Important Update on Aemetis
Every great poker player knows you must be willing to go all in when the right situation presents itself.
Sure, there are knuckleheads who will threaten all in on nearly every hand, and they could get lucky, but often that strategy will be a flash in the pan.
A wise poker player will know how to weigh his odds, ignore the fear that comes with risking the whole farm, and then proceed in a rational but confident manner when the stars align.
My time as a wise poker veteran has come. I’m going “all in” on Aemetis.
Here’s the update that has prompted this move:
In case you haven’t read my earlier?pieces?on Aemetis, a huge catalyst for their company are these renewable energy tax credits.
For the most part, they generate two main tax credits, one is a 45Q carbon sequestration tax credit and the other is a 48C renewable energy investment tax credit.
They have somewhere between $45-50 million in 48C tax credits currently and expect to produce roughly $150m of tax credits in 2024, mostly derived from their 45Q initiatives.
The unique thing about these tax credits is that they are transferable!
Meaning, they can sell their tax credits at a discount to other people for cash since they don’t have any taxes to pay.
Well, for a company like Aemetis, this is game-changing. They have the ability to generate almost $40 million in free cash flow if a transaction takes place this summer. (assumes they sell them at a standard 8% discount)
To put that in perspective, their market cap is $254M, they only have $4M of cash on hand, and they’re just now turning a corner by being able to sell their renewable natural gas inventory and on track for positive cash flow. This $40M cash inflow with expectations of nine figures in cash flow coming in 2024 & 2025 could give Aemetis the cash cushion it needs to be valued at one billion or more.
So what’s the hold-up?
They’ve had the $45M in credits generated for a while now, but they were waiting on IRS guidance to clear up a few nuances regarding who these credits could be transferred to and ultimately how to file the transfer of these credits with the tax authority.
I’ve been watching this like a hawk because I had a feeling this notice from the IRS would be published and the market would be slow to react given it’s a beast of a notice to read through, and it’s also not a widely watched company. Other analysts will likely wait for a press release from Aemetis to announce they’ve been approved to sell these credits, as opposed to tracking the notice and reading it themselves.
Well, I got an alert from a tax firm on Wednesday that this notice was out and so I dug in.
I got through a good portion of the 108-page notice and the two most important parts that I was keeping my eye on were instructions on how to file the tax credit transfer as well as any clarity on what circumstances might limit Aemetis’s ability to transfer their tax credits.
Before I proceed I should add a disclaimer that I am not a CPA nor have I worked in a traditional accounting firm; however, I do handle the sales of tax credit consulting services to CPAs throughout the country so I would say it’s in my arena. Plus, my third-grade teacher told me that my reading comprehension was that of a fifth-grader… but I digress.
In regards to the process of transferring these tax credits, the notice was pretty explicit.
“Proposed §1.6418-2(b)(3) would provide the manner of making a valid transfer election. Stakeholders asked for clarity regarding the manner of making a valid election and provided suggestions for how an election should be effectuated and potential information to be included. Proposed §1.6418-2(b)(3) outlines the requirements for making a transfer election for eligible taxpayers other than partnerships or S corporations (those rules are in proposed §1.6418-3(d)). While described in more detail in the proposed regulations, to make a valid transfer election, an eligible taxpayer as part of filing a return (or a return for a short year within the meaning of section 443 of the Code (short year return)), generally would be required to include the following--(A) a properly completed relevant source credit form for the eligible credit; (B) a properly completed Form 3800, General Business Credit (or its successor), including reporting the registration number received during the required pre-filing registration (as described in proposed §1.6418-4); (C) a schedule attached to the Form 3800 (or its successor) showing the amount of eligible credit transferred for each eligible credit property; (D) a transfer election statement as described later in this preamble; and (E) any other information related to the election specified in guidance (as defined in proposed §1.6418-1(e)).”
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As you can see, they lay out all the documents needed to record the transfer of these tax credits as well as a few more details that extend beyond this section, but this gives the jist of it.
Secondly, there was an important part of the notice that detailed three ways that a credit holder would be disallowed from transferring their tax credits. The first two reasons were not applicable, but the third reason stated that essentially businesses who generated 45Q and 48C tax credits that did not own the property which generated these credits would not be allowed to transfer the credits.
At first, this made me weary because I read it as, you needed to “own the land” that these credits were generated off of in order to transfer the credits. In which case, Aemetis would still be safe considering they do own the land on which both projects generated tax credits, but I would have been slightly less certain as they do lease the land on which the dairy digesters are installed on dairy farms.
After further exploration, I figured out the notice was actually referring to the facility or manufacturing site that generated the credits not the actual ground that these sites were on. In this case, if a company was leasing an energy facility from a landlord and generated these tax credits, they would not be allowed to transfer said tax credits.
This is fortunately not the case for Aemetis as they own both facilities that have generated their tax credits thus far.
I also ended up calling one of the tax attorneys who issued the email alert discussing this new notice from the IRS. I received a few important pieces of information from her:
So where does this leave us?
Before I trigger any feelings of FOMO or irrational exuberance PLEASE do your own research. This is my own personal trading and not advice for anyone reading this.
There could be small stipulations that I’ve skipped over in the IRS notice that could change the timing or ease of transferring these tax credits. But to the best of my abilities, I feel 98% confident that this notice allows Aemetis to sell the $45M of tax credits they currently have on hand, and they will do so at the latest in August after final comments are issued and earliest over the next month.
I feel the odds of this bet playing out are in my favor and warrant an even larger bet on this company. The question that follows is what kind of position should I take?
Given my high conviction and a crystal clear catalyst, I feel that options would be the likely choice.
That being said, as is the issue with all option positions, the hardest part is the timing.
My opinion is that Aemetis will likely have their tax team review this new notice over the next few days and then issue a statement at some point over the next two weeks detailing they have the “green light” to transfer these tax credits and they will begin conversations with interested buyers.
However, I could also see the tax team taking a few weeks or perhaps waiting for final comments to be issued in August and past my options’ expiration of July 21st.
Considering the timing of the announcement seems to be my biggest concern, I’m going to put on a smaller options position in my taxable portfolio but I’m going to triple my long position in my Roth IRA.
This increase will essentially make $AMTX nearly 50% of my retirement portfolio.
Hopefully, I don’t look like an idiot, but as I said earlier, at some point you have to be willing to go all in. And I just can’t foresee being more confident on a bet with as much upside as this one any time soon.
Graham, out.
This is not financial advice. The information provided here is for general informational purposes only and does not constitute financial, legal, or professional advice. Always do your own research and due diligence before making any investment decisions. The views and opinions expressed here are solely those of the author and do not reflect the views of my employers or any other organization. The information provided here is not intended to be a substitute for professional advice and should not be relied on as such. If you have any specific questions about any financial matter you should consult a licensed financial or legal professional.