Tailwinds & Turbulence

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The aviation market, once grappling with the aftermath of the Covid pandemic, has soared to new heights. A combination of robust demand and hefty investments in infrastructure has led to aggressive expansion. Yet, this rise poses its own challenges as airlines must now grapple with the delicate balance of increasing their flight frequencies while simultaneously curbing their carbon footprints. The endgame may be zero-carbon aviation, but in the interim, the spotlight is on sustainable aviation fuels (SAFs). LanzaTech is a firm looking to carve its niche in this developing sector. But as it stands on the runway, poised for takeoff, there's an air of skepticism and a market slowdown that looms overhead. Can LanzaTech soar over these headwinds?

Eco-Fly Zone

Aviation is witnessing robust growth. Driven by enhanced regional connections, the rise of budget airlines, and significant infrastructure investments, the sector is poised for expansion. Fuel consumption reflects this trend; from the current 70 billion gallons annually, projections indicate a jump to 160 billion gallons by 2040. However, there's an environmental challenge. The aviation industry's sustainability commitments require immediate and impactful solutions.

The optimal answer, for now, lies in sustainable aviation fuels (SAFs) — fuels that are compatible with existing machinery, negating the need for massive infrastructure overhauls. Parallelly, major industries emit an alarming 12 gigatons of carbon each year, and there's mounting pressure to reduce these figures. Experts concur that innovative technologies are essential to help large-scale industries meet their environmental commitments.

Enter LanzaTech. Backed by the likes of Microsoft's Climate Innovation Fund and Shell, LanzaTech is uniquely positioned in the space. Established in 2005, the company focuses on harnessing carbon emissions and converting them into usable products, using Gas fermentation technology.

The company essentially repurposes gas emissions from varied sources into ethanol, jet fuel, and key chemicals. These chemicals are integral to products that are used by consumers daily, from plastics and rubber to synthetic fabrics and fuels. What sets LanzaTech apart from its competitors is the company's ability to achieve this without tapping into food resources or utilizing additional land, presenting an efficient solution to an industry-wide challenge.

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Wings of Change

LanzaTech is ambitiously eyeing a $1 trillion addressable market, aiming to recycle an impressive billion tons/year of waste feedstocks. At present, the firm's capacity sits at 150,000 tons annually, dispersed across commercial hubs in China, , and Belgium. These ventures are bolstered by notable collaborations with giants such as Shougang Steel JV, IndianOil, and ArcelorMittal.

The company's upcoming Sustainable Aviation Fuel initiative, the LanzaJet Freedom Pines Fuels Project, is on track and set to roll by early 2024. Furthermore, with a diverse customer pipeline for Biorefining, the company's reach is undeniably expanding. Each of company's project takes roughly 24-36 months, from Technoeconomic Analysis (TEA) to wrapping up constructiony. 

Revenue varies by each stage of the project, with early to advanced engineering stages could bring in $1 to $5 million, and construction generating between $16 and $23 million. Once operational, the company predicts a steady annual revenue of $8 million, assuming a 50,000 ton/year facility model per customer. Between 2023 and 2025, LanzaTech is protecting significant growth based on its current pipeline. The 80+ projects in their early developmental stages could be key revenue drivers, encompassing both one-time earnings, like equipment sales, and recurring ones, such as licensing royalties.

Yet, there is some cause for concern. The recent slump in the aviation sector and prevailing economic unpredictabilities cast shadows on the company's growth projections. Add to that the skepticism surrounding the cost viability of biofuels and sustainable chemicals, the path ahead for LanzaTech, though promising, has its fair share of turbulence.

Financials and Valuation 

In Q2 2023, LanzaTech reported revenues of $12.9 million, reflecting a 31% growth from the same period in 2022, largely attributed to sales from engineering services. This suggests a modest progression of their projects through the pipeline.

On the flip side, the company's financial health has slightly deteriorated with net loss widened to $26.8 million, up from $15.9 million the previous year, driven mainly by factors like the cost-sharing dynamics of the UK government-funded Project Dragon and an uptick in operating expenses. For the year, LanzaTech is targeting a revenue bracket of $80 to $120 million. The company is looking to trim its operating loss by 10 to 20%, projecting an EBITDA loss in the range of $55 to $65 million. 

LanzaTech is looking to achieve breakeven by 2024, which is necessary given that the company lost $34 million over the last year. At the close of Q2 2023, LanzaTech had a cash balance of around $161 million. This buffer might be crucial, given that the company can meet its profitability targets. LanzaTech is currently trading at close to $5.96 per share, resulting in a market cap of $1 billion.

This sets the company's valuation near 10x its forward price-to-sales, based on its 2023 revenue midpoint guidance. While LanzaTech's deal pipeline appears to be growing and there's potential for margin enhancement from recurring revenues, the current valuation seems a bit high, considering the broader economic environment may challenge the company's pace of securing new contracts.

Bottom Line 

The rapid growth of the aviation industry and the stringent mandates on emission reductions point to soaring demand for sustainable aviation fuel in the foreseeable future. LanzaTech, having showcased its innovative solutions, robust commercial alliances, and a promising growth pipeline, seems strategically positioned to harness this demand. Nonetheless, there's a degree of uncertainty around its immediate growth, exacerbated by broader economic challenges, the aviation sector's slowdown, and the inherent high costs of its processes. Only time will tell if LanzaTech truly gather pace and validate its market valuation.

Source: Tailwinds & Turbulence