Moving up the value chain with a new GTL JV
Today’s announcement of a GTL joint venture with partners Waste Management (WM), NRG Energy (NRG) and Ventech Engineers International (Ventech) is more than just another milestone for Velocys PLC (VLSV.LSE). To understand the materiality of this deal, investors need to take on board five points: (1) Velocys now has an equity stake in a liquid fuels project with multiple site potential, moving it up the value chain in terms of commercialising its IP. (2) Its partners are serious players – NRG and WM are Fortune 500 companies, while Ventech is a well-known EPC contractor. (3) The parties bring strong balance sheets, removing funding uncertainty. (4) Similar to E&P exploration, partner validation de-risks the projects for investors while allowing all parties to leverage their collective financial and technical resources. (5) Given permitting has been sought for the first site at WM’s East Oak site in Oklahoma, the catalyst for a commercial project to proceed looks to be a matter of months rather than years away. In our view, this could be the most significant announcement since Oxford Catalysts acquired Velocys.
Good partners, bringing a range of skills and services
Velocys’ JV partners each bring complementary skills to the GTL project. WM (market cap c $19bn) is North America’s largest residential recycler and has a leading portfolio of waste/landfill gas to energy portfolios. It brings sites and cheap feedstock to the project. NRG’s (market cap c $9.7bn) power portfolio generates c 47,000MW and it brings project management skills to the JV at pre-agreed prices. Ventech (privately owned) brings well-established engineering, design, fabrication and construction skills. It is encouraging that significant players in the green energy space have identified Velocys’ technology as market leading. The first site being chosen, East Oak, is owned by WM and has had a GTL pilot plant running for 10,000 hours already.
Valuation: De-risked, continues to underplay potential
The GTL JV announcement adds confidence that a number of commercial plants are likely to be rolled out. While the economics of the JV are not disclosed we suggest that Velocys’ resultant equity stake is likely to give the company a greater share of the upside compared to our previous NPV of £18.8m per 2,500b/d plant. The JV announcement is an example of the deep pipeline of opportunities previously noted by Velocys. The first commercial small-scale GTL plant supported by large US energy players is likely to stem from a deal on which the market had no visibility.
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