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Air Products and Chemicals – Shifting To Hydrogen Is Forward-Looking But Risky – Seeking Alpha.

Investment Thesis

Air Products (NYSE: NYSE:APD) is the global leader in providing industrial gases and process technologies to over 30 industries. APD products cover the production and supply of gases such as atmospheric and process gases (hydrogen, Helium, and Carbon monoxide). In recent years, APD is in the active process of shifting to clean hydrogen energy at scale while divesting its traditional energy, as indicated by its recent sales of the LNG business unit for $1.8 billion.

As discussed in my previous coverage on Plug Power (NASDAQ: PLUG), the hydrogen economy is growing at a high single-digit pace until 2030, primarily fueled by the demands for green and blue hydrogen under the global decarbonization agenda. hydrogen is essential for everything that cannot be electrified, acting as a “clean fuel”. As such, the pivot of APD is undeniably reasonable. However, the rapid shift to hydrogen, which now accounts for more than 70% of the backlog, is a risky move that adds more volatility to the company. As such, the rating to the company is a Hold. More analysis will be provided below.

APD’s position in the shift towards hydrogen energy

APD is ambitious about maintaining the lead in hydrogen production by developing world-scale hydrogen megaprojects in the US, Canada, and Saudi Arabia. Air Products has the technology and the expertise needed to provide cleaner energy for the future. Investing in hydrogen production is consistent with the primary motive of the company’s drive for sustainable growth as its core strategy for growth in clean energy alternatives. Air Products’ management is actively implementing its vision of a sustainable approach to driving the energy transition through hydrogen megaprojects.

The company wants investors to see itself as a committed leader:

Commitment

APD has invested $15 billion in projects worldwide. APD is accelerating the hydrogen transition by providing hydrogen infrastructure. The president and Chief Executive Officer, Seifi Ghasemi reaffirmed to investors that “APD is firmly focused on reducing its costs and pricing despite the existing geopolitical challenges to execute the total energy transition to low and zero-carbon hydrogen projects in the world.”

Visionary role

APD, with 65 years of hydrogen experience, is at the very forefront of driving the global shift to hydrogen. This is exemplified by a partnership with NEOM Green hydrogen Company, which builds the world’s largest green hydrogen production facility located in NEOM’s Oxagon region at a value of $8.4 billion. APD works with NEOM as a contractor for engineering, procurement, and construction (EPC) and system integrator for the entire facility is an intentional decision in facilitating the fast shift to hydrogen. NEOM City is “a vision of what the future looks like” – so as the company’s vision to drive transformation of the future of energy

More tractions in green energy business segments

• After California adopted approaches towards achieving a 100% energy transition to zero-emission, APD is actively implementing a network of hydrogen refuelling stations that refuel over 2,000 light-duty vehicles and 2000 heavy-duty trucks.
• The company has committed $15 billion to hydrogen production and supply in scale in its various locations. The focus is on offering a cheaper alternative to fossil fuels, such as heavy-duty transportation and manufacturing.
• APD has contracted with Chengzhi Shareholding Co. Ltd, a high-tech Chinese state-owned industry group, to accelerate transport decarbonization in China’s Yangtze River Delta. The Joint Venture aims to start its commercial-scale hydrogen refuelling stations in Changshu, Jiangsu province, for city heavy-duty trucks and buses.

Decarbonizing Heavy Industries

APD signed an agreement with TotalEnergies for the delivery of Green hydrogen with the aim of supplying 70,000 tons of hydrogen annually beginning in 2030. The first long-term deal in this contract with TotalEnergies seeks to supply 500,000 tons per year of hydrogen to decarbonise TotalEnergies Refineries in Europe. This is an opportunity for an investor to get into the market and move with the imminent rise in the hydrogen energy business.

These strategic investments and collaborations accompany the heavy manufacturing of hydrogen-powered vehicles that demand efficient and affordable hydrogen energy. This presents an opportunity for opportunists to invest in the future of energy.

Valuation: Better prospect comes with higher risks

As a believer in the future of hydrogen, what Air Products is doing strategically presents an optimistic picture to me – standing at the forefront of energy transition and leading the industry peers by radically transformation.

This is reflected in the model below in which the revenue and total operating income of the company is forecast to grow between 8 – 10% every year until 2026. This is assumed that, while rapidly expanding, the hydrogen industry requires time to grow and mature before steady revenue comes in. On the other hand, profit margin will slightly expand following the higher operating expenses in the process of the pivot, reaching 41.5% EBITDA Margin.

In terms of valuation multiple, Air Products’ P/E ratio was affected by the company’s pivotal decision to develop in the hydrogen industry, which reflects investors’ initial concerns on the company. But as more partnerships being announced and backlog growing, the valuation multiple is enhanced gradually. This also reflects my view that as the uncertainties around hydrogen economy fade, the company can reach an even higher multiple closer to its closest peer Linde, which is at the 23 – 25x range.

All valuation metrics look good so far, except there is a problem – the risks of the company are higher since the company is developing and transitioning into a whole new sector which is still at a very early stage. Also, the company is reportedly reluctant to sign a traditional offtake agreement that secures a stable income.

Consequently, the higher risks and expected returns are reflected in the higher discount rate, which should be applied at around 12 – 15%, taking into account the higher risk free rate and the higher cost of debt for its around $10 billion long-term debt.

This gives us a price range from around $245 – $260. Therefore, it is a Hold to us as the company is more or less rightly priced at the moment.

Investment Risks

• Regulatory Uncertainties: Governments are introducing friendly regulations such as funding programs and incentives in support of green hydrogen projects. For example, the US Inflation Reduction Act (IRA) includes the Clean hydrogen Production Tax Credit to drive the hydrogen economy. This is financial support for hydrogen production and hydrogen infrastructure that will scale hydrogen stocks, but as the industry matures, the cancellation of subsidies may negatively affect APD.
• Technology risks: hydrogen is still in the early stages of adoption and will probably take 5-10 years to prove itself. The production of hydrogen includes complicated processes and types of technology, such as electrolysis or pyrolysis. Therefore, different paths and advancement of technologies may impact make APD’s products obsolete and less cost efficient
• Intense competitions: Plug Power, which produces hydrogen fuel cells, is a serious competitor for battery-powered EVs as opposed to APD. Also there is Ballard Power Systems (NASDAQ: BLDP), a power fuel cell manufacturer for automobiles as a close competitor of APD. As the industry grows, the competition in technology and pricing may be more intense and affect the sales and margin of APD.

Conclusion

To conclude, Air Products is leading to capitalize on the growing hydrogen economy via its investments and strategic partnerships, as well as forward-looking divestment. However, the radical transition does not give investors confidence as hydrogen sector is still at its innings. As such, reflecting both the future potentials and the associated risks, the company is a Hold to us, until more certainties and stability show.

Project has been awarded a $5.4m grant from the US Department of Energy

The US Department of Energy has awarded a $5.4m grant for the construction of a pilot clean-steel project that will demonstrate a novel system that will integrate zero-carbon turquoise hydrogen production with a direct-reduced iron furnace.

US Steel will provide the iron ore that will be reduced (ie, using hydrogen to both melt and remove oxygen from the ore) and “potentially” use produce clean steel from the iron in an electric arc furnace, with California-based start-up Molten Industries providing its methane-pyrolysis technology, and CPFD Software providing simulation technology that can speed up the design and time-to-market of the tech.

Molten Industries uses renewable electricity to power “white-hot chemical reactors” that crack natural gas or biomethane into hydrogen and graphite (a form of solid carbon), which can be used in lithium-ion batteries. Because there is no air inside the reactor, the carbon cannot react with oxygen to produce CO2, hence the process emits no greenhouse gases (except perhaps for upstream methane emissions outside Molten’s control).

In fact, if biomethane is used, the hydrogen produced could be considered “carbon-negative”.

“The project's main objective is to demonstrate the integration of methane-pyrolysis-driven hydrogen production with a pilot direct reduced iron (DRI) shaft furnace at Molten's facility [in Oakland, California],” says Molten.

“Anticipated outcomes include significant energy, carbon intensity, and cost reductions — a pivotal stride toward sustainable steel production.”

The start-up — which recently raised $25m in Series A funding, led by billionaire-backed Breakthrough Energy Ventures (see panel below) — explains on its website: “While clean methods of hydrogen production exist — like water electrolysis — they rely on large amounts of renewable wind and solar energy. Our solution uses five times less energy than water electrolysis and can use existing natural gas networks to produce clean hydrogen where it is consumed.

It adds: “Our methane is responsibly procured from certified low-emissions natural gas and waste streams such as dairy farms, waste-water treatment plants, and landfills. This leads to hydrogen and graphite that are carbon-neutral or carbon-negative.”

The start-up claims that it is the “only team in the world that has shown we can use methane to make a lithium-ion grade graphite that drops directly into the existing lithium-ion battery anode supply chain, fundamentally changing the cost structure and geographic constraints of the graphite supply chain”.

The sale of graphite represents an additional income stream that could offset some of the cost of the turquoise hydrogen production.

Molten CEO Kevin Bush said that the pilot project “is an exciting first step in Molten’s mission to decarbonize the world’s heavy industries… we are confident that our joint efforts will pave the way for a future where carbon-neutral steel production is not just a possibility but a reality”.

US Steel chief technology officer Christian Gianni added: “Achieving U. S. Steel’s 2050 net zero emissions goal requires the development and commercialization of various technologies, some of which have yet to be available on a broad scale.

“This collaboration, thanks to the DOE grant, is an investment in the future of sustainable American steel.

植物の根の近くに生息する微生物を使った発電の研究が国際的に広がっている。二酸化炭素（CO2）を排出しないため環境に優しく、植物が育つ場所ならどこでも「発電所」になり得ると注目を集めている。世界の研究の先頭を走るのが山口大大学院創成科学研究科のアジズル・モクスド准教授の研究室。実用化の一歩手前の段階まで来ている。

 

【メカニズム】微生物燃料電池 　「植物微生物燃料電池」と呼ばれる発電システム。

 

植物の根の周囲にいる微生物が、餌である糖分を分解する際に生み出す電子を電源とする。植物が光合成で生み出したエネルギーは全ては利用されず、一部が根から糖分などとして出て土中などにたまる仕組みを活用している。 　オランダで2000年代、水草などの水生植物から研究が始まった。アジズル准教授は土に生える植物での発電に他の研究者に先駆けて成功。現在は電極の設置が難しい大きな樹木でも発電可能な仕組みづくりを目指している。一連の研究は23年、英国の科学誌バイオソーステクノロジーリポートに掲載された。また、ことし6月、中国電力技術研究財団（広島市中区）から優秀研究賞で表彰された。 　バングラデシュ出身のアジズル准教授は「世界では発展途上国などで16億人が電気なしで生活している。植物微生物燃料電池は導入コストも安価になると見込まれ、人々の生活を変える手段になる」と強調する。穀物や野菜の栽培と組み合わせれば、食物も電気も生産できる利点がある。 　資源量に限りがあり二酸化炭素を排出する石油や石炭などの化石燃料による発電に代わる、持続可能な手法の一つとして関心が高まっている。アジズル准教授の研究室は、電極に竹炭を使うなど環境面の工夫を凝らしている。日照や降雨など気象条件による影響もあまりないという。 　現段階は、電圧に比べて十分な電力が確保できないことが実用化に向けての壁となっている。アジズル准教授はこの電力不足の課題も「試行錯誤を重ねており、近く解決できるのではないかと考えている」とし、大気などの環境モニタリングなど電力使用量の少ない機器から導入が始まるとみている。

中国新聞社