Time to buy Velocys the alchemist?

Velocys, the company whose technology can convert cheap gas into expensive oil (so-called gas-to-liquid, or GTL), has just announced possibly the biggest deal in its history. A final investment decision has been made to build a commercial GTL plant using its technology, the first of its type in the US. Chief executive Roy Lipski compared this psychological milestone to the four-minute-mile. The share price collapse that followed presents a buying opportunity then, right? Read on.

Achieving commercial adoption has been a stumbling block for many new technologies - AIM has a graveyard devoted to them. But Mr Lipski's euphoria is understandable, for Velocys is within touching distance of the Holy Grail - profitability.

It's been made possible by a joint venture - established in March this year - that brought together landfill operator and America's largest waste company, Waste Management, Houston-based electricity giant NRG, and engineer Ventech, to develop GTL plants, mainly in the US. The plant at Waste Management's East Oak land fill site in Oklahoma will not only be profitable on a standalone basis, but also provide a commercial reference site for the company's technology.

"After 15 years of development, over $300 million [£179 million] of investment, and a commercial plant underway, Velocys is now poised at the forefront of the distributed production revolution taking place in this new age of gas abundance," said Mr Lipski.

He told Interactive Investor he expected the plant will be up and running in 20-24 months. "After that there will be broad-based market adoption." There's no word on what it will cost to get the plant to that point - we'll have to wait until a ground-breaking ceremony in the autumn to find out - but it won't be cheap.

Canaccord Genuity, which has just initiated coverage of Velocys, thinks the shares could be worth 400p one day. But it could be more.

"Even at our price target of 400p,the implication that just 130 thousand barrels of oil equivalent per day (kboe/d) of new Velocys reactors will be ordered (52 of the modular 2.5kboe/d plants) feels conservative to us," says the broker. Remember, each kboe/d of capacity is worth around $10 million (£5.95 million) to Velocys.

Unfortunately, Mr Lipski and Canaccord's excitement hasn't been shared by the City. Velocys shares hit a record high of at 241p on 29 July, the day of the announcement. But just 10 days later they had plunged by 29% to 167p. Why?

Word on the street was that a major shareholder was offloading stock. All eyes were on Roman Abramovich, the Russian billionaire and Chelsea Football Club-owner whose Ervington Investments vehicle bought four million shares in Velocys 18 months ago. "Clearly nonsense," says Lipski. He's right, of course. Abramovich has more than doubled his stake since May to over nine million shares, or 7.7% of the company. Even with tough sanctions against Russia in place, Abramovich is hardly the type to let national pride get in the way of business.

It's not major shareholders like Lansdowne Partners, Ruffer or Invesco, either. Remember, too, that Neil Woodford, former star fund manager at Invesco Perpetual, has almost seven million Velocys shares in his new Woodford Equity Income fund. At least one major shareholder continues buying stock, we hear.

It would appear that the selling is largely retail investors keen to trouser some profits after a rally from 139p less than four months ago. And, as we know, it doesn't take much volume in the quiet summer months to unsettle a share price and trigger stop losses.

"It's regrettable," says Mr Lipski. "But it's just a technical situation that will redress itself in due course. There is no fundamental reason for the recent share price movement. We remain extremely positive."

He has every reason to.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.