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Note: I have covered Nikola Corporation (NASDAQ:NKLA) previously, so investors should view this as an update to my earlier articles on the company.
On Thursday, zero-emission transportation start-up Nikola Corporation (“Nikola”) announced a multi-faceted strategic collaboration with Plug Power (PLUG):
1. Nikola Tre FCEV Truck Sales Agreement
Plug Power has committed to purchase “up to” 75 Nikola Tre FCEV trucks over the next three years with the first trucks expected to be delivered in 2023. The company plans to use the trucks for delivering green hydrogen to customers in North America.
2. Liquefaction Solution for Hydrogen Hub
Plug Power has been selected to provide the liquefaction solution for Nikola’s recently announced Arizona Hydrogen Hub project with an initial capacity of 30 tons per day (“tpd”) with plans to scale the facility to up to 150 tpd at a later stage.
3. Large-Scale Green Hydrogen Supply Agreement
This is actually the most important part of the new partnership. The companies have executed a 125 tpd green hydrogen supply agreement which is expected to provide Nikola with a minimum of 100 tpd of hydrogen with the option to increase volume over time. The agreement will allow Nikola to source hydrogen from multiple locations across the country once Plug Power’s numerous hydrogen production facilities come online over the next couple of years.
Supply is expected to start on January 1, 2023 with volumes ramping up to 125 tpd by the end of 2026 with 80% fixed under a take-or-pay contract.
What to make of the announcement
On the surface, the collaboration appears to be a win-win situation for both companies as Nikola needs to secure hydrogen supply for its planned network of “up to” 60 hydrogen fueling stations by 2026 while Plug Power requires offtakers for its large-scale hydrogen production initiatives with a targeted output of 1,000 tpd by 2028.
Assuming a sales price of $5 per kilogram, the hydrogen supply agreement would result in at least $182.5 million in firm annual revenues for Plug Power starting in 2027.
Nikola in danger of running out of funds
Unfortunately, odds are firmly against the new collaboration ever coming to real fruition as even under generous assumptions, Nikola is likely to run out of funds by the end of next year at the latest point as discussed by me in more detail in a recent article.
The company simply lacks the capital required to successfully scale commercial production of its zero-emission trucks, particularly with the recent addition of Romeo Power which is likely to result in cash burn increasing even further.
At this point, Nikola’s sole remaining funding option appears to be selling more equity but its languishing share price has made it increasingly difficult for the company to raise sufficient amounts from open market sales or under its existing common stock purchase agreements with Tumim Stone Capital LLC (“Tumim Stone”).
But over time, more and more market participants are likely to give up on the stock due the company’s obvious issues and the ongoing drag caused by an ever-increasing number of shares being sold into the open market on a regular basis.
As a result, trading volume is likely to decrease going forward thus further limiting the company’s ability to sell sufficient amounts of shares.
Bottom Line
Nikola clearly represents the weak spot in this newly formed strategic partnership.
Even assuming ongoing, aggressive utilization of its equity distribution agreements, the company might run out of funds ahead of the scheduled commercial launch of its Nikola Tre FCEV truck in H2/2023.
As a result, Plug Power will likely have to continue its quest for large-scale offtakers regarding its ambitious, medium-term hydrogen production targets while relying on diesel trucks for supplying customers a little bit longer.
At some point, Nikola won’t be able to cover its capital needs from additional share sales into the open market anymore and with very limited funding alternatives, in my opinion, bankruptcy appears to be the most likely scenario for the ailing company.
Given Nikola’s bleak prospects and ongoing requirement to sell large amounts of new shares into the open market, investors should consider selling existing positions and moving on.
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