Velocys PLC (OTCPK:OXFCF), the UK headquartered company which aims to enable sustainable fuels for aviation through waste to fuel conversion, has recently seen its share price explode. This share price rise is not justified given the news released. A total company valuation of £90 million+ is overvalued, to say the least, at this point in the company’s development and when considering its overall forward-looking pipeline.
The company had two different pieces of news that fueled the rise, both released on the 12th of June. In the morning, the company announced that it had received a grant from the Department for Transport (DFT). This was for a sum of just £500,000 and was awarded under the Future Fuels for Flight and Freight competition. Shares only rose five percent on the back of this news. The sum awarded was very minimal in comparison to the total current valuation of the company and the actual startup costs for the Altalto project, which is the company’s planned waste to fuel facility.
The second piece of news which came later on in the day was the main catalyst for the large share price rise. The company received a grant of formal planning permission for the Altalto project in Immingham in North East Lincolnshire, England. This final formal grant of planning permission was to be expected as the local planning committee had already given outline approval for the waste to jet fuel plant back in May. And in May, the share price movement was nothing compared to the breakout that we have seen this week.
It’s important to note that the Altalto project, although wholly owned by Velocys is actually a Joint Development Agreement (JDA) between British Airways (OTCPK:ICAGY), Velocys, and Shell (NYSE:RDS.A). This JDA was extended to support the continued technical and commercial development of the project. Under the JDA extension in May 2020 Shell and British Airways committed to £1m of combined funding for the project and in return received an option to buy one-third of the Altalto project each in the future for £1. This builds on £2.8m of funding from Shell and British Airways committed to the project in 2019.
Source: Velocys.com – Altalto project planned design
What this means for Velocys and its valuation
Velocys still remains a very early stage development company. Studying the last financial results for the company – interim results to June 2019, the company booked just £22,000 worth of revenues for the six-month period. Both of its projects (Immingham, UK, and Mississippi, United States) remain early stage projects. They are both now in the pre-FEED (Front End Engineering Design) stage with the company focusing on developing them into the FEED stage. However, the cost of bringing both these projects forward remains very high. The UK government subsidy of £500,000 is relatively small in comparison to the current cash burn of over £10 million a year for the company. And the company describes the Immingham, UK project, as ‘Hundreds of millions of pounds of investment into North East Lincolnshire’.
The company remains a substantial time away from achieving any material revenues in regards to the projects with a large amount of costs still to come prior to getting to that point. As the company ramps up its pre-FEED programme, cash burn will also increase as the company expands and development costs increase.
Velocys’ Mississippi project: the Bayou fuels project, which uses waste from paper and timber industries in order to produce fuel for road transportation in the United States still does not yet have a partner. While they are looking for one, it will be difficult for the company to progress the project forward quickly on their own without financial aid.
Due to the company’s current early stage and exploratory positioning, we should not underestimate how difficult it will be for the company to scale up from plans and prototypes to a fully commercial operation. This is a very costly process and will require significant further capital. Although this could be mitigated to a certain extent by the collaboration with Shell and British Airways, the financial aid given to date by the partners of under £5 million is minor in comparison to the overall administrative costs and project costs associated with bringing the project forward. It suggests that Shell and British Airways are keeping their options open as regards future collaboration. And if the project looks to be successful, they will own two-thirds of the project for £1 each, which feels like a tough deal for Velocys shareholders.
As the project moves forward, new personnel who are experienced with later stage development will also be required as the company attempts to move from prototype to production, further adding to costs and complexity. The company is currently planning to commence construction in 2022, which is still a substantial period of time away, with construction planned to be finished in 2025.
The company is significantly overvalued when studying the valuation on a fundamental basis, looking at what it has already achieved. The company continues to have no real material assets to their name. In their 2019 interim results, the company reported that they had net assets of just £628,000. There has been a large amount of dilution, and this has been a big driver in causing significant share price deterioration over the years, with the company raising £7 million via way of placing in July last year at just 3p. Velocys’ share price is down 87% over the last 5 years. It’s difficult to justify the recent increase in overall company equity valuation by £60 million on the back of the funding grant of just £500,000 and the confirmed planning permission. This leads me to believe that the recent share price rise is heavily over-extended. And much of the rise is based on future prospects as the company’s outlook improves. The share price had initially risen just 20% following the news but has since exploded far higher past 14p. This is particularly strange considering that the permit news was largely expected following the press release back in May, where the planning committee had approved the waste to jet fuel plant with the formal decision notice expected later on. The company may very well see this recent rise as an opportunity to raise capital and further bolster the company’s liquidity position.
Although the likes of Shell and BA remain onboard currently and continue to aid in funding, they do not currently own a stake in the project, with them having the option to take one in the future. This leaves Velocys exposed as both Shell and BA have the opportunity to pull out of giving future funding which could halt development and significantly affect shareholder value. But, for now, they remain onboard, which is a positive for the coming months and will help them to get into the FEED stage of development.
The company also has a commercially-ready reactor for Fischer-Tropsch synthesis of hydrocarbons, these had demonstrated to work at their the ENVIA site on Oklahoma city as they produced 1.6 million litres of fuel and waxes over the demonstration at ENVIA. However, this partnership did not provide any real material revenues for Velocys and was used for “performance data” and “learnings”. Since then, the board fulfilled one order for this technology, which was for a bio-refinery in Japan back in November 2019. This sale was worth just £400,000 and leaves the company in the early stage/prototyping arena.
I believe that the recent rise in Velocys share price has been largely fueled by momentum-driven trading with a clear detachment from the company’s fundamentals at this point. The snowballing effect has largely taken hold as more and more buyers dive in to push the share price far higher. Following the news, the market had a weekend to process the news and opened up just 20%, so for the shares to rise another 100% since then is unjustified. I remain bearish on Velocys’ current valuation with very small amounts of revenues coming from the Fischer-Tropsch technology, the company remains a high cash burn business with future fundraising rounds almost inevitable. This means that investors buying on the current spikes have the ability to get burnt quickly through the short-term volatility but also through potential future capital raises. For people looking to buy for the long term, it would be better to wait for the share price to settle first to a point where the market believes the true value is found, before taking a position; I believe this position will be far lower than at present.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.