Tuesday, September 18, 2007

Greening up Jamestown

Jamestown. No not the Jamestown where the colonists set up housekeeping. The Jamestown in question is in New York - the “Furniture Capital of the World.” There is not a lot of furniture making there now, so the town folk are glad to have an energy development project underway.

Praxair (PX: NYSE) and Foster Wheeler (FWLT: Nasdaq) just announced an agreement to jointly develop clean coal technologies and plan a demonstration project in Jamestown. The two plan to integrate oxy-coal combustion systems into coal-fired electric generating plants to facilitate capture and sequestration of carbon dioxide. The due claims its equipment and process can reduce CO2 emissions by as much as 90%.

Their idea is to install Foster Wheeler’s steam generators in coal-fired power plants. The steam generators will use oxy-coal combustion technology that concentrates the carbon dioxide emissions so they are easier to capture and send to storage. The gas people at Praxair will supply the oxygen necessary for this oxy-coal combustion process. Praxair will also provide the equipment to capture the carbon dioxide at the other end of the combustion process.

The Praxair-Foster Wheeler scheme is far more complicated that suggested in the foregoing paragraph. Let’s suppose for the moment that it will work and the two have cracked the code on stemming CO2 emissions from power plants.

If a “green” oriented investor buys takes a stake in PX or FWLT, what would they get? Can industrial, “black” operations turn themselves into a new, “green” color and will that transformation lead to shareholder value?

First, neither company has revenue or earnings from oxy-coal combustion since the project is not yet off the drawing board. Second, they are in quite different businesses even if they share the same customers. Praxair is an industrial gas supplier, making their business model highly focused on delivery and service. Foster Wheeler, on the other hand, is an engineering services and capital equipment company, concentrated in the oil and gas, chemicals and pharmaceutical companies.

Sales for Praxair have ramped steadily over the past three years, as the company has expanded its product line, penetrated new territories, and added customers. We are more impressed however by the company’s sales to operating cash flow conversion rate of 21.6%. Praxair returns a third of its profits to shareholders through a dividend, which is currently yielding 1.2%. The stock price has moved upward with sales, but is still moderately valued at 19.5 times 2008 estimated earnings.

FWLT shares are valued near 23 times projected earnings, the divergence from PX explained in part by the difference in business models. Foster Wheeler struggles with margins, but finally turned a profit in the first half 2007 and the year 2006 after four years of red ink at the operating line. The net profit margin in the trailing twelve months ending June 2007 is 7.3% and the cash conversion rate is just a tad lower at 6.8%.

Investors seeking their own “green” in the greening of the economy would be better off with shares of PX, a more consistently profitable and efficient operation. Praxair will also have a customer for an extended period, proving oxygen and recovering CO2 as long as the equipment is in place and functional.

The next question - whether the partnership can turn the oxy-coal combustion idea into profits - is less easily answered. First, the idea has yet to be tried in a fully operational coal-fired power plant. Second, Praxair and Foster-Wheeler have some competition.
Babcock & Wilcox, a division of McDermott International, Inc. (MDR: NYSE) is teaming up with American Electric Power (AEP: NYSE) to prove the commercial viability of oxy-coal combustion. They are getting help from American Air Liquide, the U.S. unit of the French industrial gas supplier, Air Liquide. They have a pilot demonstration underway at a Babcock & Wilcox facility in Ohio and a feasibility study should be done by June 2008.

Neither the author of the Small Cap Copy web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

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