XOM - FuelCell Energy: Carbon Capture Progress With Exxon Mobil Unlikely To Move The Needle

2023-05-01 20:42:06 ET

Summary

• Stock rallies after the company discloses a purchase order for third-party supply of long-lead time fuel cell module and tooling equipment with FuelCell Energy providing related engineering support.
• Based on statements made in the company's respective 8-K filing with the SEC, no material revenue is associated with this order.
• Exxon Mobil has not yet made a final investment decision but placed the order to ensure the original project schedule being maintained.
• In the near- to medium-term, FuelCell Energy's results will remain dependent on its legacy, capital-intensive utility-scale fuel cell business, which continues to suffer from weak margins and outsized cash outflows.
• Given ongoing execution issues and elevated risk of further dilution, investors should continue to avoid the common shares.

Note: I have covered FuelCell Energy ([[FCEL]], [[FCELB]]) previously, so investors should view this as an update to my earlier articles on the company.

After hitting a new 52-week low last week, FuelCell Energy's common shares rallied approximately 10% on Monday following perceived progress towards commercialization of carbon capture technology in partnership with a division of Exxon Mobil ( XOM ).

FuelCell Energy (...) has received an order from ExxonMobil for long-lead fuel cell stack module equipment and engineering support required to implement a potential demonstration of modular point source carbon capture at an ExxonMobil facility. While ExxonMobil has not yet made a final investment decision, this order advances critical-path equipment procurement and module engineering work. The commercial demonstration project is anticipated to be a full scale prototype of the modules used in large-scale systems for industrial and commercial point source carbon capture applications.

FuelCell Energy continues to gain confidence in achieving large scale commercialization of FuelCell Energy’s carbonate technology for industrial and commercial point source carbon capture. (...)

We see market demand across various commercial and industrial segments to scale and commercialize our unique carbon capture solution, which captures carbon dioxide from various exhaust streams, while generating additional power and hydrogen. We believe our carbon capture solution is the only solution that can capture carbon while producing electricity and hydrogen at the same time.

To provide some background:

FuelCell Energy and Exxon Mobil's joint efforts to commercialize carbon capture technology date back to at least 2016 when the companies announced their initial agreement with a focus on natural gas-fired power plants:

The scope of the agreement between ExxonMobil and FuelCell Energy will initially focus for about one to two years on how to further increase efficiency in separating and concentrating carbon dioxide from the exhaust of natural gas-fueled power turbines. Depending on reaching several milestones, the second phase will more comprehensively test the technology for another one to two years in a small-scale pilot project prior to integration at a larger-scale pilot facility.

Later in 2016, the companies announced the selection of Southern Company's ( SO ) James M. Barry Electric Generating Station near Mobile, Alabama for pilot plant tests:

The James M. Barry Electric Generating Station, a 2.7 gigawatt mixed-use coal and gas-fired power plant operated by Southern Company subsidiary Alabama Power, will host pilot plant tests of the technology, which uses carbonate fuel cells to concentrate and capture carbon dioxide streams from power plants. The tests will demonstrate carbon capture from natural gas-fired power generation under an agreement between FuelCell Energy and ExxonMobil announced in May, and from coal-fired power generation under a previously announced agreement between FuelCell Energy and the U.S. Dept. of Energy.

Unfortunately, the project wasn't realized. Based on disclosures made in FuelCell Energy's past annual reports, the company's failure to secure required funding apparently resulted in the project no longer being pursued.

In 2019, Exxon Mobil managed to take advantage of FuelCell Energy's dismal financial condition at that time by extracting a perpetual, irrevocable license to the company's entire carbon capture intellectual property for a mere $10 million.

Several months later, the companies announced a new, expanded agreement for further development of carbon capture technology, worth up to $60 million.

Pursuant to the terms of the joint development agreement, FuelCell Energy would provide exclusive research and development work for Exxon Mobil to advance the company's carbon capture technology over a two-year period.

While the new agreement provided a top-line boost and some much-needed cash flow, it actually downgraded FuelCell Energy's role from a strategic partner to a mere contract research and development services provider as Exxon Mobil will be the sole owner of all information and intellectual property resulting from the agreement.

In recent years, the agreement has been extended several times mostly due to the company's failure to achieve certain technological milestones and deliver a fuel cell design suited for a planned demonstration project at Exxon Mobil's Rotterdam refinery in the Netherlands. The company's execution issues actually resulted in the requirement to make some concessions to Exxon Mobil .

The most recent amendment extended the agreement to August 31, 2023 to allow for

1. Continuation of research that would enable the parties to finalize data collection in support of the project gate decision to use the developed technology in a Company fuel cell module demonstration for capturing carbon at Exxon Mobil’s Rotterdam facility.
2. Continuation of the development, engineering and mechanical derisking of the Generation 2 Technology fuel cell module prototype.
3. Studying the manufacturing scale-up and cost reduction of a commercial Generation 2 Technology fuel cell carbon capture facility.

Based on Monday's announcement, FuelCell Energy has apparently made some progress in recent months - otherwise Exxon Mobil wouldn't have placed an order for long-lead time items and related services.

Please note that the company will only provide engineering support while the required fuel cell stack module equipment and tooling will be acquired from various third-party vendors.

On the flip side, Exxon Mobil has not yet made a final investment decision (originally scheduled for last year) and the company's 8-K filed with the SEC on Monday actually states that the purchase order was necessary " to maintain the desired demonstration project schedule in the event of a positive project gate decision ".

In addition, the 8-K states that there's no material revenue associated with this order for the company.

Bottom Line

While Monday's announcement signals some progress in the company's efforts to develop a fuel cell solution suitable for a demonstration project at Exxon Mobil's Rotterdam refinery, there won't be any material revenues associated with the reported order.

In addition, even in case of a positive final investment decision, it will likely take several more years until the technology will be ready to move from demonstration to commercialization.

In the near- to medium-term, FuelCell Energy's results will remain dependent on its legacy, capital-intensive utility-scale fuel cell business which continues to suffer from weak margins and outsized cash outflows.

Remember, the company has committed to aggressive growth investments which in combination with anticipated losses from operations might result in negative free cash flow of up to $350 million this year.

As a result, investors better prepare for further, aggressive utilization of open market share sales as a means to replenish the company's cash reserves.

Given ongoing execution issues and elevated risk of further dilution, investors should continue to avoid the common shares.

Investors looking for a somewhat less risky investment in FuelCell Energy should consider taking a position in the company's Series B Preferred Shares ((FCELB)) which trade around 50% of face value despite ranking senior to common stock and paying a rather juicy 10.1% cash dividend on an annual basis.

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