Three Hydrogen Energy Companies Worth Knowing

 

Three Hydrogen Energy Companies Worth Knowing
Tuesday October 31, 3:43 am ET


Debra Fiakas, CFA submits: It is lonely at the top and that is just
where Hydrogen sits - at the top of the periodic table. It holds that
position with the atomic number one. Unlike glamour elements like gold
or silver, Hydrogen rarely gets noticed. It is colorless, odorless, and
tasteless. The thing is, Hydrogen is also the lightest element, a gas
in its normal state. That makes it highly flammable and dangerous.
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Nonetheless, Hydrogen is also the most abundant element in the
universe. It is also the friendliest, forming compounds with most of
the other elements. There it is in the water we drink - H2O.

Since there is so much of it, Hydrogen cannot be ignored by in the
quest for solutions to our looming energy problems. What promise does
Hydrogen hold? Quite a few developers think the answer is considerable.
There are twenty-five companies with listed securities in our Renewable
Energy Index that are pursuing one element or another of Hydrogen as
fuel. Most likely there are twice or three times that many private
companies in the field. We picked three out of the crowd that either
have market-ready products, customers and/or revenue.

The first two are working with Direct Fuel Cell technologies and have
found success with "reforming," i.e. using a fuel processor to
convert hydrocarbon fuels into a gas mixture of Hydrogen and other
gases. Medis Technologies Ltd. (NASDAQ: MDTL - News) is a bit
circumspect on its fuel source, indicating simply that it is a patented
proprietary fuel. FuelCell Energy, Inc. (NASDAQ: FCEL - News) uses
plain-old pipeline natural gas to set up the Hydrogen/oxygen reaction
inside the cell. In contrast, Ballard Power Systems, Inc. (NASDAQ: BLDP
- News) produces fuel cells that use Hydrogen as a raw fuel.

Medis Technologies is targeting its Medis 24/7 Power Pack at the market
for handheld devices, such as smart phone multimedia devices and power
tools. The Medis 24/7 Power Pack is a disposable charger or auxiliary
power built on patented direct fuel cell technology. One unit is
expected to give up to 30 hours talk time for a cell phone or up to 80
hours listening time on an iPod. It produces no discernible heat output
and is environmentally friendly. Medis has managed to get the expected
cost down to affordable levels for consumers with a suggested retail
price $19.99 to $24.99.

The key to the price level is production. Medis is installing a
production line in Israel that could produce up to 1.5 million units
per month when fully operational in 2007. A big hurdle for market
introduction is certification by Underwriter Laboratories, a process
Medis started last fall.

Recently Medis signed a memorandum of understanding with two Russian
groups, which will help Medis get its Power Packs certified for sale in
Russia. The Russian partners have pledged to buy initial units produced
in Israel, but will later set up production facilities in Russia.

As exciting as all these events might seem, investors are presented
with a dear stock price ($24.46, 10/27/06) given that Medis is still
several months away from production and sales. There are two published
estimates for MDTL with apparently widely divergent views on the next
year. According to First Call, one analyst expects a profit of $0.50
per share in 2007 on over $100 million in sales and the other expects a
loss of $0.59 per share on $65 million in sales.

Ballard Power Systems has remained loyal to using Hydrogen as a raw
fuel in its Nexa product, partly because of the limitations presented
by the "reforming" step. The fuel processors used by FuelCell
Energy are dependent upon a strong distribution system for the fuel
source. Natural gas, for example, is available only for stationary
applications, limiting FuelCell Energy to its target market of power
generation. Methanol is easier to convert into Hydrogen but methanol is
in limited supply. Medis is able to target portable applications
because its fuel source is "on board," that is already in the
product.

A readily available fuel source is a key for Ballard, since it has set
its sights on the electric vehicle market. It has allies in
DaimlerChrysler and Ford Motor Company, which along with Honda, have
introduced fleet demonstration vehicles to customers. Ballard also
formed a partnership, Chrysalix Energy, with Shell Hydrogen to fund
development of transportation infrastructure and support services. In
fact, Shell Hydrogen signed an agreement last week with Proton Energy
Systems, a subsidiary of Distributed Energy Systems Corp. (NASDAQ: DESC
- News), to install a Hydrogen fueling system in the New York City area
to demonstrate Hydrogen generation technology for vehicle fueling. Air
Product, Inc. (NYSE: APD - News) is also a partner in the project.

Ballard's first commercial fuel cell product, the Nexa power module,
has been around about five years now. This product, along with
materials, has helped build Ballard's sales to $62 million in the
twelve months ending June 2006.

Ballard is burning cash at the rate of about $10 million per quarter on
operations. With $213 million in the bank at the end of June 2006,
Ballard appears to have the resources for several more years to develop
its technology. The nine analysts who have published estimates for
Ballard are not looking for profitability any time soon. The First Call
consensus estimate is a loss of $0.55 per share on 2007 sales of $79.0
million, representing only a small improvement over the consensus
estimated loss per share of $0.66 on $62 million in sales.

Unlike Ballard, FuelCell Energy is targeting stationary applications,
rendering the fuel sourcing and transportation non-issues. Using Direct
Fuel-Cell technologies, FuelCell Energy has developed fuel cell power
plants ranging in size form 250 kilowatts to 2 megawatts. Light
industry, hospitals, schools and server farms that need back-up power
sources are ideal customers. One of its most recent sales was to a
buyer in the hospitality industry in California, which will use the 750
watt power plant to supply base load power for hotel operations. The
heat byproduct from the power plant will be used to heat water for
guest rooms.

FuelCell Energy not only has a broader analyst following than Medis,
they also appear to be in agreement on next year's prospects. The
First Call consensus estimate is for a loss of $1.37 per share on $40.0
million in sales.

Beyond fuel cell technology, another important question is whether
there are alternative energy sources, such as biofuels or lithium ion
batteries that will ultimately gain wider acceptance. For example,
EarthBioFuels, Inc. is trying to put biodiesel fuel branded as
"BioWillie" into gas stations around the country and Altair
Nanotechnologies, Inc. (NASDAQ: ALTI - News) has been demonstrating its
advanced lithium ion batteries in an all-electric fleet truck and an
SUV.

We believe the market for energy sources is diverse and multiple
applications are needed, leaving room for numerous players and
technologies. The winner, if there is to be one, will not be apparent
for some time to come. In the meantime, investors can look to small
capitalization companies to apply their usual pluck and skill to
harnessing Hydrogen.

Disclosure: Neither the author nor any persons associated with Crystal
Equity Research holds a beneficial interest in any of the securities
mentioned in this article.