Has Plug Power Done Enough to Plug the Hole in its Finances?

Plug Power (PLUG 4.48%) has been a disastrous investment over the past year. Its stock has collapsed, falling more than 80%. The primary factor weighing on the stock has been concerns that it could run out of money.

However, Plug Power recently took a step to address that issue. It plans to raise $1 billion in fresh equity capital to fund its operations and expansion. Here’s a look at whether that will be enough to keep the hydrogen stock afloat.

Running out of power

Plug Power’s stock plunged last November after revealing it had growing concerns about its ability to continue operating because of a liquidity crunch. The company was battling significant supply challenges in the North American hydrogen market. As a result, the company said at the time that it “is projecting that its existing cash and available for sale and equity securities will not be sufficient to fund its operations through the next twelve months.” Plug planned to pursue several options to raise fresh capital, including issuing debt on the corporate level or tapping a loan program of the U.S. Department of Energy.

At the end of September, the company only had about $110 million of cash and equivalents on its balance sheet (along with an additional $682 million of restricted cash, available-for-sale securities, and equity securities). Meanwhile, its operations are burning through cash ($864 million in net cash used in operating activities during the first nine months). It’s also investing heavily in capital projects (over $500 million through the third quarter).

Plugging into a fresh source of capital

Plug Power recently revealed that it entered into an agreement with investment bank B. Riley Financial for an at-the-market (ATM) offering of up to $1 billion in equity. The company would use any cash raised through this offering to fund its operations and capital projects.

However, unlike a direct secondary offering of shares that brings in a flood of new cash at once, an ATM program is a lot like its acronym. The company will go to the market and raise cash when it needs the money over the next 18 months. Under the terms of the agreement, it would only issue up to $30 million from share sales in any calendar week.

The company opted for this approach to limit the dilution to existing investors. Given the plunge in its stock price over the past year, Plug Power’s market cap has fallen to around $1.6 billion. A $1 billion equity issuance all at once would therefore be highly dilutive to existing investors. By spreading out the sales, the company could potentially mute some of that dilution by selling more stock in weeks when shares are on the rise. The company also likely wouldn’t have been able to complete a large block sale of $1 billion in stock at anything but a heavily discounted price.

Will that be enough?

Plug Power needs a lot of capital to continue operating. The company is targeting to invest $1 billion into green hydrogen projects annually for the next several years. Meanwhile, its operations are burning through cash.

Wall Street analysts expect the company to use about $1.5 billion in cash over the next two years. Its current projections suggest it won’t start producing positive free cash flow until 2026 or 2027. Analysts estimate it will need to raise at least $750 million or more to bolster its liquidity over the next 12 months. It could potentially raise that amount through its ATM program.

However, unless its stock price miraculously recovers, those sales will significantly dilute existing investors, increasing its outstanding shares by around 60% at the recent share price. So the company will probably need to tap other capital sources to take some of the pressure off its stock price so that its ATM program isn’t quite so dilutive. Those alternatives include issuing new debt, which could weaken its balance sheet, or bringing on one or more strategic partners to help fund some of its hydrogen developments. Finding a strategic partner would likely be the best outcome for shareholders since it would reduce its need to sell shares and preserve its balance sheet.

Still more work to do

Plug Power plans to sell stock over the coming months so that its liquidity doesn’t run dry. However, those sales could put more downward pressure on its stock price, meaning the company will need to continue looking for ways to plug up its liquidity, ideally finding a strategic partner to help fund its capital projects. Until that happens, investors should steer clear of its stock. It could continue heading lower until there’s more clarity on its liquidity situation.