Sector Watch: Cleaner coal
Producing electricity is a dirty business; smokestack emissions from coal-fired plants are recognized as a major pollutant and source of global warming. Despite these issues, coal remains the primary fuel for global electricity production, mainly because of its low cost and abundant supply.
Coal produces about half of America’s electricity and is expected to produce 57% of electricity by 2030. Most of the coal burned in U.S. power plants contains substances that cause slag to form within boilers. Slag deposits, formed when ash produced during combustion melts and hardens, reduces the boiler’s efficiency and increases pollutants.
Most of the coal burned in India and China also forms slag, contributing to serious air pollution problems in those countries. The Chinese government is making pollution control a top priority of its new 5-year economic plan, a massive challenge given that China is opening the equivalent of two new coal-fired plants each week to meet its growing power needs.
U.S. environmental regulations are becoming more stringent and utilities are under pressure to curb emissions from their coal-burning plants. The Clean Air Act Amendment of 1999 required gradual reductions in noxious plant emissions on varying timetables. Over 1,000 utility and large industrial boilers in 19 states were affected by the 1999 mandate. This was followed in 2005 by the Clean Air Interstate Rule (CAIR), which extends emissions reduction requirements to 28 states beginning in 2009. CAIR affected an additional 300 utility and industrial broilers. In 2013, the Clean Air Visibility Rule takes effect. This nationwide initiative impacts an additional 50 utility boilers as well as hundreds of industrial boilers across multiple industries.
New environmental regulations are also addressing groundwater pollution and increasing industry demand for leak detection and secondary containment piping systems. The Federal Resource Conservation and Recovery Act requires that oil and other potential contaminants be stored, handled and transported via underground pipelines that have leak detection systems and secondary containment tanks. These regulations are causing oil and gas exploration and production companies, gas transportation and marketing companies and oil refineries to change how they transport their products.
Companies benefiting from new pollution controls and environmental regulations include MFRI, Inc. (Nasdaq: MFRI) and Fuel Tech, Inc. (Nasdaq: FTEK), both based in Illinois.
MFRI
MFRI, Inc. manufactures and sells filtration products, piping systems and industrial process cooling equipment. Its filtration products, used to limit particulate emissions, are marketed to operators of utility and industrial coal-fired boilers, incinerators and cogeneration plants.
The Niles, Il. company’s specialty piping and leak detection systems are used in transporting chemicals, waste streams and petroleum liquids and in oil and gas gathering. MFRI also sells industrial process cooling equipment used in liquid chillers, mold temperature controllers, cooling towers, plant circulating systems and other industrial applications.
MFRI’s sales reached record levels of $56.9 million in the three months ended April 30, 2007, up 21% from $46.9 million a year earlier. Net income jumped to $1.0 million, or $0.16 per share, from $151,000, or $0.03 per share, in last year’s first quarter, and the company’s order backlog grew 53% year-over-year to $112.3 million. Analysts expect this company to produce 50% growth this year and next year.
On Tuesday MFRI rose 6% to $24.93, in a 52-week range of $10.12 to $31.59. My target for MFRI is 40% above the current share price.
Fuel Tech
Fuel Tech, Inc. provides engineering solutions to optimize combustion systems in utility and industrial applications. Its Nitrogen Oxide (NOx) Reduction Technology business offers products that reduce NOx emissions from boilers, incinerators and furnaces. Another segment, FUEL CHEM, markets chemical processes that control slagging, corrosion, and the formation of harmful particulates in furnaces and boilers.
Fuel Tech distributes its products through a direct sales force, licensees and agents. Sales for the six months ended June 30, 2007 were down 12% year-over-year to $32.5 million, and net income was lower at $1.1 million, or $0.04 per share, from $3.3 million, or $0.14 per share, a year earlier. However, the reason for these declines was delays in signing new contracts. The company expects significant new contract volume in the second half of 2007 as more utilities lay the groundwork for compliance with stricter 2009 emissions standards.
The Batavia, Il.-based Fuel Tech also envisions significant opportunities in the Chinese market, where it is expanding its presence. China is making a strong push to improve air quality prior to the start of the 2008 Olympics Games. Analysts predict Fuel Tech will generate 110% growth next year and longer-term growth averaging 40% annually.
My $35 price target for Fuel Tech is 25% above the current price of $28.76. The 52-week high is $38.20, while the low is $13.77.
