There's nothing quite liking seeing that company you've been tracking shoot up in value while you sit on the sidelines as a non shareholder. Fuel Cell Energy (FCEL) is an excellent company that offers the chance to escape that fate. It has the potential to reach profitability in the next few quarters, and with profitability, provide a significant boost to shareholder returns. As taken from the Fuel Cell Energy website:
FuelCell Energy, Inc. is an integrated fuel cell company that designs, manufactures, installs, operates and services stationary fuel cell power plants.
FCEL is located on three continents. Its main base is its North American operations with a headquarters in Danbury, Connecticut and factory in Torrington, Connecticut. It also consists of a majority-owned joint venture in Germany under the name of Fuel Cell Energy Solutions including manufacturing in Munich and services from Dresden. In Asia it has a partnership and licensing agreement with POSCO (PKX) based out of South Korea.
FCEL's fuel cells are different from its competitors. Most companies fuel cells make use of the Solid Oxide Fuel Cell (SOFC) standard. Companies such as Ballard Power System (BLDP), and Bloom energy have adopted this approach, although they've mainly found success in niche markets (cell phone towers for BLDP, and data centers for Bloom Boxes). SO cells offer extremely high efficiency, but have proven unable to scale to scale up enough to be commercially viable.
FCEL, on the other hand, makes use of Molten Carbonate (MCFC) technology, allowing their power plants to operate on the megawatt scale. Their DFC cells have capacities of 2.8MW, 1.4 MW and a sub MW class DFC cell. These cells can also easily scale up - the largest fuel cell park in the world at 59MW is currently being constructed with FCEL cells in South Korea. Furthermore, by the nature of the design FCEL fuel cells are highly efficient, thus reducing greenhouse gas emissions while simultaneously providing excess heat that can be used for Combined Heat and Power (CHP). All of this is done nearly silently, and without particulate emissions- allowing the Fuel Cells to be placed in the center of population centers without provoking NIMBYism. Their feedstock is highly flexible, enabling them to make use of cheap natural gas, renewable biogas, or directed biogas. The biogas can be derived from sources as diverse as wastewater treatment plants, and dairy farms.
Now, I know what you're thinking. Fuel cells, really? People have been saying fuel cells are the future for years, and yet no companies are profitable!
That looks like its about to change. On the most recent Q3 results conference call (found Here) Arthur (Chip) A. Bottone, the CEO, dropped this bombshell:
We expect our margins to continue to expand at the 70-megawatt annual run rate due to continued manufacturing efficiencies and cost reduction and then expand even further with higher production volumes and a favorable sales mix. We are well positioned for continued global growth and to achieve profitability on an EBITDA basis, with annual production volumes of approximately 80 megawatts.
The significance of this can be found in the lowering of the guidance for profitability from 90MW to 80MW. This news arrives during FCEL's ongoing ramp up in production to a 70MW run rate, from just 56 MW ealier this year. Furthermore, as increasing manufacturing efficiencies have lead to 100MW in annual capacity from its factories, one can see that FCEL is on the verge of profitability.
Why FCEL Will Achieve Profitability
There are a number of reasons to be optimistic that FCEL can achieve the demand required to achieve a profitable production rate. First and foremost, the distribution agreement with NRG (NRG) (the nations largest independent power producer) has the potential to be a game changer. NRG is offering FCEL cells with a power purchasing agreement model that has proven to be incredibly effective in the solar arena -as evidenced by Solar City's stock price. Plus, NRG's nationwide presence and proven track record should open up a number of brand new markets for FCEL. NRG is doubly incentivized to support FCEL due to their ability to purchase 5M shares in FCEL at an average price of $2.18- a significant share price appreciation from current levels and a huge vote of confidence in FCEL. Secondly, the licensing agreement with POSCO will help to provide a steady stream of revenue from royalties, and increased supply chain efficiencies. POSCO is breaking ground on a facility in South Korea that will produce up to 100MWs of FCEL cells. Another perk of the POSCO relationship is the commencement of a test of using boil-off gas at LNG facilities with FCEL cells to generate extra electricity. This is a 600MW market in South Korea alone, with similar facilities existing all over the world.
Similarly, the presence of generous policy support will help to provide steady demand for the fuel cells. FCEL's fuel cells qualify for the Federal Investment Tax Credit (ITC) that lasts until 2017. State policies are also forward looking, such as California's mandate for 1.3 GW of storage by 2020 (which FCEL's fuel cells qualify for). In the North East Hurricane Sandy brought increased attention to grid stability and reliability resulting in supportive policies in Connecticut, New Jersey, and New York.
Either way, FCEL's cells are on the verge of grid-parity. In a recent interview with FORBES, Chip Botttone has cited technology improvements and production efficiencies as enabling the company to have a clear road map for competing without subsidies. As Chip stated:
For us, FuelCell Energy, the reality is today we can produce power without subsidies with $6-8 gas for 14 to 15 cents. If you throw in federal incentive tax credits, you are down to that 9-10 cent price point. Maybe 11.
This is especially good news considering Natural Gas prices are currently in the $3-4 range, and expected to stay there.
This leads me to my next point. By far, the most important engine for FCEL is the changing nature of the global energy system. The old system of centralized national grids, served by tightly regulated utilities operating massive fossil fuel power plants, is being left by the wayside. Rapidly falling costs are leading to increasing renewables penetration, while smart devices and microgrids are revolutionizing the way we consume energy. Look no further than Germany's "Energiewende" to see this energy revolution in action (a country with a significant FCEL presence). By no means, however, is Germany alone. According to the Renewable Energy Policy Network for the 21st Century 2013 Global Status Report, renewables were the single largest source of new generation in the United States last year, and massive renewable capacity is being installed in China and other developing countries. Furthermore, the economics of renewables are quickly becoming favorable in more and more locales across the world, which is reflected in rapidly rising installation rates.
(Source: IHS, via Cleantechnica)
Much of this revolution consists, however, of installing intermittent solar and wind power. Unfortunately, they require a steady baseload power source to back them up when the wind doesn't blow, and the sun doesn't shine. Natural gas is increasingly playing this role due to its ability to quickly ramp up and down with demand, and wide distribution networks. Small amounts of flexible capacity, such as fuel cells running on natural gas, are capable of enabling a significant amount of intermittent renewable installation. Furthermore, the incredible boom in shale gas production in the United States (and likely spread to Russia, parts of Asia, and Latin America) will ensure that Natural Gas, the primary feedstock of FCEL's cells for the near future, will remain incredibly cheap and widespread. Given MC fuel cell's ability to run on natural gas, FCEL's fuel cells can be easily placed at different nodes on the natural gas network (limiting transmission costs) and effectively complement rapidly rising distributed generation.
Microgrids are another great source of potential. A Microgrid is a small scale version of the central grid that contains its own source of power demand, and power supply. They are commonly found at universities, military bases, and government campuses which like the reliability and security offered by microgrids. While often connected to the central grid as backup, if microgrids want to be independent they need their own source of baseload 24/7 power. FCEL's cells are ideally placed to be at the center of these microgrids, especially considering the higher average price for electricity in microgrids. Microgrids are expected to grow into a nearly $40 Billion market by 2020. If even a sliver of this market can be captured, FCEL should see significant share price appreciation just from microgrids.
A look at FCEL's financial trends supports the optimistic view of upcoming profitability. It's Q3 results reported revenue of $54 million, and a gross margin of $4.5 million, both records. Furthermore, return on average assets and operating margins are both increasing rapidly year over year. Given the excellent position FCEL currently finds itself in, these trends should continue their upwards march. FCEL's huge backlog of approximately $380 million dollars is primed to explode.
FCEL's Potential Catalysts For Further Growth
Climate change regulations have the potential to significantly boost FCEL. Ongoing global climate treaty talks (yes, those are still happening) are looking to have a treaty in place by 2015, to go into effect by 2020. Any effective treaty would prove to be a significant boon to firms in the clean energy arena. Even if a global treaty fails to come into effect, climate change regulations are becoming increasingly prevalent with a new cap and trade systems developing in China and South Korea, and upcoming regulations on existing power plants in the United States. Although FCEL fuel cells commonly use natural gas as a feedstock, the electrochemical process characteristic of fuel cells offers huge emissions advantages over traditional combustion methods such as gas turbines, along with the ability to redirect waste heat as CHP. If biogas is used, the power generation is nearly carbon neutral.
Emissions (Lbs. Per MWh)
Fuel Source | NOX | SO2 | PM10 | CO2 | CO2 with CHP |
Average U.S. Fossil Fuel Plant | 5.06 | 11.6 | 0.27 | 2,031 | NA |
Microturbine (60 kW) | 0.44 | .008 | 0.09 | 1,596 | 520 - 680 |
Small Gas Turbine | 1.15 | .008 | 0.08 | 1,494 | 520 - 680 |
DFC® Power Plant | 0.01 | 0.0001 | 0.00002 | 940 | 520 - 680 |
Source ( FCEL Website)
Another important catalyst for FCEL's stock price is the increasing hype regarding fuel cell cars. Car makers are revealing concept fuel cell vehicles (FCVs), and planning on bringing FCVs to mass market in the next few years. Articles such as this one: L.A. Auto Show: Will fuel cells make battery electric cars obsolete? are becoming more and more prevalent. This should bring increased attention to the fuel cell industry as a whole, and boost the stock price from an influx of momentum traders attempting to profit off of the hype.
FCEL's significant R&D spending, and recent acquisition of Versa Power Systems ensures that it won't be caught with its pants down by competitors. Versa Power Systems is a pioneer of large scale SOFC. Whereas most SO fuel cells have been relegated to niche markets due to their inability to scale effectively, Versa Power Systems sought to change this. If they succeed in this endeavor, FCEL's ownership stake provides FCEL another hedge.
FCEL also has a number of more speculative projects under development. FCEL is studying the use of tri-generation systems- which provide a stream of excess hydrogen that could be used to support FCV infrastructure, or sold to industrial consumers. Similarly, FCEL has received a grant from the U.S. Department of Energy to look into the viability of using FCEL's DFC cells as a carbon capture mechanism. Historically, carbon capture technologies have proven costly and ineffective, often absorbing significant amounts of the generated power. FCEL's cells, on the other hand, use the waste CO2 to generate additional power at a much lower cost. This could prove to be yet another massive market for FCEL.
Conclusion
The fuel cell powered future is coming. Compared to previous fuel cell hype cycles, the overall energy context is much more favorable today. The world is in the midst of a full blown revolution in the way we produce and consume energy. There is a large and growing need for clean base load power that can operate on a distributed scale.
In this world, the future for Fuel Cell Energy is bright. The path to profitability is clear, and a huge jump in share price -and shareholder returns- is within grasp. FCEL is big and growing with diversified products and a number of breakthrough opportunities ahead. While undoubtedly a riskier stock than your divided paying traditional energy stocks, such as Exxon Mobil (XOM), with higher risks come greater reward. Overall, FCEL's current price of around 1.35 looks to me like an absolute steal. Look to the upcoming Q4 results for even more positive momentum.
Disclosure: I am long FCEL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)
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