PE Live: Hydrogen firms need to deliver on stock surge
Pure play hydrogen energy system companies have massively outperformed their peers, and expectations are high they will start to deliver profits well before 2030
The share prices of hydrogen-focused companies have hugely outperformed comparable energy system manufacturers in 2020 and are increasingly attracting the interest of investors and firms seeking a stake in the sector, panellists agreed on a recent PE Live webcast.
Excitement is being driven by the “change in tone” across a range of companies that are “looking more seriously at billion-dollar scale investments in hydrogen technologies”, says Sean McLoughlin, Emea head of industrials research, global research, at bank HSBC.
Hydrogen ‘pure play’ companies are increasingly teaming up with industrial giants to create joint ventures large enough to commercialise technologies and scale-up activities.
“It is the idea that hydrogen offers deep decarbonisation across power, transport, industry and residential heat that is really driving policy,” he says, describing hydrogen as the “Swiss Army knife of the energy system”.
"It is the idea that hydrogen offers deep decarbonisation across power, transport, industry and residential heat that is really driving policy" McLoughlin, HSBC
McLoughlin notes that production of 70mn t/yr and c.$130bn in gas sales will experience “hockey stick growth post 2040”, at which point HSBC predicts sales to be approaching $1tn. “If you look at 2050, it is interesting to see the spread across those different verticals.”
HSBC splits the universe of investable large-cap stocks providing exposure to hydrogen into four groups: power and automotive OEMs; chemicals, metals and infrastructure; integrated oils; and utilities.
While the bank covers 25 stocks across these sectors, for many hydrogen remains a tiny component. “Most of these companies have today zero to 0.1pc of revenue from hydrogen. So it is very much a future growth story. Only the gas majors have low-to-mid single digit hydrogen exposure.”
Pure play stocks
To gain direct exposure, investors or firms looking for a stake in the hydrogen sector need to consider small- and mid-cap pure play stocks. These are largely a mixture of fuel cell and electrolyser manufacturers.
“What is interesting is that a lot of these companies now are scaling up,” he says. “[Canadian producer] Ballard is building a factory with its partner Weichai in China, [UK-based] ITM Power is about to build the world's largest dedicated electrolyser factory and [Norway’s] Nel is also scaling up capacity. You get the sense that these companies are at the beginning of industrialisation.”
The rising level of interest, number of projects and industrial partnerships have driven the outperformance of these pure play companies, according to McLoughlin, referring to the 11 listed stocks that have market cap in excess of $400mn.
“Those 11 stocks have on average outperformed their respective markets by 150pc so far this year,” he says. “A lot of investors are looking at how to be exposed to this, where the real value lies and which of the many business models and different technologies will be the ones that offer the best returns and have the best future growth prospects.
“The whole sector seems to be the winner at the moment. But over time we will see further differentiation of performance driven by individual companies.”
These rapidly rising share prices reflect market expectation that many more hydrogen companies will become Ebita-positive in the not-to-distant future—and potential disappointment if their ambitious plans do not come to fruition.
Large-scale facilities suddenly do not seem like such a long way off. A $5bn facitiy to produce green ammonia in Saudi Arabia’s Neom project, with contracts signed by Air Products and ACWA Power in early July, is scheduled to be onstream by 2025, notes McLoughlin. “A lot of the large multi-GW projects are for the near to medium term. In terms of equity markets, 2024-25 does not feel like that far away.”
Some fuel-cell companies have been listed for a couple of decades and their business models appear robust. “They have come through the ‘valley of death’ and are now generating quite significant revenues,” says McLoughlin.
“They need to scale up further to make their positive gross margins become positive operating margins. It is now down to the companies to prove that they can be profitable. There are a number of risks to scaling up—I would not underestimate the complexities of building a large factory or a five-to-tenfold increase in manufacturing capacity. We need to see companies successfully increasing scale to help keep up their trajectory.”
The technologies for storing hydrogen in salt caverns, transporting it in pipelines and using it in gas turbines have all been around for decades at commercial scale.
“We are not talking about something that is at the R&D or bench-scale level,” says Michael Ducker, vice president, renewable fuels and western region, at manufacturer Mitsubishi Hitachi Power Systems. “We are now trying to scale up electrolysis to utility levels. We are taking robust and mature platforms and replicating them 10, 20, 50 times to apply at scale.”
“The market needs energy storage technologies such as hydrogen to support our deeper decarbonisation efforts across the power sector and other verticals” Ducker, MHPS
It is therefore not an open question of how the systems will perform, rather just “applying the same risk mitigation strategy as we do in any major energy infrastructure project” says Ducker.
“We look at it as 'it is proven but not done at scale’. This is important to keep in mind when we look at the production, storage and use of hydrogen and the commensurate risk that people perceive within the industry.”
The speed and direction of the buildup of a hydrogen economy will also depend on the policies of governments and state entities. “It comes down to states, utilities and regions having the foresight and capability to assess how we optimally integrate all these technologies,” says Ducker. “Ultimately, we have one objective—helping to cost-effectively and reliably reduce carbon in an effort to negate the impact of climate change.”
Hydrogen has experienced false dawns in the past, but Ducker says changes around the world mean this time its emergence is on firm foundations. “We are not trying to push hydrogen into the market. Hydrogen is solving very distinct problems around us. The market needs energy storage technologies such as hydrogen to support our deeper decarbonisation efforts across the power sector and other verticals.”
Renewable power firms are likely to be big beneficiaries of the development of a hydrogen economy. Most obviously, this could simply come from larger amounts of renewable energy needed to power green hydrogen.
“Renewable energy firms are also able to link the two worlds of electricity and gas,” says Aurelie Nasse, strategic marketing director, MHI Vestas Offshore Wind. “We can optimise our renewable energy production systems to be more suited to hydrogen production.”
A recording of PE Live 9: Creating a sustainable hydrogen supply chain can be heard here.