The acquisition of US firm Pinto Energy by gas-to-liquids (GTL) firm Velocys (VLS:AIM) does not appear to have won the market's favour with the shares slipping 1.3% to 224.75p.
The $3.7 million all-share transaction (with additional payments contingent on performance) will add execution risk and is likely to involve significant capital requirements. The rationale for the deal seems to be driving increased adoption of its GTL technology.
The Velocys business proposition is based on offering patented small, modular GTL plants which can convert unconventional, remote and problem gas into valuable liquid fuels. These facilities are expected to be relatively low-cost at around $250 million for a 2,500 barrel per day (bpd) facility. It has built up a roster of clients – both in and outside the US – at various stages in the process from initial planning to final investment decision (FID).
Pinto was one of these clients and the company had been working on a 2,800 bpd plant for its most advanced site - Ashtabula in Ohio. Located in close proximity to the prolific Marcellus shale basin.
Canaccord Genuity, which initiated on the stock last week, retains its buy recommendation and 400p price target. It comments: 'We believe Velocys's acquisition highlights the company’s efforts to accelerate adoption of its technology. The most critical driver of Velocys's value is the take-up of its modular GTL process, which we believe should offer customers’ IRRs in excess of 20%.
'Going further down the route to being a project developer increases Velocys's control over the take-up of its technology, at the cost of some increased execution risk. At this stage we believe the merits of demonstrating the commerciality of its process far outweigh any increase in risk. Velocys’s core offering and value is likely to remain its technology licensing business, and we do not expect any impact on other customers from this investment.'
Numis, which also has a buy take and a price target of 269p, says: 'We view this a positive development for Velocys for several reasons: 1) The Pinto Energy project development team should accelerate the development of 'shovel ready' GTL projects helping stimulate early technology adoption. Pinto Energy is financially motivated to achieve financial close on up to three projects before the end of 2015.
'2) The deal will provide Velocys access to important market intelligence including GTL project economics enabling it understand how best to position itself as adoption accelerates.
'3) Velocys will own the development of a 2,800bopd project at Ashtabula which benefits from substantial existing infrastructure and is expected to reach FID in six to nine months. Velocys will receive a project development fee once the site is 'shovel ready' and financed.'