FuelCell Energy: on the Declining Path

FuelCell Energy (FCELB) recently reported its second quarter 2016 results. The company reported revenues of $28.6 million which was only $19,000 less than that for the same period of last year. Moreover, the company incurred a gross loss of $200,000 compared to a gross profit of $2 million for the same period last year.

The problems

FuelCell had to incur two heavy non-recurring charges totalling $20 million during the quarter that resulted in the gross loss.

The incurred charges were related to service agreements for legacy projects taken up in order to optimize the service business and expand future market potential.

The company’s operating expenses increased from $10.8 million to $12.6 million Y-o-Y. This was a result of extensive project development activities combined with targeted and accelerated R&D expenditures in an effort to enhance the product offerings. Ultimately, the company made a loss of $16.2 million or $0.56 per basic and diluted share during the quarter, down compared to $10.7 million or $0.44 per basic and diluted share in the year ago quarter.

Even though the company reported a flat revenue growth and a fall in earnings, the back log was quite strong. The company had a backlog of $411 million at the end of its Q2. Further, more than 70% of this i.e. $295 million is services related backlog which commands a higher margin. The backlog is also several time its quarterly revenue which means the company is getting a lot of business. The issue that FuelCell needs to address is that of building a sustainable business model which can churn out recurring profits. And with its latest innovative moves, one should believe the company will be able to do it in the long term.

Latest moves:

The key to progress in any industry is innovation. But for a company like FuelCell which deals with latest technologies and still has to develop a full-fledged market, innovation is the way of life and the key to survival. These companies need to come up with recognizable and viable innovative solutions to industrial problems one after the other to keep the customers and investors interested. In a bid to foster the innovations, FuelCell collaborates with its industrial partners and works on their live problems.

FuelCell's latest move in this direction was its collaboration with Exxon Mobil Corporation (XOM) to pursue a novel technology in Carbon Capture Sequestration (CCS). The new technology will be used to capture carbon through a new application of carbonate fuel cells and thus help reduce operating costs. Exxon itself has a great experience of reducing green-house emissions which could be vital for the development of FuelCell’s new technology.

The advantage of carbon capture is not limited to just ensuring clean operations and earning carbon credits. From the commercial point of view, there are various uses of carbon dioxide like carbonated drinks, food processing, and chemicals. Further, it is used as an injection gas by oil and gas producers for enhanced oil recovery. In other words, carbon dioxide can be sold after being captured and the investment made to employ the carbon capture technology can easily be recovered. Lastly, the carbon capture system can also concentrate the captures carbon dioxide to generate electricity.

Market growth:

This could prove to be a big step forward for FuelCell as this technology has the potential of capturing 90% of carbon dioxide that is being emitted by large emitters such as power plants and other industrial units produced due to burning of fossil fuels. As a result, the application of this novel technology is going to prove highly beneficial to many-many potential customers. Especially the power plants that would use it will have to bear a lower cost of carbon taxes. And it is estimated that at least half of the global power generation will still be done using fossil fuels by 2050. So, there are going to be enough power plant operators who will be more than willing to pay for FuelCell’s latest carbon capture method.

According to a report on marketsandmarkets.com, carbon capture sequestration market is estimated to grow at a CAGR of over 27.18% from over $1.78 billion in 2013 to nearly $6.81 billion by 2019.

Further, according to the projection made by the US government, the amount carbon emissions is going to decline with a reduction in coal fired power plants as the government's Clean Power Plan comes into force. The projected decline in carbon emissions is 32% in 2030 compared to 2005.

A reduction in supply will be taking the price of carbon dioxide up. Synapse forecasts an increase in carbon dioxide price per ton from $20 per ton in 2020 to $35 per ton in 2030 and to $85 in 2050 in mid-case scenario.

Therefore, this particular partnership with Exxon Mobil could go a long way in providing the much needed momentum to FuelCell for the long term.

Conclusion:

FuelCell has not been able to generate sustainable profits till date. But it is getting a lot of business to do because of its ability to innovate continuously. And as a result it has built a good amount of backlog. On similar lines, the company has partnered with Exxon to develop a novel technology that has a very promising long term future. This could really get the monkey off its back.

Published on Sep 8, 2016
By Vinay Singh

Copyrighted 2016. Content published with author's permission.

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