In this article, I will break down the Fuel Cell Energy (FCEL) Q2 2017 earnings call from June 8. Look at critical military technological advancements that create long-term benefit for Fuel Cell Energy. Look at US legislative developments in the federal and state level. Explore any significant pieces of recent news on FuelCell Energy and the industry at large. Finally risk!
On June 8 CEO Chip Bottone and CFO Mike Bishop led a very successful earnings call. Some highlights of the quarter were the generation portfolio expansion by 10.2 MW including a 1.4 MW project on Long Island with PSE&G. The 7.4 MW letter of intent for a US Navy base. The State of Connecticut passed Bill 7036 creating a potential path for Beacon Falls. The Department of Energy Awarded Fuel Cell with $3.0 million specifically for a solid oxide fuel cell energy storage solution. Profitability is now attainable at 45 MW per year in product sales or 60 MW a year in generation revenue.
Bill 7039 has to be the most significant takeaway from the earnings call; Chip called it “a very big deal.” One because it provides a pathway to the 63 MW Beacon Falls shovel-ready fuel cell park. Two because this is only for fuel cells and that is the key. Other big RFP’s have been solar or wind while fuel cells have had a legislative issue. Generation revenue was another key to this earnings call.
The firm anticipates 30 MW of annual generation revenue given the current plants on the balance sheet. If this trend of small PPA deals continues, profitability will be much easier to attain than ever before. The PPA model represents an even more attractive buying opportunity given how close they are to reach a profit. 45 MW of product sales OR 60 MW of annual generation revenue is the new break-even model. If the firm is already at 50% of its needed generation revenue, then 20-30 MW of product sales is the other piece of this puzzle. What becomes more interesting is every single PPA deal makes the annual product sales number shrink for EBITDA break even, This company is now a utility as well as an industrial manufacturer.
Source: FuelCell Energy
Military tech advancements
An article was recently published on the new German super stealth submarines this identifies new developments for fuel cell-powered stealth weapons. These submarines are silent compared to other submarine systems and much less expensive than a nuclear submarine. Fuel Cell subs would need to refill every three weeks. A Tri-Generation fuel cell plant would be a perfect fit at a Naval base as a fueling station as well as a power plant/ heat source.
Another advancement is the use of fuel cells and hydrogen is the application of drones. Fuel cell drones is another signal trend that can help push tri-generation plants forward with commercial and military applications. These drones can store more energy than batteries at a fraction of the weight.
General Motors (GM), Honda (HMC), and the US Army have collaborated on a fuel cell SUV, the ZH2 which has great potential. “Hydrogen fuel cell vehicles have the potential to offer greater range, fuel efficiency and noise reduction than the diesel- powered trucks currently in use.” Noise reduction is necessary for the development of a new vehicle for strategic purposes. Hydrogen and stealth equipment go hand in hand. Another benefit is it allows for flexibility when producing fuel. The truck also emits water which could save lives in survival situations.
The recent 7.4 MW deal with the Connecticut Municipal Electric Energy Cooperative (CMEEC) and the US Navy represents an ongoing shift to fuel cells for microgrid generation. Between hydrogen storage and the need for secure uninterruptable power, fuel cells are attractive to the armed forces for security reasons. These trends cannot be overlooked. Infrastructure projects around the east and west coast will soon allow more hydrogen vehicles. The military will slowly adopt more hydrogen-based products as hydrogen proves its reliability. Storage and tri-generation technology will be important to the military going forward. Fuel Cell can significantly benefit from a closer relationship going forward.
The United States Legislative developments at the Federal and State Level
Congressman Tom Reed from the NY 23 district has sponsored a bill in the House of Representatives HR 1090 Technologies for Energy Security Act of 2017. The bill is the investment tax credit that investors are anticipating. It has a growing list of co-sponsors, as of June 16 there are 93 cosponsors. That is up from about 60 three months ago, but the bill is held up in the Ways and Means Committee. HR 1090 is a bipartisan effort with a slight majority of Republicans supporting it. (Text of HR 1090)
The Connecticut General Assembly passed House Bill 7036 An Act Promoting The Use of Fuel Cells For Electric Distribution System Benefits and Reliability. As mentioned above this is significant. The bill Is a fuel cell only RFP and a Connecticut only RFP. The Beacon Falls fuel cell park could be back in play because of this. The bill is a game changer for FuelCell Energy.
HR 1090 will have a direct correlation to the price of fuel cell shares. HB 7036 will create an avenue for Beacon Falls. Remember in October 2016 we saw a drop in share price from the $8 range to the $5 range when there was bad news from Beacon Falls in both instances. While it is a speculative claim, I think that if Beacon Falls gets approved by an energy buyer the stock will go back to these relative prices. Federal legislation is held up in Congress, but state legislation could create large upside.
Significant Fuel Cell News
On May 30th FuelCell Energy was awarded a $ 3.0 million contract from the US Department of Energy to develop cost effective and clean long-duration energy storage. This project will be solid oxide fuel cell technology as well as reversible solid oxide. These systems can both produce fuel as well as power generation.
Exxon has created two recent presentations that have involved Carbon Capture Sequestration. The annual meeting deck slides 31, and it looks like Exxon made a presentation on CCS. Exxon has backed the natural gas side of CCS. Production of hydrogen, the capture of CO2 emissions, and additional 120 MW of power make these systems very attractive for the right buyer.
Key TakeawayExxon continues to include carbon capture as a key to their efficiency plan. This is as much a public move to clean up their image as it is to build a business. Exxon has spent billions on efficiency; they will continue to pay more. I see FuelCell as a big part of this plan going forward.
Storage and carbon capture look to be the most promising long term. Tri-generation will be crucial to fueling stations, the ability to produce fuel on site reduces costs and minimizes the carbon footprint instead of trucking fuel into each site. The cost effective storage of energy is still a serious problem. Batteries are big and expensive, other clean energies take up lots of lands, and they can not run 100% of the time. 24/7
FuelCell has never made a profit! No profits have resulted in stock dilution and terrible fundamentals. The stock keeps going down! The bad news is detrimental, and the good news is not effective on the share price. The investment tax credit has large implications for the industry if things go south. FCEL is a high-risk investment.
The downside has always been just as high as upside for years this stock has performed terribly. FuelCell has shifted their model to a utility and can build protection against losses as they book small deals. Mike Siefferman wrote “The Symbiotic Relationship Between Exxon Mobil and FuelCell Energy in A Petrochemical Environment.” Siefferman’s idea is smart; he immediately sees the synergies that are created by this partnership. These systems can do 150 million cubic feet per day, Tri-generation can take natural gas and produce heat, power, and hydrogen.
The key downsides are simple. Stock dilution, bad financials, poor corporate transparency, and risks of a takeover. I am still long mainly because of Beacon Falls and the recent bill 7036 in CT. Generation revenue was up 700%; Advanced Technologies are up 107%. Backlog continues to increase year over year. I am now looking at PPA deals as more important than minor product sales. The more month to month revenue the better. At 5-10 MW of PPA contracts, 60 MW could be booked in 10-20 months.
60MW-27.9MW= 32.1MW remaining to reach break even
32.1 MW/10MW per quarter =3.21
32.1 MW/5 MW per quarter=6.42
3.21*3 months= 9.63 months
6.42* 3 months= 19.26 months
Given these assumptions on PPA deals, I think this is very possible. We have seen a recent surge in small deals being kept on the balance sheet.
I am bullish on FuelCell I have been long for years, and continual buy stock as the price goes down.These particular trends in the military and the government spell good future for hydrogen and FCEL. As an industry leader and multinational this company has strong potential, The future looks bright regardless of the share price. If FCEL can book 5-7 MW per quarter, I see this being a profitable business in four to six quarters. If HR 1090 goes to the floor and gets passed by the House and Senate, I think Trump will sign it for security reasons. Beacon Falls would be a 63 MW park that is huge for the firm I think if this project comes back the stock will go up a lot, maybe past the pre-split price point. This stock continually trades at a discount, but it is only for risk takers. Be prepared to lose you money if things do not go FuelCell’s way. The risk is huge! The rewards could be huge. I see hydrogen as the future.
For more published research on FCEL look here.
For more published research on FCEL look here.