Velocys is a licensor/expert on Gas To Liquids (GTL) technology. It applies this at a small scale to gas to create high value oil related products. It is a university spin out supplemented by some acquisitions and I admire the way they have gone about building alliances, obtaining funding and generally making themselves a very credible proposition in their market (they claim to have a bigger project pipeline than competitors).

However, for reasons explained below I question the existing valuation of the company.

The way I see the facts it is almost impossible to value this company. There are too many unknowns about the future revenue stream due to:
1. the opacity of the project pipeline
2. uncertainty about oil/shale gas prices
3. Russia/Ukraine

Project Pipeline: I am not criticising the company's stance of keeping future projects discreet, I'm sure it is commercially sensible, it is just that it makes the company difficult to value.

Oil price: Financially they are in large part betting on the long term sustainability of the recent US oil price/shale gas price arbitrage opportunity - taking cheap or free shale gas and turning it into valuable oil related products. Although the projects are inherently long term, the commissioners must surely need to account for recent oil price weakness in their forecasts.

In addition, my understanding is that the US government is planning for the first time to permit exports of shale gas and the industry is building export terminals to service the industry. This will surely push up the price of shale gas over the next few years and provide alternatives to the GTL solution?

Each of these may negatively impact commissioner's Net Present Value calculations for GTL projects.

Russia/Ukraine: Although Velocys' main focus is the US they are developing business in other parts of the world including Brazil, the Far East and Russia. Although the company says that at present it is not effected by EU/US trade sanctions on Russia, at best they cannot be helpful and at worst they reduce the probability of projects proceeding. They may of course escalate further in future, or not.

For me Velocys is impossible to value. I bought largely on instinct and I sold due to the Russia/Ukraine issues on the supposition that if the market…

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