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FuelCell Energy (NASDAQ:FCEL) appointed a new CEO in 2019. Jason Few has a proven track record in turnaround situations and a good reputation within the industry. Two years later, the company has a flawless balance sheet, good access to capital, a less capital-intensive way to finance sales, a groundbreaking new product that could significantly improve the company's profits over the medium term, and a solid corporate strategy.
Jason Few new CEO driving change
Jason Few joined FCEL in 2018 and was appointed President and CEO in 2019 tasked with:
be responsible for the revitalization and advancement of FuelCell Energy, including its ongoing restructuring efforts, its efforts to enhance commercial activity, and its efforts to improve operational effectiveness.
Source: FCEL Investor site
Source: FCEL investor site
Mr. Few has extensive industry experience; probably his most significant management achievement was the turnaround he oversaw at Reliant Energy, transforming an indebted loss-making energy company into a multi-billion dollar consumer services company.
Few sits on the boards of Marathon Oil Corporation and a Hospital as well as FCEL. He has a degree in Business and Computer Systems from Ohio and an MBA from The Kellogg graduate school at Northwestern Uni.
He has the right education, industry knowledge, and experience to drive a turnaround at FCEL.
FCEL has an excellent balance sheet
The new team started work on strengthening the finances of FCEL immediately; we can now see the results of their efforts.
Balance sheet item | 2017 | 2020 |
Total cash and ST investments | 49.3 | 149.9 |
Accounts receivable | 68.5 | 17.6 |
Inventory | 75.5 | 52.9 |
Total Current assets | 130 | 234 |
Total Assets | 383.8 | 523.5 |
Accts Payable | 42.6 | 9.6 |
Total Current liabilities | 98.1 | 58.9 |
Long term debt | 73.7 | 116.9 |
Capital Leases | 0 | 55.2 |
Total Liabilities | 162.7 | 269.1 |
Total Liabilities and Equity | 383.8 | 523.5 |
Source: Author Generated data from Seeking Alpha
Cash is up substantially, the money coming from a reduction in inventory and accounts receivable.
Short-term liabilities are down significantly.
Long-term debt is up, as is total equity. The new debt is a result of the financing of sales (more on this later).
The balance sheet is flawless. The old dame of the fuel cell industry might be going somewhere, at least now, for the first time, it can afford to pay the ticket price to travel.
FCEL Financing Sales
FCEL operates in more than 50 countries worldwide, has the world's largest fuel cell site in South Korea, and the largest one in the US at Bridgeport, Connecticut.
FCEL produces large-scale, ultra-clean electricity generation sites. They have a reputation for reliability and have far more operating hours and Megawatts produced than any other Fuel Cell company.
FCEL units are big, funding the development and sale of these units has always been problematic. Before the new management, FCEL operated like a utility, and they would build and pay for the site and then charge for the energy produced. This is very capital intensive and meant the company was always short of cash to develop new products and work on its enormous backlog.
The recent units have delivered on a sale and leaseback deal; this frees up much-needed capital but does appear on the balance sheet as increased debt.
The recent sale and leaseback deal of the San Bernardino Municipal Water department installation was the second deal financed through Crestmark. Crestmark has a good understanding of the biofuel industry and seems ready to fund future FCEL deals. The San Bernardino deal represents just over $10 million through a ten-year time frame.
FCEL announced in the September 10K (Page 30/31) filing that they had financed the 7.4MW Navy Submarine unit using a "partnership flip" deal with West Bancorp Inc. This is a common tax equity financing arrangement that has excellent terms for FCEL. It is noticeable that these two sites have been brought to commercial activity reasonably quickly, at least for FCEL. The new funding methods allow FCEL to begin further developments far more rapidly than they previously could.
Suresource Hydrogen: a game-changing product
FCEL is the original fuel cell company, founded in 1969 with an IPO in 1992. It has concentrated on selling large-scale on-site power generation units, and its main customers have been the US military, governments, and large corporations. It has an enormous 1.3 billion dollar backlog of work that seems to have been on the books forever, and little progress has been made at monetizing the backlog.
In 2017 the company started researching Hydrogen as a potential fuel; this research has led to a product with enormous potential.
The Suresource Hydrogen powerplant
Suresource is the brand name FCEL uses for its powerplants. They are large-scale electricity-producing Fuel Cell systems that use Natural Gas as fuel.
Source: FCEL
Suresource Hydrogen does not use hydrogen as a fuel, the technique of most fuel cell companies, but produces it as a by-product.
The Suresource Hydrogen units reform Methane (from Biogas or Natural Gas) generating electricity and heat; they are configured to produce excess Hydrogen suitable for transportation and storage. In this configuration, the Suresource product delivers Electricity, Heat, and Hydrogen. Hence they are known as tri generation sites.
Source: FCEL
This product will be an essential part of the Hydrogen economy gaining a foothold around the world. The potential sales for this product are huge; it is the ultimate clean energy source. It takes methane that would have escaped into the atmosphere, then produces electricity, heat, and Hydrogen.
The first Trigeneration unit is currently being built, the fuel cell is due on-site this quarter. The site at the Port in Long Beach will use Biogas as fuel and produce electricity, hot water, and Hydrogen. The Hydrogen will be used to power Toyota's fuel cell trucks and cars. The electricity produced will be greater than the needs of the port, the excess going to the California grid. Biogas as fuel will make this whole project carbon negative.
FCEL Corporate Plan
The new turnaround strategy has been named by FCEL as "The Powerhouse Strategy" it has three stated aims:
1. Transform "Build a durable Financial Foundation and Enhance Financial Results."
2. Strengthen "Drive Operational Excellence."
3. Grow sales to existing strategic customers with "innovation and improve the development and sale of new products."
1. Transform FCEL
FCEL is transformed; along with the management restructure, the business has been re-organized. The strange Hurzon Consulting deal is over (this deal made FCEL a nogo stock for me).
Short-term debt repaid, lower-cost long-term debt, and funding practices established.
The evidence of progress here is clear, new sales financing improved the balance sheet, and Q3 finances came in considerably above target, delivering an upside surprise that may have started a share price increase.
2. Strengthen FCEL
This part of the strategy is about being lean and mean; FCEL is looking to reduce costs by utilizing economies of scale as their volumes grow. The manufacturing sites in the US and Germany are currently significantly underutilized. The Torrington site alone could cope with 200MW per year, FCEL now has 250MW operating in the field, and they started production in 1992. Increased sales are required, and the company has invested in a new sales strategy, including a re-launch of products in Europe. They are developing new products and working on the enormous backlog by identifying opportunities to reduce costs for customers.
3. Grow FCEL
Buy-in and Focus are what FCEL needs, however, there are still concerns about its ability to deliver.
@HenrikAlex expressed these concerns in his excellent article FuelCell Energy: Stock Rallies On Improved Q3 Results But Product And Execution Issues Remain To fully understand the risks of investing in FCEL I recommend you read his article.
Innovating new products appears to be moving at a pace. The carbon capture deal with Exxon (XOM) is yet another example of how FCEL is moving forward, innovating thinking on a large scale and focused on developing large-scale solutions for its customers.
Conclusion
FCEL is in the early stages of a turnaround from loss-making drift to lean and mean innovator. The price chart of this stock already reflects an improved sentiment, with an apparent uptick and a developing trend of higher highs and higher lows. This might be the perfect time to buy.
I Bought FCEL at $7.42 on October 22nd. It is a short term position derivative position using leverage provided by IG Markets (LON:IGG)
