A Member of his Inner Circle recently asked Pat McKeough about a company that is aiming to succeed with a “revolutionary” system for producing cleaner energy through natural gas. This new process would not release emissions into the atmosphere and would eliminate the costly and often wasteful use of steam-based technology.
While Chicago Bridge & Iron is developing a plant to put this NET Power venture into practice, Pat notes that the company has suffered several major setbacks in its engineering and construction business, and had to suspend its dividend to help meet growing debt obligations.
Q: I would be grateful for your opinion on Chicago Bridge & Iron. The company’s stock is way down but I have been told that it has a new and inexpensive revolutionary (and clean) method of producing energy from natural gas and is in the process of building power stations to use it. Many thanks for your advice, as usual. Joining the Successful Investor was the smartest move in the whole of my investing career.
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A: CHICAGO BRIDGE & IRON N.V. (symbol CBI on New York; www.cbi.com) is a U.S.-based engineering, procurement and construction company. It specializes in projects for oil and gas firms.
The company recently plunged to an eight-year low after reporting poor results in the latest quarter and suspending its dividend.
In the three months ended June 30, 2017, Chicago Bridge’s revenue fell 40.6%, to $1.28 billion from $2.16 billion a year earlier. The company lost $301.7 million, or $3.02 a share, compared to its profit of $123.9 million, or $1.10 a share.
The engineering and construction business was particularly weak, with revenue falling 53.2%, to $702.2 million from $1.5 billion. The drop was primarily due to the wind-down of a large liquefied natural gas (LNG) project in the Asia-Pacific region as well as lower revenue from two U.S.-based LNG projects. The company has been unable to replace these contracts with new ones. The big loss came from the lower revenue as well as big cost overruns at some of its major projects.
Chicago Bridge’s long-term debt of $1.8 billion debt is a high 129% of its market cap. To satisfy its creditors, the company had been forced to eliminate its dividend.
It also plans to sell its technology business, and use the proceeds to pay down its debt. The technology business offers licensed technologies to the hydrocarbon industries and equipment for use in petrochemical facilities, oil refineries and gas processing plants. It’s also the most profitable of Chicago Bridge’s operations and the one with the best growth prospects.
One of the business’s smaller ventures right now is NET Power, a partnership between 8 Rivers Capital, Chicago Bridge and Exelon. It is developing a small 50 megawatt thermal power plant to make use of a new natural gas power system. It produces zero atmospheric emissions, including carbon dioxide.
Growth stocks: Smaller power plants another potential benefit
NET Power believes the system, based on a technology called the Allam Cycle, is cost competitive. Its lead inventor is Rodney Allam.
Unlike other fossil-fuel power-generation technologies that release emissions to the atmosphere or use expensive, add-on carbon capture systems, the primary by-product of NET Power is pipeline-quality, high-pressure carbon dioxide (CO2). That gas is not released into the atmosphere.
Generally speaking, when natural gas is processed to create electricity, it must generate steam to turn turbines. However, as part of this procedure, the steam must eventually be condensed back into water. When this takes place, NET Power estimates between 30% and 40% of the energy created can be lost.
Another major negatives tied to traditional steam-based technology is plants must invest heavily in equipment that reduces carbon dioxide emissions to legal levels. That is often cost prohibitive.
The Allam Cycle will use carbon dioxide in place of steam. The benefit of this approach is that it lets the firm keep recycling that carbon dioxide through its combustor and eventually turns it into a “working fluid” that is mostly high-pressured carbon dioxide. This, in turn, is believed to be “pipeline-ready” and can be sold to and used by oil firms that then inject it into old oil wells to “flush out” any remaining oil.
Another benefit to NET Power technology is that lets the average power plant be far smaller than they are now. That’s due to the elimination of steam.
NET Power began construction of a demonstration plant last year at La Porte, Texas, and hopes to have it in operation by the end of this year. But the technology is still a long way from commercialization—if it works on a large scale.
Inner Circle recommendation: We don’t recommend Chicago Bridge & Iron N.V.
For our recent report on a Canadian stock aiming to build on the past year’s gains, read Acquisition should push this stock’s profits even higher.
For our advice on uncovering Canada’s best growth stocks, read Top guidelines for a successful growth investment strategy.
