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Velocys PLC: Certain risks, uncertain rewards

Publication Date: 07 Jun 2019 - By Permjit Singh By Permjit Singh
Actionable
Differentiated

Equity Fundamental Equity USA EU ex-UK UK Energy

Velocys (LON:VLS) is a UK-based smallcap company engaged in the development and production of advanced fuels from biomass. Legislation for this exists in the US and the UK, the countries where it has operations.

The company claims its fuels can reduce greenhouse gases and particulates up to 70% and 90% respectively. Velocys' UK and US bio-refining projects have moved from the research and development phases and are now at commercialisation of intellectual property, with a view to commence operations in 2023.

An impairment was made of around £34m in 2017 against Velocys’ joint-venture, ENVIA, predominantly driven by a less ambitious revenue forecast.  

In September 2018 the Board of Directors of ENVIA decided to suspend operations and undertake a review of strategic alternatives at the ENVIA plant, and as a consequence recorded an impairment of £10.1m with respect to its loan to ENVIA. 

Any way you look at it, Velocys faces any number of major risks. For instance, further funding will be needed to reach Financial Close in 2020 for its two projects. The company believes that equity remains the preferred structure to support the business as a going concern in the near term.

Independent engineering sign-off is critical to its projects. There could continue to be a lack of clarity on the UK’s future waste policy, including maintaining the UK landfill tax and/or policy uncertainty around waste for large-scale capital-intensive schemes. 

Existing project partners might not fund the UK project to Financial Close. Design and operation of waste handling facilities is not a Velocys core competency, making it dependent on third-party performance. Its core technological advantage and IP could be exploited by competitors

Renewable fuels credits - such as RINs under the Renewable Fuel Standard, RFS in the USA or the development fuel Renewable Transport Fuel Certificates [dRTFC’s] in the UK - could be withdrawn or their value reduced. 

Finally, Velocys' cash usage is significant versus prospective future cash flows (particularly in the short-term) and the company continues to be reliant on the support of a small group of major shareholders.

Conclusion

For: There is an unmistakable demand for renewable biofuels worldwide and the company is banking on it. 

Against: More investment is needed for starters. The company faces political uncertainty. There is an uncertain return on investment, if any. The company has potential though it is not proven in full-scale biofuel production, and to quote its CEO: ”Velocys is within reach to offer a tangible solution to support decarbonisation."  

Overall:  Whilst the company's many risks are apparent, the rewards are not making it one to avoid.  

Disclosure:

I have no positions in any of the securities referenced in the contribution

I do not use any non-public, material information in this contribution

To the best of my knowledge, the views expressed in this contribution comply with UK law

I agree with the terms and conditions of ReachX

This contribution is for informational purpose and does not constitute investment advice nor is it an offer to sell or buy, nor is it a recommendation for any security.

Permjit Singh

 

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