Velocys shares: a 40% gain today, but why?

With the focus on green initiatives during COP26, the AIM company has landed a massive deal for its carbon-negative jet fuel. Graeme Evans has more on this ‘major milestone’.

Meeting COP26's net-zero ambitions depends on companies such as AIM-listed Velocys (LSE:VLS), which is on a mission to make air travel greener by turning waste into jet fuel.

Its shares jumped as much as 40% today after the University of Oxford spin-out announced landmark deals where British Airways owner IAG (LSE:IAG) and Southwest Airlines (NYSE:LUV) have pledged to buy hundreds of million gallons of carbon-negative jet fuel.

These off-take agreements should enable Velocys to secure financing to complete its Bayou Fuel facility in Mississippi, where the process of turning woody biomass into sustainable aviation fuel is expected to begin in 2026.

Velocys is also involved in building Europe’s first commercial scale waste-to-jet-fuel facility on the banks of the Humber in Lincolnshire.

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Altalto Immingham, which received planning permission in June 2020 and is being developed in collaboration with British Airways, will produce enough to fuel the equivalent of more than 1,000 transatlantic flights every year.

It is expected to consume hundreds of thousands of tonnes per year of household and commercial waste destined for landfill or incineration and convert it into cleaner burning fuel using Fischer-Tropsch technology.

Blended with conventional fuels, the product can be used in existing engines and transport pipelines. It can deliver a net CO2 saving of up to 70%, with the potential to achieve over 100% savings when carbon capture and storage infrastructure is available.

The impact of such projects for the carbon-cutting targets being outlined this week at the COP26 Glasgow climate summit is potentially significant, with aviation representing 2% of global emissions, 3% of US emissions and 7% in the UK.

Unlike road transport, aviation has no near-term alternative to liquid fuels.

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IAG is targeting 10% sustainable aviation fuel use by 2030, having pledged to invest $400 million (£295 million) in its development over the next 20 years.

Commenting on the Bayou off-take agreement, IAG's chief executive Luis Gallego said delivering enough supply for the airline industry would depend on the right government support.

In early September, the White House announced a programme to accelerate the supply of sustainable fuels, highlighting Velocys’ technology as a key contributor to scaling up production.

Gallego added: “We would encourage the UK and the EU to follow suit in supporting the development and deployment of green technologies including carbon capture."

The Mississippi plant will use waste from the paper and lumber industries, woody biomass forest residue that would otherwise rot on the forest floor or contribute to forest fires.

Today's agreements feature the purchase by Southwest of an expected 219 million gallons of sustainable aviation fuel at a fixed price and over a 15-year term from 2026. This becomes 575 million after blending.

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The IAG arrangement is for 73 million gallons, which after blending will produce 192 million gallons of net zero fuel over 10 years.

Velocys originated from a University of Oxford technology spin-out company called Oxford Catalysts, which floated on AIM in 2006.

In 2008, it acquired a US company with complementary reactor technology that had been developed at the Pacific Northwest National Laboratory. Shares today rose 2.3p to 8.6p, the highest level since a spike in the valuation in early January.

Chief executive Henrik Wareborn called the agreements a major milestone, strengthening his conviction that sustainable fuel will play an important role in the aviation industry.

He added: “This agreement shows that commercial scale demand for sustainable aviation fuel  can be satisfied already by the middle of this decade and that Velocys plays a pivotal role in enabling this.”