Meltdown At Gevo
I am currently reading the book The Frackers: The Outrageous Inside Story of the New Billionaire Wildcatters. The excess and greed of a few of those profiled is mind-boggling. Of particular note, the late Aubrey McClendon nearly ruined Chesapeake with his excessive spending. But after presiding over a huge decline in Chesapeake shares he got margin calls and his personal shares were sold out from under him. So he turned around and did some self-dealing with Chesapeake that benefited himself enormously financially, at the expense of shareholders.
The greed was excessive, but in his defense he and Chesapeake co-founder Tom Ward (whose self-dealing was also highlighted in the book) did create a multi-billion dollar company from scratch that became one of the leading energy producers in North America. It doesn’t excuse the fact that he did things out of self-interest that weren’t in the best interest of shareholders, but the company itself did provide a lot of energy to consumers.
The same can’t be said of advanced biofuel company Gevo, one of three advanced biofuel companies that went public in 2010-11 with the backing of billionaire venture capitalist Vinod Khosla.
It has been almost exactly 6 years since Gevo’s IPO in February 2011. If you had invested $10,000 in Gevo at the IPO and left it there, today that investment is worth about $2.20. You wouldn’t have enough left to buy a Big Mac. Presiding over the destruction of shareholder value while personally enriching himself was part of McClendon’s story. But Chesapeake did enjoy profitable years under McClendon’s guidance, and its market capitalization was once $25 billion.
Gevo CEO Pat Gruber has presided over a 99.98% destruction of shareholder value. His reward? He receives total compensation of more than $1 million a year, including bonuses worth hundreds of thousands of dollars each year. McClendon’s board was criticized as being very compliant with his demands. I can only imagine that Gevo’s board is also pretty compliant. Otherwise it’s hard to understand why a board would not request Gruber’s resignation given the share performance under his guidance.
So far Gevo has managed to stay in business by screwing over its existing shareholders.
For years, Gevo has burned through cash, and then raised money by simply issuing new shares when cash was dwindling. The pattern was predictable. They would frequently issue some feel good piece of news about the future outlook. On the strength of the positive news (which rarely if ever had any near-term positive impact on cash flow), they would then issue new shares — which would tend to crash the share price. Wash, rinse, repeat all the way down. Existing shareholders were diluted to oblivion.
I predicted in January 2014 that KiOR would be bankrupt by year-end, which did happen. I considered following that up in 2015 with a prediction that Gevo would be bankrupt by year-end, but they weren’t going to throw in the towel as long as they could still raise money by issuing new shares. So, while I thought they would go bankrupt, the timing was uncertain.
But the end may now be near.
On their way to zero, Gevo has done two reverse splits to prop the price of the shares back up, so they would meet the NASDAQ listing requirements. In 2015 they did a 1-for-15 reverse stock split, but shares continued to decline. Last month the company did a 1-for-20 reverse stock split, and again shares continued to decline.
Late last month the company announced that the EPA had approved their isobutanol as an advanced biofuel, which means it is eligible for lucrative tax credits (but low fuel volumes mean the near-term impact is nominal). Then the company announced that a lender had granted them more time to pay back a loan. I joked with a friend earlier this month “It looks like they are setting up for another round of dilution.”
Then Gevo announced that it has entered into a Letter of Intent (LOI) with HCS Holding GmbH to supply isooctane under a five-year off-take agreement. But at the same time the company once more shafted existing shareholders. After the close on February 13th, Gevo announced a new $11.9 million public offering of common stock and warrants. A Valentine’s Day massacre ensued.
Shares that were still above $3 a share in early February (as a result of the recent reverse split) dipped to 92 cents this week. Shares have subsequently recovered back to $1.09, but the company will soon once again be fighting to maintain its NASDAQ listing. The company shed value so quickly in response to the offering that the current market cap of $14.9 million is barely above the value of the offering.
So far I haven’t said a word about the viability of Gevo’s process. As someone who spent years producing isobutanol commercially as a chemical engineer for a major chemical company, I do have some thoughts about their technical and economic viability. But that’s a longer discussion for another day. The share price speaks for itself.
For now, Gevo will likely continue with the tactic that has served them well: rosy press releases and new stock offerings. And that will keep them in business as long as investors continue to purchase the offerings. It’s amazing how long they have managed to execute this strategy, but it validates my decision not to predict bankruptcy in 2015. This “dead man walking” has mastered the art of slowing that walk to a crawl. Maybe Gruber should be commended for managing to keep the company afloat. But existing shareholders are getting shafted in the process.
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