GWH - ESS Tech: Flush With Cash As Solar And Wind Energy Booms

2023-12-11 16:22:46 ET

Summary

• ESS Tech's partnership with Honeywell could be transformative for its revenue ramp.
• The $128 billion conglomerate is taking an equity stake in ESS and will incorporate iron flow batteries in its clean energy go-to-market efforts.
• ESS is positioned for growth as utility-scale energy storage shifts towards long duration and iron flow batteries gain traction.

The Fed's battle with inflation and the subsequent collapse of liquidity for growth firms has defined our economic zeitgeist for nearly two years. The impact on climate economy tickers has been brutal. ESS Tech, Inc. ( GWH ) is down 50% year-to-date, renewable energy yieldco NextEra Energy Partners, LP ( NEP ) is trading at its lowest level since 2014, and energy storage peer Eos Energy Enterprises, Inc. ( EOSE ) currently sits just 26 cents above the Nasdaq's minimum listing requirement. Interest rates being at 22-year highs has not only expunged the type of risk-taking stock market investors that drive the valuation of early stage companies like GWH, but it has also ramped up solvency risk by making capital more expensive and scarce. ESS held total cash and short-term investments of $125 million at the end of its fiscal 2023 third quarter. This was up roughly $25 million sequentially and is 61% of GWH's current market cap. ESS holds zero debt with its enterprise value now at a remarkable $85 million. Hence, I think the risk-and-reward dynamic has tilted to the reward side.

US battery storage capacity is set for intense growth in the next few years with the US Energy Information Administration expecting at least 20.8 gigawatts of battery storage capacity to be added from 2023 to 2025. By 2025 there will be at least 30 gigawatts of battery storage capacity, a 6x increase from 2021. The fledgling industry is an often understated but critical part of the global shift towards zero-carbon electricity sources. Whilst the bulk of new capacity will be short-duration lithium-ion batteries, long-duration energy storage is set to take an increasingly larger part of the market as renewables become more integral to the US electrical grid. ESS is also chasing the global market and signed an agreement with German energy provider LEAG in the summer to provide its iron flow batteries for a clean energy hub.

GWH Secures Partnerships, Cash, And Revenue

GWH is still in the early stages of growth, recording revenue of just $1.54 million during its third quarter, up 710% from its year-ago comp. Revenue year to date stands at $4.7 million, as global demand for its batteries continues to grow. GWH expects revenue to ramp up to $9 million for the full year 2023, implying fourth-quarter revenue of at least $4.3 million. This would represent sequential growth of 180% and would be up from zero sales in the year-ago period. The big takeaway from the third quarter was GWH's balance sheet strength and the partnership with the $128 billion conglomerate Honeywell International Inc. ( HON ). These come as solar and wind power look set to constitute 16% of total US electricity generation in 2023, gradually growing to 18% in 2024 in partial response to the dual production tax and investment tax credits provided by the 2022 Inflation Reduction Act. The act should see US solar grow by an additional 160 gigawatts through to the end of the decade.

Cash and short-term investments got a boost from the large partnership with Honeywell which saw the conglomerate make a direct equity investment of $27.5 million to acquire 16,491,754 newly issued common shares. The partnership is exactly what GWH needs to expand its sales pipeline with Honeywell looking to incorporate GWH's iron flow batteries into their clean energy go-to-market efforts. Critically, Honeywell intends to purchase up to $300 million of batteries in the near term and made a $15 million prepayment towards these purchases during the third quarter. This saw GWH's balance sheet receive a $42.5 million boost, with sales from the Honeywell partnership set to form a material part of their growth ramp in the future quarters. Whilst the utility of cash burn figures at this early stage is somewhat limited and will oscillate as volume expands, ESS flagged during its third quarter that the investment will help expand its cash runway well into 2025.

Growth Ramp As Utility-Scale Energy Storage Moves To Long Duration

The partnership with LEAG will initially see a 500 MWh iron flow battery demonstration system built in Germany by 2027, the first phase of what's set to be 20 GWh of storage to be paired with 14 GW of renewable generation in the largest green-energy hub in Europe. This is a strong vote of confidence in the company's technology whose size forms a fundamental risk factor for bulls. The industry is moving at pace and GWH should see more opportunities as utility-scale energy storage moves from the conventional 2-to-4-hour lithium-ion-based capacity to longer 8-to-12-hour durations. Iron flow batteries will embed greater grid flexibility for its users and help address the renewables duck curve. Whilst still very early stage, GWH is rated a hold with the Honeywell partnership introducing the synergistic partnership the company needs to expand revenue and strengthen its balance sheet.

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