Do Your Research, Elon

Make no mistake about it, I do like Elon Musk. He’s innovative, impatient, is unafraid of asking ‘why not?’, and frankly, the world needs more forward thinking billionaires. However, he’s human and has a lot of money; and there are times where his statements, though well-intentioned, are obsessed with being ‘thought provoking’ regardless of whether such thoughts have already been provoked (or flirting the line of legality, resulting in a stock price jumping 6 points).

Just this past summer, he tagged NASA in a World and Science tweet / article regarding nuclear rockets; suggesting that NASA look into this technology since it would be a “great area of research”. Though the article breaks down related past NASA projects, it ends with saying that it’s “been decades since NASA seriously tested nuclear rockets”. But maybe the idea of testing is something entirely different from ‘researching’ and is best (and most safely) suited for after some comprehensive research has been achieved? Either way, all of this seems to beg the question of why NASA can’t seem to keep up with the tech billionaire’s original and innovative thinking… right?

Well, no. NASA thought of it first.

Aside from their past involvement outlined in that article, on August 2nd, 2017, they awarded BWX Technologies ~$19M USD for (you guessed it) R&D of nuclear thermal propulsion reactors in support of a manned mission to Mars.

The problem with statements like Elon’s, typically spoken from industry-outsiders that (no offence) lack the expert depth required for such comprehensive ‘eureka’ moments, is that they ignore the giants that have pioneered and led the way for centuries. So, who’s the giant in this game? And are they really such a big deal compared to the power of Musky?

Who is BWX Technologies, Inc?

Nuclear Power, Bombs, and Expertise

In 1867, George Babcock and Stephen Wilcox started a company called Babcock & Wilcox after having both invented the water tube boiler (the “Babcock & Wilcox Non-Explosive Boiler”) that went on to change the world. They’ve impacted power generation too many times in history to mention but here are a few highlights:

Provided boilers for NYC’s first subway system
Scene showing the opening of the first subway, New York, October 27, 1904. In attendance and riding the first train were municipal officials and civic and business leaders. At that time, the underground extended for 21 miles. (Photo by PhotoQuest/Getty Images)
■ Powered Teddy Roosevelt’s Great White Fleet of ships with Babcock & Wilcox boilers
■ Built the boilers powering 95% of US Pacific Fleet in World War 2
■ Participated in the U.S. Manhattan Project, which produced the world’s first nuclear fission bomb (and still operates the Highly Enriched Uranium Materials Facility at Oak Ridge today)
■ Designed and built the world’s first nuclear powered submarine (USS Nautilus); and
■ Designed/built the heavy nuclear components for the Nimitz-class nuclear powered aircraft carrier

Why does this history matter? The company still exists today as two companies. Babcock & Wilcox Enterprises was spun-off as a separate company from BWX in 2015 and still provides steam boilers, primarily for coal plants. The company has fallen on hard times along with that industry. But BWX Technologies, Inc. has gone from strength to strength over the last 40 years. The company has grown revenue from $850 million in 2008 to $1.8 billion in 2018. Among many other ongoing activities, BWX has an exclusive contract with the US Navy, supplying every nuclear reactor onboard their submarines as well as critical nuclear components for their aircraft carriers. For anyone shaking their fingers at nuclear reactors since they view them as a colossal danger to the world, there are people who actually sleep next to these things within tightly enclosed cabins, in the middle of the sea every single night.

If you don’t know much about nuclear reactors, they essentially harness the power of fission (splitting atoms) to create energy in a process that sustains itself. You grab enriched uranium/fuel (by the way, BWX is the only company in the US that can receive, store, and process the highly enriched uranium required for naval nuclear reactors, fast neutron reactors and nuclear weapons) and pass it through a reactor in one of many control rods. Those rods are submerged into water, which also acts as a coolant, and heats up to produce steam. The steam then powers the turbine and voila, your own self-sufficient power system.

But these cool(ing) nuclear reactor components aren’t their only offering. With a total of $1.8 billion in revenue earned for 2018, they’re making a few other big moves.

3 Business Arms

Nuclear Services Group: The Mission to Mars

As we mentioned earlier, BWX is already working on thermal propulsion with NASA. However, through their Nuclear Services Group arm, they also work with other special US Government bodies like the Department of Energy (DOE), the National Nuclear Security Administration (NNSA), the Office of Science, and the Office of Environmental Management. I’m sure you’re getting a better picture of how badass these guys really are, since they manage operations dealing with national security and the new arms / nuclear race.

Nuclear Operations Group: A Monopoly on War

Making up ~73% of the company’s total revenue (2018), BWX’s Nuclear Operations Group [NOG] supplies the US Navy with critical nuclear components that include: core barrels, reactor vessels, closure heads, steam generators, and pressurizers. Like you saw in the diagram earlier, these reactors generate power through steam and are found in attack, ballistic, and fast attack submarines. We can all imagine growing up with the game Battleship, and the thrill of trying to sink someone’s ship via radar-style tactics. However, war in real life is a little more sneaky. Ballistic submarines play a key role in the US Nuclear Deterrence Strategy; where such subs can move about and hide themselves for long periods of time (considering that the nuclear technology itself allows for subs to go without “re-charging” for 25 years). Since these subs are hidden, and are able to attack with a great deal of precision, they maintain power for defence in the event of land/air attacks.

Nuclear Power Group: Oh, Canada

The Nuclear Power arm of BWX concerns itself with the design and manufacturing of commercial nuclear steam generators, heat exchangers, pressure vessels, reactor components and other auxiliary equipment; all required to generate power and/or electricity. The fun part about generating electricity with steam / nuclear power, is that once you sell some of these giant systems, customers keep you around for maintenance. But, we’ll get more into that later.

In December, 2016, BWX acquired GE Hitachi Nuclear Energy Canada Inc., renaming it to BWXT NEC to roughly double their footprint in Canada. In this same year, they sold 8 steam generators (with potentially 24 more on the way) to Bruce Power for ~CA$130M, started refurbishing the Darlington Nuclear Generating Station for Canadian Power Generation Inc. (a Government of Canada wholly owned Crown corporation), and in 2017, secured a motor supply contract (CA$34M) and steam drum supply contract (CA$48M) with Bruce Power.

BWX Strategy and North Star

BWX’s North Star metric is one that every startup aspires to have and almost none succeed in reaching – 100% market share. But BWX isn’t aspiring to reach 100% market share, they’re just trying to maintain it. For the last twenty years, the company has made every heavy nuclear component in every US Navy submarine and aircraft carrier. They’d like to keep it that way as well as expand their monopoly to other areas (like missile tubes for instance).

Moats for Submarines

With 73% of revenue coming from a single customer, and the daily reminders of how fast technology is changing the energy/power generation landscape, it’s a wonder how BWX can get away with not only staying alive for so long, but with accomplishing a 7% YoY growth rate. Well, it’s because you’re playing with the big boys now.

Unrivalled Experience

With ties back to the Manhattan Project and the invention of the first ever nuclear submarine, it’s clear that BWX has the experience and tight-knit government relationships required to keep that experience under lock & key. They literally have more experience in nuclear steam supply systems than any other company in the entire world.

Rusty Skills Hypothesis

One thing to note is that BWX’s experience is very specific. There is only one other nuclear powered aircraft carrier in the world that wasn’t built by the US, and it’s France’s Charles De Gaulle. This aircraft carrier was ordered in 1986 and was commissioned 15 years later in 2001. It was 5 years behind schedule and often experienced complete stops in work throughout its production.

Manufacturing anything at the scale of an aircraft carrier is difficult and it takes not only experience, but ongoing production for any company to operate with maximum efficiency and keep things on schedule (and frankly stay alive). One thing we do know, is that ongoing production isn’t a problem for BWX, given their contracts with the US Navy.

Navy Contracts Keep Comin’

The US Navy isn’t like your typical customer. They don’t necessarily get rocked by the ups and downs of the market cycle. Sure, they have to make adjustments given the political climate, but typically protection ‘in case of war’ always comes first, for the whole national security thing. Further, to the delight of BWX, it is federal law in the US to maintain a fleet size of 11 aircraft carriers at any one given time. There was actually a time (2012) where they had only 10 carriers, so Congress had to grant them a temporary waiver on the 11 aircraft carrier requirement. Not a bad problem to have.

It’s a Monopoly

At the end of the day, the US government needs BWX just as much as BWX needs the US Government. It’s a bit of a codependent relationship. There is no other company with the expertise required to build nuclear submarines and aircraft carriers and the US Navy only uses nuclear power for its submarines. There is no alternative. But BWX Technologies would be out of business without the US Navy. This could be the reason why BWX is the only company in the US allowed to process and store highly enriched uranium (the required fuel for naval nuclear reactors).

This monopolizing way of thinking transcends further into how BWX delivers business in their other non-navy focused arms. Since the installation and maintenance of power systems is so custom and big, they’re able to keep customers around through decades long maintenance and refurbishment contracts. They are not only the gold standard; they are the standard.

This monopoly provides BWX Technology with very high margins. In fact, BWX’s nuclear operations group has operating margins that are typically twice as good as the large US Shipbuilders also supplying the US Navy. In 2018, BWX NOG has an operating margin of 21% and a ROE of 87%, while the Marine Systems group at General Dynamics had an operating margin of 9% and Huntington Ingalls had an operating margin of 12%. The advantages of having a monopoly vs. a duopoly.

Don’t Succumb to Monopolistic Behaviour

One of the hardest parts of running a monopoly is still maintaining good customer service. After all, the customer doesn’t have a choice right? However, when your customer has a few thousand thermonuclear warheads deployed and on call at any one time, your sales representatives are probably a bit less likely to talk back to them on the phone. The Navy is a tough customer to please and expects a new Ford class aircraft carrier every five years. BWX Technologies has to keep innovating, less they get replaced by someone with better technology, at the same time as they keep delivering existing products on time and on budget.

What about China, Fusion, and Nuclear Startups?!

With China advancing in nuclear military operations, and coming under fire for attempts at “stealing trade secrets from US aviation and aerospace companies“, we have to wonder what the bigger picture looks like for the arms race. Though nuclear tech is good for a cleaner way of doing things, whoever leads this space will likely have the most powerful position when it comes to war. This is why, though it ain’t sexy like reversible rockets or shooting a car into space, the big company contracts and relatively slower moving technology cycles is a necessary part to innovating safely both from a technology perspective as well as one rooted in national security.

Further, it seems like everyone and their dog is excitedly talking about the new world of nuclear at a commercial level. Just the other day I saw a CB Insights headline about the top startups to look out for, when it comes to transforming nuclear energy. The funny part is, two of those startups (TerraPower and NuScale) are direct customers of BWX Technologies and are listed under the company’s NSG business units. Duh.

Source: CB Insights

In Conclusion

At the end of the day, it isn’t sexy to partner up with the old guys that started it all. It isn’t cool to wait a very long time to see innovation release laterally to different markets. But, at the end of the day: it’s safer, it’s powerful, and it’s one hell of a business model.

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