Velocys bounces back

Velocys'share price slumped by almost a quarter six weeks ago, but significant progress towards commercial adoption of its gas-to-liquid (GTL) technology meant the correction was brief. A commercial plant will be built in the US this year, and now we hear that Red Rock Biofuels, a customer, has won a $70 million (£42.91 million) US government grant to build another. Already at a record high, the shares could have further to run.

Chief executive Roy Lipski said as much when we spoke to him in August when the shares were trading at just 167p. They are now 243p. Clearly the promise of alchemy - the company's technology can convert cheap gas into expensive oil - remains strong.

Red Rock will actually build a biomass-to-liquids (BTL) plant incorporating Velocys Fischer-Tropsch (FT) technology in Oregon. It will be able to turn 170,000 tonnes of forestry and sawmill waste each year into about 1,100 barrels per day of ultra clean transportation fuels.

Crucially, Velocys will get over $15 million while the plant is going up, then at least another $30 million over the life of the facility. The project should get the thumbs-up within six months and take 18-months to build.

"The Oregon project...will act as a catalyst for early adoption of BTL in North America," said Lipski.

And in another development, the company has won a patent infringement case brought against CompactGTL. A hearing to deal with damages to Velocys and reimbursement of legal costs has been set for 2 October.

Canaccord Genuity initiated coverage of Velocys recently and reckons the shares could be worth 400p one day.

"Even at our price target of 400p, the implication that just 130 thousand barrels of oil equivalent per day (kboe/d) of new Velocys reactors will be ordered (52 of the modular 2.5kboe/d plants) feels conservative to us," says the broker. Remember, each kboe/d of capacity is worth around $10 million (£5.95 million) to Velocys.

Velocys shares currently sit near an all-time high, but, with more commercial plants inevitable in the months and years ahead, we've yet to see their full potential.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.