Texas Engineering Firm Moves in the Hydrogen Market

Last week Texas-based engineering services firm ENGlobal Corporation (ENG:  Nasdaq) provided an update on a project to design and build process modules for hydrogen production facility.  The hydrogen plant has been commissioned by a renewable diesel producer, which is paying ENGlobal $25 million for the modules.   Fortunately, for ENGlobal shareholders, the project is on schedule and expected to be completed by June 2021.

Engineering firms are numerous and hydrogen is produced using long-proven processes.  Nothing exciting there.  Nonetheless, investors should take note of the effort because ENGlobal is using proprietary technology from its partner Haldor Topsoe A/S that could make the hydrogen facility one of the most efficient in the U.S.  Indeed, the plant will be one of a kind in the U.S. market even though it has been used in over three dozen plants around the world.

ENGlobal expects the plant with Haldor Topsoe technology to need as much as 20% less feed and fuel gas than conventional hydrogen plants.  That reduces operating costs and carbon footprint with one swing.  About 95% of hydrogen is produced through steam reformation of methane using natural gas as a feedstock.  Globally the hydrogen production sector is responsible or about 830 million metric tons of carbon dioxide emissions each year.  Reducing CO2 emissions by 20% is a meaningful accomplishment, especially if it can be achieved with a relatively inexpensive application of technology using standard equipment.  

Shareholders of ENGlobal have been given few details on the carbon footprint of this particular facility.   Owned by a renewable diesel producer, it would seem the feedstock could be a bio-methane.  This would alter its carbon profile entirely.  However, that may not matter for ENGlobal, which can still use the project to drum up additional business among renewable fuels, chemicals producers and refiners.  Indeed, in the update ENGlobal leadership claimed a string of potential jobs that range in size from $25 million to $125 million.

A fat business pipeline like that could deliver interesting financial results for ENGlobal.  The company reported $69.6 million in total revenue in the twelve months ending September 2020, resulting in $800,000 in net income or $0.03 per share.  Cash operating income was $1.5 million.  Landing a few of those hydrogen projects could drive revenue growth and, assuming operating profits are maintained, boost earnings per share. 

ENGlobal shares had been in the doldrums from some years, until early October 2020, when trading volumes and the price picked up.  In late November 2020, in a dramatic flourish of strong trading volume the stock price tripled and then doubled again in the next two months.     

Interestingly, the price surges did not coincide with the few bits of good news that ENGlobal had shared with the public.  The company had already provided an encouraging update on the hydrogen project in August 2020.  Whispers about sales and earnings in the third quarter ending September 2020, might have been at play.  The earnings were finally released in early November.   Then in early December the company made public the appointment of an accomplished engineer and large company executive to a newly created position of president.   

As a consequence, ENG is priced quite dearly against trailing earnings, with a price-earnings multiple off the scale.  The stock is registering as oversold according to both the Relative Strength Index and the Commodity Channel Index.  There are no estimates published for ENGlobal so there is no consensus estimate of future earnings.  That has apparently not dissuaded some traders fixing in their owns minds a figure for earnings growth form the hydrogen market opportunity and then snapping up the stock in anticipation.    

 

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