Shooting from the hip - topical, informed and opinionated posts each & every day!
The fact that wind farms were paid a record sum of almost £3 million in a single day during August will no doubt play into the hands of those who see them as unreliable, unpredictable and unnecessary. However, ironic episodes like this one could shortly become a thing of the past if hydrogen energy specialist ITM Power has its way.
With renewables accounting for an ever-growing share of the energy mix, the need for grid balancing and energy storage is becoming an ever more pressing issue. National Grid spent £700 million on grid balancing services in the period 2010-2011, rising to £1.1 billion in 2012-2013. By 2020 estimates across the industry vary from £2 billion to as much as £6 billion for grid balancing services. The problem lies in the fact that electricity cannot be ‘stored’ as such, but has instead to be converted to something else in order to be available for use in the future.
Sheffield based ITM Power thinks it has the solution in the form of its power-to-gas energy storage technology which utilises rapid response electrolysers to convert electrons (i.e. generated via electricity production) to hydrogen (from water), which can then be mixed with methane and stored in the gas grid. The beauty of this solution is that it requires relatively little outlay, as it merely links existing power and natural gas networks. Power-to-gas therefore offers a cost-effective solution to wind power generation curtailment, while also being a source of clean fuel and additional supply to an already very tight energy market.
Some of the gas used in the UK goes towards power generation, but the bulk of it is used to generate heat. If the hydrogen produced from renewable power were to be injected into the gas grid, this would provide renewable heat on a large scale. While in the UK the limit for hydrogen content in the gas system is currently set at just 0.1%, the fact that Germany is at 10% and most of Europe sits around 5% shows that there is significant scope to grow the role played by ‘green’ mixed gas in the UK. ITM Power has already recommended that the 0.1% limit be lifted to 3%.
However, the UK has been relatively slow in addressing this opportunity, and ITM has been forced to look further afield for commercial outlets for its technology. In Germany, ITM has been working closely with the Thüga group of companies, which now operates a HGas plant in Frankfurt with ITM’s proprietary proton exchange membrane (PEM) electrolyser at its heart. In 2013, the plant became the first ever to inject electrolytic generated hydrogen into the German gas grid, which was followed by final acceptance of the plant in March this year, with all milestones met on time.
In the longer term, ITM is also looking to tap the nascent market for Hydrogen Fuel Cell Electric Vehicles (FCEVs), which looks set to expand rapidly as the economic and environmental costs of conventional transportation continue to rise. With several large automobile manufacturers including Hyundai, Toyota and Honda having either commenced production or about to enter production shortly, programmes are underway in the developed world to roll out hydrogen refuelling infrastructure necessary to sustain these next-generation vehicles. In this vein, ITM is now involved in the UK, Swiss, US and French hydrogen mobility programmes and is already building five refuelling stations for the UK (two for the Isand Hydrogen project on the Isle of Wight, and three for HyFive project in London). In the UK alone, the H2Mobility programme is looking to install 65 stations over the next few years.
Electrolyser stacks (pictures courtesy of ITM Power)
Meanwhile, across the pond, ITM Power Inc is a founder member of US Government’s hydrogen mobility initiatives, H2USA and H2First, which has led to the receipt of two orders for hydrogen refuelling stations, courtesy of the $200 million California Energy Commission solicitation process. The US presence is particularly interesting from an investment perspective, as US hydrogen tech firms have seen their share prices soar of late, with Nasdaq-listed PlugPower (PLUG) having jumped c.900% over the past year.
The reason? Many of these outfits are finally rolling out commercial programmes with industry, and some are even set to record maiden profits. Thus far, however, UK hydrogen firms have remained in the doldrums.
What’s it worth?
The firm boasts billionaire Peter Hargreaves (of Hargreaves Lansdown fame) as a 9.2% shareholder and board member. Such a high-profile supporter comes with significant perks, not least of which is the financial clout Hargreaves can bring to the table. Hargreaves took 4,333,333 shares out of the 33,333,333 shares offered in a £10 million placing in January, which left the firm with a cash balance of just under £9.8 million as of 30th April 2014, versus a cash burn of just under £7.6 million for the financial year.
With £5.14 million of projects under contract at year end and a further £3 million in the final stages of negotiation, activity levels are picking up and seem to support CEO Graham Cooley’s assertion (at the time of the January placing) that the firm is now at “a key inflection point”. While the company’s broker Zeus does not have a price target for the stock, if even a fraction of the hoped for penetration of the power to gas market is snatched by ITM we could be talking about many multiples of the current stock price.
CEO Graham Cooley
We caught up with Mr Cooley recently in which he commented: “This has been a very productive period for us with solid progress in technology, sales, partnerships and project income. We built, CE marked, commissioned and consented the world’s largest PEM electrolyser and have proved the Company’s technology and project management ability. We now have a major reference plant with the Thüga Group, the largest utility grouping in the world. This solid progress directly reflects the achievements of our highly talented team.”
We can see in the chart below several positive technical signals: a large pick up in volume in recent weeks as the stock fell to just below 20p, this is indicative of ready buyers at this level and we can see a sharp reversal in the price - weak hands are likely to have been ashed out; a rising RSI and, at the close this week, the probing of the downtrend that makes up the upper line of a falling pennant formation and that are invariably resolved to the upside. A weekly close above resistance at 26/27p would be a strong signal to bulls that a run towards 40p is on the cards.
ITM Power 2 year weekly chart
In recent weeks very positive news was released in relation to the funding of upto £11m by the Business Minister Matthew Hancock specifically for the creation of 15 hydrogen refuelling stations in the UK. At present Japan is way ahead of the rest of the world in this respect (unsurprising as they have no oil resources of their own yet hydrogen is abundant) and this renewed enthusiasm by the UK Government is positive for the indsutry. The full RNS can be see HERE. As the market leader in the UK in this space, it is logical to expect ITM to be in the vanguard of those companies receiving these orders.
An upbeat Trading Statement on the 7th October with details of mutliple revenue lines in the works can be read HERE.
Potential catalysts for a re-rating
It is worth noting also that peers in the U.S trade for 10 times and beyond the current enterprise value of ITM Power. There are, to us, a number of potential catalysts that could re-rate the stock - either an outright bid for the company as it languishes at effective pocket change for the likes of Ballard Power or Plug Power; a listing Stateside on Nasdaq as the ITM management increasingly look to increase their exposure in the States (and globally for that matter) or the arrival of a corner stone investor at a premium - perhaps one of the autoplayers such as Honda.
We leave you with comments from the company itself in relation to the market opportunity that is out there and that puts the investment case into context:
On current pricing for ITM’s 1MW containerised power-to-gas unit and estimating 20% utilisation, this is a £16bn revenue, £6.4bn gross profit opportunity for ITM by 2020. This is just German wind now. In reality the same situation and therefore opportunity exists in multiple geographies for both wind and solar. This power-to-gas solution makes large scale renewable storage possible and potentially permits full renewable generation.
James Faulkner & Richard Jennings, Titan Inv Partners
CLEAR DISCLOSURE - EXPOSURE TO ITM POWER SHARES IS HELD WITHIN TITAN’S FUNDS AND PERSONALLY BY RICHARD JENNINGS.
What with the slowing of economic growth in Europe, the anxiety created by the continued spread of the Ebola virus, escalating conflicts in both the Middle East and Ukraine, and in particular the end of monetary stimulus in the US, these issues all contributed to trigger the sharp sell-off of just 2 weeks ago and that led to a big increase in market volatility over the last month.
Following nearly 2 years of trading without a 10% correction, the S&P 500 finally broke this run with a decline of 10% at the lows of 1820 only 8 trading days ago. It is amazing that the index has rebounded so sharply and indeed, at the close of play on Friday, was trading only 3% from its all-time high. That’s some rebound!
S&P 500 6 months chart
It was on September 19 that the S&P 500 hit an intraday record high at 2,019.26, and which, in hindsight, marked the beginning of a large selloff. Between that date and October 15, the market declined almost 10% to hit 1,820.66, or halfway to what is technically considered as a bear market. Investors quickly ran for the perceived safety of bonds and, to a lesser degree, gold and silver. In seeking the (wrongly and deluded-ly in our opinion) safety of US & European government bonds, volume surged without precedent as reported by ICAP Plc, the largest global interdealer broker. The company in fact reported an increase of 40% in trading volumes over the previous record, a stunning measure that shows just how frenetic trading was on those volatile days in mid October. In terms of stocks, almost 12 billion were traded in US equity exchanges on October 15 alone, a figure which is the highest number since the European debt crisis in 2011.
While markets have continued to recover, the events seen in the last few weeks are nevertheless scary. What is intriguing to us here at Titan however is that sentiment has rebounded so sharply in such a short space of time. Usually fear remains in the background after such a drubbing but, on this occasion, this has not been the case as the AAII sentiment survey below illustrates and where bullish sentiment has jumped back towards multi-year highs and the sharp drop in the VIX in the last several days also pays testimony to.
The trading range of the markets on the day of October 15 was massive and, from what we hear, this was a nightmare for almost all spread betters and traders, largely due to the use of too much leverage. Most of them just saw their positions automatically closed by the system and, in the process, missed the subsequent rally that could have offset their losses…
The Fed’s James Bullard
With comments from the Fed’s Bullard that there could be a new bout of QE if economic activity continues to slow and the deflationary signs which range from the falling oil price to negative 2 year German bond yields intensify, it seems the “hit” of another shot of monetary stimulus is all that is needed to keep the Ponzi going… Our proprietary indicators alerted us to the low in the markets on October 15 and now, with the index trading back towards the high, we wonder, with the renewed positive sentiment in the markets, whether this is the so called “suckers rally” and the last opportunity to get out? On balance we think that the markets are likely to run a little further, perhaps just beyond the all time high and then it’s time to get of of dodge again!
Our favourite sectors: precious metals and selected oil E&P continue to ignore the value signs that flash in 50 foot neon to us. Industry experts: old time shrewd fund managers like George Soros and Jim Rogers and Marc Faber continue to accumulate these assets as prices drift seemingly ever lower. We take solace in being in such hallowed company, company that has, over the cycle, proved that they can generate real wealth through taking the other side of the beaten down trade.
As an indication of just how detached from reality many of the precious metals stocks are, take a look at the table below.
Silver stocks basket deviation from analyst median price targets
This table depicts the differential between many silver stocks and their median target prices (which have already been cut, aggregately, meaningfully this year) – the higher the bar chart the cheaper the stock is relative to its target.
Take a look here also at the price to book value for the major gold miners too. Although not back to the nadirs of 2013 due to write downs many companies have seen this year and that has depleted the “book” side faster than the price element, it is unarguable that on a long term basis these are materially undervalued.
From a pure sentiment perspective, this is about as bad as it gets. Even we at Titan are questioning everything we have postulated and researched on the Precious Metals sector. Are prices going lower, is the record short futures positioning in the silver paper market based on solid fundamentals, can the technicals get even more oversold? The bull points of increasing physical demand for gold and silver physical, reducing supply going forward, the cheapest stock prices for years on almost all value measures and, a complete absence of insider selling, these are all fading into the background of relentless declines… Calling the bottom in this sector is becoming an ever more crowded graveyard.
I guess in proof reading this piece, the last bull has almost given up and that must be the ultimate buy signal!
You should not take this piece as an advocation to trade in any of the instruments mentioned here and you should always take professional advice in relation to your own personal circumstances.
*All Titan Funds operate within a spread betting account which means that gains or losses are currently free of tax. However, legislation can change in the future. Spread betting is a leveraged product which could result in losses of some or even all of your initial deposit. Ensure that you fully understand the risks.
Zak Mir Video Blog On Bulletin Board Heroes: Bushveld Minerals, Great Western Mining and Union Jack Oil
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Spreadbet Magazine editor Zak Mir takes a look at the technical position of some of the bulletin board stocks of the moment amongst private investors.
Here are the key points from today’s video:
Bushveld Minerals (BMN)
The shares have recovered after an October bear trap from below 3p with a vertical move.
The 20 day moving average at 3.22p is the preferred end of day close stop loss.
While there is no end of day close back below the 20 day moving average one would be looking to a journey to the top the December price channel at 5.5p by the end of next month.
Great Western Mining (GWMO)
Inverted head & shoulders formation adds to the saucer bottom impression on the daily chart.
The latest price action is a bull flag breakout through initial October resistance at 1.3p.
While there is no end of day close back below the initial October resistance the upside for the shares should be towards the January price channel top at 3p plus over the next 1-2 months.
Union Jack Oil (UJO)
The shares look to have rebounded well off the floor of a notional range between 0.30p – 0.50p.
The best way forward now is probably to look to buy into any weakness towards the 200 day moving average fractionally below 0.3p.
Only an end of day close back below the late 2013 price channel floor would delay the prospect of a rebound to as high as 0.5p plus zone over the next 1-2 months.
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Pearson (PSON) - Full year guidance reiterated: Adjusted earnings per share expected to be between 62p and 67p in 2014.
Rolls Royce (RR.) - has signed a final agreement to create a jointly-owned company that will design, develop, produce and support accessory drive train transmissions (ADT) for all of Rolls-Royce’s future civil aircraft engines.
Shire (SHP) - revenues up by 33% at $1.552 million in Q£.
Cobham (COB) - has secured a contract with Australian Maritime Safety Authority (AMSA) to provide an airborne search and rescue capability in Australia for 12 years from 2016, with aircraft modification and mobilisation activity to commence later this year. The contract, secured through open industry competition, has a value including estimated flying charges of AUD $640 million over 12 years. If three additional optional years are exercised by AMSA, the full value would exceed AUD $700 million.
Spectris (SXS) - now expects that EBITA performance for the full year will be modestly below the current consensus of £200 million.
Vesuvius (VSVS) - trading performance for the third quarter of this year has been in line with the Board’s expectations, despite some softening in market conditions in certain regions.
John Lewis of Hungerford (JLH) - expects to report sales for the year to 31st August 2014 of £7.4 million, up from £6.6 million.
Solo Oil (SOLO) et al - the Horse Hill-1 well has discovered an oil accumulation in the conventional Upper Jurassic Portland Sandstone. A preliminary most likely estimate of 3.1 million barrels of gross in place hydrocarbon volume has been calculated within the upper Portland, with a further gross unrisked in place prospective hydrocarbon volume of 16.8 mmbbls of oil in a separate lower sand in the Portland interval located in an untested fault block to the south.
Dart Group (DTG) - reported operating profit for the six months ended 30th September will be approximately 10% ahead of the same period in the previous year. However, increased losses are expected in the second half, which are a function of the continued expansion of seasonal leisure travel operations.
Omega Diagnostics (ODX) - management expects that this year’s financial performance will be below that previously envisaged due to no sales of the Visitect® CD4 product.
Avation (AVAP) - has taken delivery of a new ATR 72 aircraft from the factory in Toulouse, France and the aircraft has been leased to UNI Airways Corporation, the largest regional domestic airline in Taiwan.