a guess.
The shares have been 70% lower than this over the past eight years that they’ve been public, and 100% higher, and there’s not a lot of real fundamental reasoning you can use to be definitive about whether you think the company should be worth $200 million or $1 billion in a couple years, it’s all up in the air and depends on how many plants/refineries get built licensing their gas-to-liquids technology and using their reactors… this is a company that is well financed for the next couple years, but whether the stock withers on the vine or explodes higher, or just continues to be volatile as it has been since 2006, seems entirely to be a matter of news flow and speculation — and whether they get some big, attention-getting orders as plants move forward with investment commitments and actually start construction. The next semiannual earnings release will come next month sometime, and I’d expect them to announce the status of their leading projects then.
And, of course, if natural gas falls to $1.50 while crude oil goes back to $100, that would be a nice kick in the pants for them — many folks anticipate that the arbitration opportunity between relatively expensive oil and relatively cheap natural gas will continue to exist even in the current environment, but it sure looks a lot better when the price differential (and direction of movement) between those two commodities is more extreme.
That’s about all I can tell you after my first quick look at this company. I know we’ve got a few folks out there in Gumshoeland who follow Velocys, since it’s come up in conversation a couple times over the years, so if you’ve got some more insight or opinion you’d like to share please jump right in with a comment below.
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