Leaving current political discussions aside, there is little doubt that the market for clean and renewable fuel is growing substantially, and only a handful of companies are ideally positioned to capitalize on the demand for even lower carbon fuels presented in a global market. Aemetis (NASDAQ:AMTX) is one of them.
Aemetis is no newcomer to the business. Founded in 2006, AMTX owns and operates facilities in the United States and India that produce more than 100 million gallons of renewable fuel per year. AMTX operates a company-owned plant in Keyes, California that brings more than 60 million gallons per year (MGY) of capacity for ethanol, distillers grain, and distillers corn oil. In addition, this emerging global player also owns and operate a 50 million gallon per year capacity distilled biodiesel and refined glycerin bio-refinery near the port city of Kakinada, located on the Eastern coast of India.
However, Aemetis isn’t stopping there. The company is also in the process of designing and building a groundbreaking cellulosic ethanol facility near its Keyes, California plant, where the technologies of industry leading providers LanzaTech and InEnTech are being joined to produce ultra low-carbon, clean burning renewable fuel. More about this shortly.
While the current share price is not yet reflective of the enormous potential already built into AMTX, for investors looking to capitalize on undervalued opportunities, AMTX may be the perfect for a portfolio seeking to profit from the increase in the price of crude oil above $50 per barrel. With the company managing its technology and growth portfolio aggressively, perhaps the only obstacle that is in the way of substantial share price appreciation, the high-interest debt, may soon become an issue of the past. Indeed, the infrastructure is already in place to maximize growth and spearhead significant revenue appreciation.
The Elephant Is Leaving The Room
The obvious factor in keeping the share price tame at this point is the debt load of the company. And, although AMTX took on an ambitious growth plan with a relatively high-interest expense, the management team is aggressively finding ways to restructure the debt to far more favorable terms that will likely unleash the currently suppressed value reflected in the share price.
Investors who follow AMTX are supportive of the news that management is actively involved in reducing or eliminating much of the outstanding high-interest rate loans that were primarily used to acquire and upgrade the Keyes plant in California. These loans, provided by long time and reliable financing source Third Eye Capital, packaged much of the prior financing for Aemetis with interest rates ranging from a low of 5% to a high of 18.25% plus 5% annual renewal fees. However, AMTX management is vigorously taking steps to either repay or replace the higher interest disbursements by taking advantage of opportunities available through several debt programs, such as a structured 3% interest rate deal under an EB-5 subordinated debt structure.
Thus far, AMTX management has been successful in raising $35 million of 3% interest replacement funding and is undertaking a plan for a second $50 million of EB-5 subordinated debt to refinance the existing company debt at lower commercial bank rates using the roughly $165 million of the original construction cost of the current assets. To date, AMTX has completed the first phase of the EB-5 offering and received $35 million of new funding at an interest rate of 3%. Additional steps designed to eliminate and replace the higher interest rate debt instruments is ongoing, but, coupled with the growth of the company’s global initiatives, and with the financial expertise of the company’s management, the debt elephant may already be halfway out of the room.
As Aemetis executes its debt restructuring plan, investors can finally focus on the assets and business platforms that will generate substantial revenue and growth opportunity in a global market that is mandated by clean fuel and emissions initiatives for the next several decades.
AMTX’s Mission To Convert Waste To Value
With investors confident that management is effectively addressing the debt overhang, attention can turn to the many growth drivers at Aemetis. Positioned as a global renewable fuels and biochemicals company, AMTX is leveraging its industrial biotechnology expertise to convert first-generation ethanol and biodiesel plants into patented advanced biorefineries using renewable agricultural waste material to produce high-value products.
As with most emerging industries, there is also an evolutionary arc from which opportunistic companies are born. At Aemetis, this progression began with traditional corn ethanol and vegetable oil based bio-diesel and moved to non-food feedstocks like grain sorghum and sterine. Today, Aemetis is pushing well into the next chapter of the industry, focusing on renewable waste feedstocks and cutting edge technologies.
AMTX generated more than $143 million in revenues in 2016 alone, and is on pace to deliver even higher numbers now that the company is transitioning to next-generation lower carbon biofuels, and progressive regulatory policies are in full force in both the US and India.
For instance, the US Renewable Fuel Standard (RFS) requires obligated parties to blend ethanol and bio-diesel in increasing quantities each year. The mandate states that “conventional biofuels” must reduce greenhouse gas emissions by 20% relative to gasoline or diesel fuel and that “advanced biofuels” must reduce greenhouse gas emissions by 50%. As the existing corn-based ethanol industry has effectively reached the 15 billion gallon per year conventional biofuel mandate, future growth opportunities will go to companies, like Aemetis, who are positioned with the technology and capital necessary to build biorefineries of the future.
California Welcomes Aemetis
California, a leader in progressive energy policies, has initiated regulations for a Low Carbon Fuel Standard (LCFS), and this bodes very well for AMTX. The AMTX biodiesel plant has been approved for California’s LCFS pathway in 2016, allowing them to receive an additional ten cents per gallon for all fuel sold into the California market. Aemetis’ cellulosic ethanol fuel will sell for roughly $4.50 per gallon, with D3 RIN worth about $2.20 per gallon. A further benefit from the LCFS premium provides an additional .70-.80 cents per gallon to AMTX in the California market, and the company also qualifies from a federal tax credit of $1.01 per gallon for cellulose ethanol production.
However, California is not the only market providing a boost for Aemetis’s long-term prospects. Investors should factor in additional global initiatives that are paving the way for a substantial and long-term demand for biofuels. AMTX is ideally positioned by having production plants strategically located to serve large markets, and will benefit from considerable upside from next-generation production processes. The company also has resources to implement additional revenue-generating technologies that will produce higher demand advanced biofuels in the US and abroad.
As AMTX continues to focus on the production of advanced low carbon fuels and chemicals, whether through acquisition, company development, or from the commercialization of innovative technologies, the company is well positioned to replace traditional petroleum-based products by converting first-generation ethanol and biodiesel plants into advanced bio-refineries on a global scale. While the cellulosic ethanol project, which will add an additional 40 MGY in capacity in California alone, is impressive, additional growth opportunities lay outside of the United States.
The 25 Billion Gallon India Opportunity
AMTX already has a significant footprint in the United States, proven by its ability to generate $40 million of positive cash-flow revenue from its Keyes ethanol plant in California. While AMTX may soon enjoy similar income as oil markets begin to normalize in the $50-$80 per barrel range, the most significant near term market opportunity for AMTX may lay in its growing presence in India, a market that offers a 25 billion gallon per year opportunity for diesel fuel alternatives.
The growing demand for low carbon biofuels in India may become the most lucrative of the near-term opportunity for AMTX. The company’s India operation is debt-free, except for ongoing inventory financing. An expected $10 million per year of free cash flow from the Kakinada plant will allow for the pay down of debt for Aemetis’ parent company. Today, cash is being utilized to integrate additional technology and capacity that will allow the subsidiary to deliver more than $100 million per year in revenue from a three-year biodiesel supply agreement with BP (LON:BP) Singapore, as well as from expanded sales strategies throughout the domestic India market.
Management has also considered leveraging the growth in India to support a potential IPO of the India subsidiary, with the goal of raising fresh equity capital designated to offset debt and expand operations in the India market. Management believes that an IPO would be well supported by the robust 5% annual growth in the India domestic fuel market, rising crude oil prices, as well as the company’s valuable IP portfolio that includes its patent-pending enzymatic bio-diesel process technology designed by the India team.
Until recently, India’s regulatory policies slowed growth with the miscalculated implementation of tax increase. However, AMTX expects that the current regulatory agenda and a willingness to curb unnecessary tax regulation will free the market from excess restriction. Despite the high 18% GST tax imposed since July of 2017, the AMTX India subsidiary managed to continue deliveries of biodiesel to customers located near its production plant. With the expected roll-back of the GST tax, the company expects shipments of biodiesel will expand significantly as the company adopts new sources of domestic feedstock.
Aemetis Hits 2017 Milestone In India
Although somewhat overlooked by the industry analysts at the time, the AMTX subsidiary in India achieved a significant biodiesel technology commercialization milestone last November when Aemetis became one of the first companies in the world to convert low-cost, high free fatty acid waste feedstocks into distilled clear biodiesel that can be sold in both the European and US markets. This made AMTX’s India operation one of the most progressive enzymatic biodiesel production plants in the world, providing the company the capability to convert a broad variety of low-quality, high FFA feedstocks that cost up to 30% less than competing biofuel feedstocks made from grape seed, canola, soybean, and other vegetable oils. The milestone was a culmination of over two years of work with Denmark based Novozymes, one of the world’s largest biofuel enzyme suppliers. The collaborative breakthrough enabled the development of a patent-pending process for the use of enzymes to extract the useful components of low-quality, low-cost feedstocks for the production of biodiesel.
Leading The Industry Forward In Three Markets
Ideally positioned for growth with both technology and capital, AMTX has set in place a three-year roadmap to ramp up product revenues. In doing so, AMTX is reducing conventional ethanol industry volatility risk by migrating to high-growth cellulosic ethanol, distilled biodiesel, and renewable jet/diesel fuel markets.
AMTX’s fuel ethanol is a low carbon, clean burning, high octane transportation fuel that is produced with renewable feedstocks. The company’s biodiesel product significantly reduces air pollution, is environmentally friendly, and is 100% manufactured from waste vegetable oils.
Aemetis’ by-products include glycerin, a byproduct of biodiesel production that has substantial use in pharmaceutical, food and beverage, cosmetic, and other industries. The company also sells nearly 400,000 tons of wet distillers grain, a byproduct of ethanol production, which is a protein and energy-rich animal feed. Distillers corn oil, another ethanol production byproduct, is sold for poultry and cattle feed.
Aemetis Share Provides Opportunity
With just over 20 million shares outstanding and a share price of approximately $1.05, potential investors may underestimate the value in AMTX, as the current market cap of roughly $21 million does not account for the company’s considerable physical assets. While AMTX carries a considerable high- interest debt load, the seasoned management team is executing a systematic plan to replace costly debt with low-interest debt and aggressive revenue growth across multiple markets in the US and abroad to release the true value of the company’s shares.
At approximately one dollar per share, investors can realize an opportunity to generate long-term value through the company’s substantial asset base, the growing renewable fuels market, and global initiatives to create cleaner burning and more efficient renewable fuels. Not only are opportunities in the United States playing out very well for the company, the company’s presence and potential market dominance in India also provide a compelling argument that the stock is currently undervalued.
By partnering with industry giants like BP Singapore and leveraging advanced technologies to address growing markets, AMTX sits well positioned for both near and long-term appreciation in its stock price. The company is led by industry veteran Eric McAfee, the co-founder of PEIX and EPM, and a management team with over a decade of experienced leadership in the biofuels sector.
While investing in some emerging opportunities may appear to provide a higher risk/reward profile, investors should not overlook the obvious; AMTX already has significant infrastructure in place, a management team led by industry veterans, and a global market that will continue to grow substantially during the next decade.
This article was originally featured on CNA Finance