Hydrogen
is
poised
to
grow
at
an
exponential
rate
in
the
coming
years
as
an
energy
source,
but
is
now
the
right
time
to
buy
in?
Based
on
the
Hydrogen
Council
projections,
hydrogen
will
account
for
18%
of
the
global
energy
demand
by
2050,
which
means
a
nearly
eightfold
increase
in
the
size
of
the
global
hydrogen
market.
The
International
Energy
Agency
estimates
hydrogen
will
cover
10%
of
the
global
energy
demand
by
2050,
which
would
be
a
threefold
increase
from
current
levels.
Why
is
there
a
growing
interest
in
hydrogen?
Environmental
considerations
are
one
of
the
main
reasons.
The
goal
of
the
Paris
Agreement
is
to
significantly
reduce
global
greenhouse
gas
emissions
to
help
limit
global
warming
to
less
than
2°C
compared
with
pre-industrial
levels.
Hydrogen
has
the
potential
to
help
reduce
global
CO2
emissions,
in
particular
those
from
transportation
industry.
Morningstar
analysts
expect
strong
growth
in
clean
hydrogen
investments
to
continue
but
they
are
less
optimistic
than
the
consensus.
They
think
there
are
some
constraints
that
need
to
be
removed
to
facilitate
the
transition
to
a
hydrogen
economy,
such
the
high
costs
of
producing
and
distributing
clean
hydrogen.
A
significant
build-out
of
hydrogen
infrastructure
and
policy
support
for
clean
hydrogen
to
become
cost
competitive
will
also
be
needed.
Even
if
they
believe
that
hydrogen
offers
a
pathway
to
help
decarbonise
the
economy,
they
higlight
the
difference
between
hydrogen
types.
Decarbonisation
will
require
a
shift
away
from
grey
toward
blue
and
green
hydrogen.
Make
it
Cheaper
“Clean
hydrogen
has
become
a
key
element
of
many
governments’
decarbonisation
strategies,”
says
Krzysztof
Smalec,
equity
analyst
for
Morningstar.
The
European
Union
estimates
that
cumulative
investments
in
hydrogen
could
reach
€180
billion-€470
billion
(£155
billion-£405.8
billion) by
2050
and
China
expects
hydrogen
to
count
for
10%
of
its
energy
share
by
2050.
And
while
the
United
States
has
not
committed
to
an
official
federal
strategy
yet,
Smalecs
think
their
future
infrastructure
spending
packages
could
include
investments
in
hydrogen.
The
first
challenge
is
to
make
hydrogen
competitive
is
to
decrease
the
cost
of
production,
he
adds.
Green
hydrogen,
produced
using
renewable
energy
sources
such
as
solar
or
wind,
is
at
least
two-to-three
times
as
expensive
as
grey
hydrogen,
which
is
made
from
fossil
fuels.
Blue
hydrogen,
instead,
has
a
narrow
gap
in
terms
of
production
costs
and
offers
a
60%
to
95%
reduction
in
emissions,
depending
on
the
carbon
capture
technology.
Based
on
these
considerations,
the
best
way
to
take
advantage
from
this
long-term
trend,
say
Morningstar
analysts,
is
to
select
on
industrial
gas
firms
as
they
are
established
players
in
the
production
and
distribution
of
conventional
hydrogen.
The
gas
industry
stocks
under
our
coverage
performed
differently
in
2023.
The
French
company
Air
Liquide
is
up
28%
(in
€
at
November
27)
and
now
is
trading
at
a
Price/Fair
value
(P/FV)
of
1.15.
Linde’s
shares
recorded
a
29%
gain
(in
USD)
and
now
the
price
is
almost
in
line
with
our
valuation,
while
Air
Products
and
Chemicals
is
discounted
by
more
than
10%
compared
with
its
fair
value
of
$314,
as
their
shares
are
down
115%
(in
USD)
in
the
year
to
date.
Here
are
the
views
of
Krzysztof
Smalec,
Morningstar
equity
analyst
on
three
sector
stocks:
Air
Products
and
Chemicals
(APD)
With
more
than
20%
of
their
sales
that
come
from
hydrogen,
Air
Products
and
Chemicals
is
the
largest
supplier
of
hydrogen
in
the
world
and
the
company
with
highest
exposure
to
hydrogen
among
the
three
names
under
our
coverage.
We
expect
Air
Products’
hydrogen
exposure
to
increase
significantly,
as
the
company
has
announced
several
multi-billion-dollar
blue
and
green
hydrogen
mega
projects,
expected
to
come
onstream
over
the
next
years,
and
that
by
2035
hydrogen
could
account
for
as
much
as
70%-80%
of
their
revenue.
Based
on
our
expectations,
new
investments
will
fuel
strong
growth,
helping
the
company
more
than
double
its
adjusted
EPS
over
the
next
five
years.
By
the
way,
we
think
that
the
market’s
focus
will
increasingly
turn
from
new
project
announcements
to
execution,
and
uncertainty
around
the
backlog
could
weigh
on
the
stock.
Air
Liquide
(AI)
Air
Liquide
generated
approximately
€30
billion
of
revenue
in
2022,
serving
a
wide
range
of
industries,
including
chemicals,
energy,
healthcare,
food
and
beverage,
and
electronics.
Air
Liquide
is
the
second-largest
industrial
gas
distributor
in
the
world
and
benefits
from
operating
in
an
industry
that
is
inherently
moaty
because
of
high
switching
costs.
Although
industrial
gases
are
essentially
commodities,
they
are
a
crucial
input
in
many
industries.
Since
gas
typically
represents
only
a
fraction
of
total
costs,
customers
are
often
willing
to
pay
a
premium
and
enter
into
long-term
contracts
with
reputable
distributors
to
ensure
uninterrupted
supply.
As
such,
public
industrial
gas
companies
have
historically
earned
returns
in
excess
of
their
cost
of
capital,
and
we
believe
these
lucrative
profits
will
persist.
Over
40%
of
Air
Liquide’s
investment
opportunities
are
related
to
the
energy
transition,
including
low-carbon
hydrogen
as
well
as
carbon
capture
and
storage.
We
expect
opportunities
in
hydrogen
to
be
a
meaningful
revenue
driver,
as
Air
Liquide
recently
unveiled
plans
to
invest
roughly
€
8
billion
in
low-carbon
hydrogen
over
the
next
15
years.
Management
expects
these
investments
to
triple
the
firm’s
hydrogen
revenue
by
2035,
from
roughly
€2
billion
in
2020
to
€6
billion.
Linde
(LIN)
Linde
is
the
largest
industrial
gas
supplier
in
the
world,
with
operations
in
over
100
countries.
The
firm’s
main
products
are
atmospheric
gases
(including
oxygen,
nitrogen,
and
argon)
and
process
gases
(including
hydrogen,
carbon
dioxide,
and
helium),
as
well
as
equipment
used
in
industrial
gas
production.
Demand
for
industrial
gases
is
strongly
correlated
to
industrial
production.
But
even
if
organic
revenue
growth
largely
depends
on
global
economic
conditions,
in
the
third
quarter
Linde
reported
a
3%
year-over-year
revenue
growth
and
400
bp
increase
in
its
operating
margin.
The
company
raised
its
full-year
guidance
on
adjusted
EPS
to
$14.00-$14.10
(from
$13.80-$14.00),
and
so
we
have
raised
our
fair
value
estimate
to
$393
from
$379.
Linde
has
announced
a
multi-million
dollar
investment
to
develop
hydrogen
infrastructure
in
South
Korea
and
has
a
comprehensive
portfolio
of
blue
hydrogen
solutions
which
we
think
will
help
the
firm
win
its
fair
share
of
opportunities
in
the
space.
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