Scharfsinn86
Plug Power (NASDAQ:PLUG) was already in a precarious position prior to yet again disappointing investors with another bad quarter. The hydrogen fuel company now faces liquidity concerns, while government regulations appear to not favor the industry. My investment thesis remains Bearish on the stock, though the recent bounce in the face of negative news is worth notice.
Source: Finviz
Liquidity Concerns
Plug Power has boxed the company into a corner after years of missing targets, leading to mounting losses. The company continues to face massive delays in new hydrogen fuel plants, with the Georgia plant still not producing hydrogen after hosting the Investor Day there on August 23.
Source: Plug Power Q3’23 shareholder letter
The Q3 results generated another nearly $300 million loss after Plug Power missed revenue targets again. The prime issue facing any business with delays is that costs don’t disappear and have to be absorbed whether producing revenues or not. Management even suggested the fuel business wouldn’t be profitable until the Texas plant was operational, and this isn’t targeted until 2025 now.
Plug Power burned $1.2 billion in cash YTD and the non-restricted cash balance sat at only $500 million, down from over $2.0 billion at the start of the year. The company is working on DOE loans of up to $1.5 billion for 80% financing of possibly existing hydrogen plants under construction, along with pursuing other forms of financing projects as follows:
Source: Plug Power Q3’23 shareholder letter
Naturally, the problem facing a company needing access to capital is that the terms aren’t always conducive to investors. Public market investors are usually better off waiting until the terms of new capital are released to the public to ensure any new investment isn’t compromised.
Restrictive Subsidy Rules
What won’t help Plug Power is that the new proposed rules from the Biden Admin for the hydrogen Production Tax Credit (PTC) are very restrictive. The new rules will undoubtedly cause delays and potentially cancel plans for hydrogen production and use.
The Treasury Department issued tighter restrictions than expected, requiring the use of clean energy built within the prior 3 years and for the use of the same grid. Even more troubling, the electrolyzers used to split water into oxygen and hydrogen must run during the same hours that the wind and solar farms operate starting in 2028.
The American Clean Power Association chief executive Jason Grumet made the following statement to the New York Times regarding the hourly restrictions:
…will discourage a significant majority of clean power companies from investing in green hydrogen manufacturing and facilities.
The restrictions are meant to prevent from new hydrogen plants to rely on carbon energy sources to produce the hydrogen. The fear is that without requiring new matching clean energy sources, coal or gas power plants might end up compensating for the lost power from a solar or wind farm contributing electricity to a hydrogen fuel plant.
Any clean hydrogen plant with access to new wind or solar electricity can utilize the $3/kg tax credit to make the production of green hydrogen comparable to with natural gas. Otherwise, the clean hydrogen process costs an estimated $4/kg to $6/kg and isn’t very feasible.
On the Q3’23 earnings call, the Plug Power CEO highlighted concerns on a hourly matching program as follows:
We also think that if you think about time matching, it’s pretty clear that treasury has realized that hourly time matching doesn’t work because of direct market for that really doesn’t exist.
Morgan Stanley recently cut Plug Power to a $3 price target due to the issues with higher capex inflation, interest rates and the fact that green hydrogen is too reliant on subsidies. This negative rating was based on the uncertainty of the proposed regulations released today, and the actual rules only reinforces those concerns.
Plug Power reacted somewhat positively to the news, probably as more of a relief rally that the Treasury Department actually issued guidance. A lot of hydrogen projects have likely been on hold waiting on final details of the clean hydrogen tax subsidy, and this at least allows those qualifying for the credits to move forward.
Takeaway
The key investor takeaway is that Plug Power has too many capital needs in a new market like clean hydrogen to invest in the stock here. In addition, the proposed rules for hydrogen subsidies appear far too restrictive for the industry and Plug Power has no margin of safety to handle any rules that further delay or even potentially cancel projects.