The United States Department of Energy (DOE) loan programs office (LPO) provides loans and loan guarantees to support the development and deployment of innovative clean energy projects. A DOE LPO loan directly lends money to the company for eligible projects. Whereas a loan guarantee assures the private lender, like a bank, that the DOE will cover a majority portion of the private loan should the recipient fail to make good on the repayment. The DOE plays the role of lender or guarantor under these programs, which fall under Title 17 Innovate Clean Energy Loan Guarantee Program.
The DOE LPO recently awarded two conditional commitments for billion-dollar loan guarantees for two companies in order to finance their projects to produce sustainable aviation fuel (SAF). SAF can be added to jet fuel to reduce carbon emissions (CO2), just like how ethanol is added to gasoline to reduce CO2 emissions. However, SAF can also be used as a drop-in fuel, meaning that it can be used as jet fuel to power aircraft. The news initially sent the stocks of these two companies in the oils/energy sector surging higher. Let’s examine each deal.
Calumet: Evolving Into the Leading SAF Producer in North America
Calumet Inc. (NASDAQ: CLMT) produces refined fuels, specialty hydrocarbon products, and renewable fuels. The company owns and operates various oil refineries that are flexible enough to be configured for a variety of fuels and products. Its Specialty Products division makes various lubricant oils, solvents, waxes, and petrolatum (petroleum jelly) used in personal care products, cosmetics, pharmaceuticals, and coatings. These are byproducts made from petroleum refining. Calumet also produces fuels, including gasoline, diesel, and jet fuel. Its Montana Renewables subsidiary processes renewable and sustainable fuels and is the largest producer of SAF in North America.
Montana Renewables Receives $1.44 Billion DOE Conditional Commitment
Calumet’s Montana Renewables LLC (MRL) subsidiary was awarded a conditional commitment for a loan guarantee of up to $1.4 billion from the DOE to help finance constructing and expanding its renewable fuels facility. The expansion would boost production capacity to nearly 300 million gallons of SAF and 330 million gallons of combined renewable diesel and SAF. The SAF is sold to U.S. airlines, helping to lower CO2 emissions materially. MRL's SAF is a combination of synthetic paraffinic (SPK) and conventional jet fuel, meeting ASTM D&566 and ASTM D1655 specifications. It's a drop-in compatible fuel for existing aviation fueling technology and infrastructure.
MRL will finance several projects with the loan, which include constructing a second renewable fuels reactor, which will enable 150 million gallons of SAF capability to be online by 2026. It will also install SAF blending and logistics, debottleneck existing renewable fuels and feedstock pretreatment units, boost renewable hydrogen production, and provide a number of site enhancements. The added capacity could result in an additional EBITDA of $200 million, which is the bottom line. The interest payments start once SAF production begins.
Montana Renewables CEO Bruce Fleming commented on its planned MaxSAF expansion project: “The expansion will directly replace fossil jet and diesel, reduce MRL's carbon footprint by producing more renewable hydrogen and electricity, and contribute to regional economic development."
Gevo: A Speculative SAF Player Inches Closer to Production and Credibility
Gevo Inc. (NASDAQ: GEVO) has been a volatile, low-priced stock for years, with the aspiration of becoming a revenue-generating advanced biofuel producer. Gevo’s stock surged up to $15.57 during the post-pandemic reopening in 2021 but has since fallen to a low of 48 cents by Aug. 5, 2024. It's been a regular favorite of momentum traders but has also left a lot of bagholders in its trail. Gevo has been a developmental company for years. It produces revenue from its renewable natural gas (RBG) business, which generated $4.3 million in the second quarter of 2024 but posted a loss of $24 million from operations.
Acquiring an Ethanol Production Plant
On Sept. 12, 2024, Gevo announced the acquisition of the ethanol production plant and carbon capture and sequestration (CCS) assets of Red Trail Energy LLC for $210 million in cash and expected to close in Q1 2025. The acquisition is supposed to make Gevo’s adjusted EBITDA positive in 2025. This started the surge in its stock from 69 cents up to $3.13, further propelled by the prospects of getting closer to its Net-Zero 1 initiative for the production of net-zero greenhouse gas (GHG) emissions SAF. The company is building a production facility in Lake Preston, South Dakota, projected to be operational in 2025.
Gevo Receives $1.46 Billion DOE Conditional Commitment
On Oct. 16, 2024, Gevo announced it had received a conditional commitment for a loan guarantee with disbursements of up to $1.46 billion for the DOE LPO for its Net-Zero 1 (NZ1) project in Lake Preston, South Dakota. The plant is projected to produce 60 million gallons of SAF annually. It will also produce 1.3 billion pounds of animal feed products and 30 million pounds of corn oil annually.
Gevo CEO Dr. Patrick Gruber commented, “This marks a watershed moment for the Net-Zero 1 project and a critical step forward in Gevo’s mission to transform the aviation industry by providing a scalable, sustainable, and economical renewable-carbon-based jet fuel—SAF.”
Gruber concluded, “This valuable commitment to help finance NZ1 if finalized, should also attract other capital investments to unlock SAF commercialization given the robust due diligence conducted by the agency. The due diligence work by the DOE has been incredibly detailed and thorough, and the benefit is a substantially reduced execution risk profile for the project.”
