Nel ASA - Is Hydrogen the Future?
Hi everyone, welcome to the first special edition article from The Spark by Euan McNicholl! Euan’s special edition articles will be published on the first week of each month, taking a deeper look at a company and the investment opportunity it presents. We hope you enjoy his first article on NEL ASA (NEL) - over to you Euan!
NEL ASA (OL: NEL) - Is Hydrogen the Future?
The main question we will need to consider throughout today’s report is whether or not hydrogen energy is an efficient and viable alternative to today’s ever-growing energy struggles. We have seen plenty of claims and promises in regard to renewable energy over recent years from the EU. An example of this is their commitment to a 55% reduction in greenhouse gas emissions by 2030, compared with 1990 levels, with the hope of being climate neutral by the year 2050. Even at the most recent COP26 climate conference in Glasgow, which took place in November of this year, there was a lot more emphasis put on hydrogen as a viable form of energy production. All of these aims have come under scrutiny in recent years as there seems to be the all too familiar case of too much talk and not enough action. That being said, there is nothing like hurting people’s pockets to make them wake up to the ongoing problems caused by reliance on non-renewable energy production, as we have witnessed recently. According to 2019 reports, Russia accounted for 41% of the EU’s natural gas imports (see below), and having a dictator in control of your energy supply creates a host of problems, as we have seen through the effects of the war in Ukraine.
Below is a map of the most important gas pipelines in Europe showing how Russia distributes all of its oil and gas all over the continent. The Nord Stream 2 pipeline is currently under construction and will be a 1,200km pipeline running parallel to the current Nord Stream pipeline and will take gas from the Russian coast near St Petersburg to Lubmin in Germany. The US, UK, and neighbouring countries to Russia such as Ukraine and Poland have been outspoken in recent years about their discomfort with the production of the Nord Stream. Ukrainian president Volodymyr Zelensky has called Nord Stream 2 "a dangerous political weapon" and with how things are playing out at the minute, he seems to be correct.
So, where does Nel ASA come into this? Well, if the Russia Ukraine crisis has taught us anything, it is that Europe is overly dependent on Russian gas. This, alongside the climate policies made by the UN and EU, could be the catalyst for change. Nel ASA is domiciled in Norway, a prime location to offer energy services to the likes of Germany and the Netherlands which are currently heavily dependent on Russian gas. Poland is building a new pipeline connecting it to Norway's gas fields, which is set to be complete in October 2022. Although this is not promoting renewable energy production, what it does show is Norway’s capabilities and willingness to export its energy to countries throughout Europe. The EU has proposed a plan to make Europe independent from Russian fossil fuels before 2030 through diversifying means of energy supply, and this is an opportunity for Nel as one of Europe’s leading renewable energy companies to assert its presence in the space.
Unlimited Hydrogen, Unlimited Energy, Unlimited Opportunities
Nel’s roots date back to 1927 in Norway as the first electrolysed installation testing for pure hydrogen to fertiliser. Since then, Nel has evolved into a multi-faceted hydrogen company providing hydrogen solutions for production, storage, and distribution. They have industry-leading technologies, particularly in electrolysis. Electrolysis is the process that allows clean hydrogen energy to be produced from water meaning the access to renewable energy opportunities is practically endless. With more than 3,500 electrolysers across the world, Nel is beginning to assert its presence on the global stage and is widely regarded for having cutting-edge electrolysis technology. In 2007 Nel acquired ProtonOnSite, making them world leaders in electrolysis technology and helping to solve the main issues regarding the storage of hydrogen energy. Nel uses both PEM and AEM (Polymer/ Anion Electrolyte Membrane) to make the most efficient use of the electrolysis process as it separates the hydrogen and oxygen from water and can store the hydrogen allowing it to be turned back into electricity. I believe that this form of intermediatory energy storage will be a major part of a future energy society. For landlocked countries like Germany, which don’t have the sunniest weather for solar energy, or windy coastal regions for wind energy, hydrogen offers a solution that does not require dependency on weather.
PEM electrolysis process producing hydrogen at the cathode via the membrane
The second side of the business is hydrogen fuelling for hydrogen fuel cell vehicles. Nel has acquired H2 logic which is widely regarded as world-leading hydrogen fuelling technology. H2 stations are what Nel describes as the new generation, 70 Mpa, fuelling fuel cell electric vehicles. This newest technology allows for triple the fuel capacity at one-third of the space which will allow installation at even the most compact gas stations. Refilling hydrogen cars is very similar to filling up with petrol or diesel taking in and around 5 minutes to fill a tank. This is undoubtedly an advantage over the long waiting times when recharging an electric car.
Nel has received orders for hydrogen fuelling stations in Canada, Poland, and France all within the last month, showing the rising demand for these forms of energy fuels. Nel has also opened its first H2station in Korea in 2020 along with the announcement of construction on what it claims will be the world’s largest electrolyser manufacturing plant located in its home city of Oslo, Norway. These large-scale expansions show the scale at which Nel is aiming to grow and the huge potential of being one of the first movers in a largely untapped market. Investing heavily into Korea is a smart move from Nel in my opinion, as Hyundai’s new production of the hydrogen fuel cell-powered Hyundai Nexus appears to be one of the first cars to really start taking shape in the industry. Alongside Hyundai championing the hydrogen vehicle game, South Korea itself has also made it part of its national ambition to have more than 300 hydrogen refueling stations operational by the end of 2022. Nel Hydrogen US which is a subsidiary of NEL ASA has received a contract for a containerised PE electrolyser and light-duty hydrogen fuelling station package across from a leading power and gas utility in the United States. Entering into the US and Asian markets is also big for Nel as they will be able to reach a much larger customer base than solely providing to Europe.
Hyundai Website Describing the Hyundai Nexus Charging Times
Read below on independent reviews of the Hyundai fuel cell-powered Nexus. Key takeaways from the reviews are that the car itself and the technology are solid and improving but “The obvious drawback? That so few hydrogen fuelling stations currently exist in the UK.” This is the case across the globe and I feel especially in mainland Europe and eastern Asia, Nel can begin to become a major player in the production and installation of this infrastructure.
Hyundai Website Describing the Hyundai Nexus Charging Times
Alongside the two main pillars of the business, electrolysis, and fuelling, Nel is also working in some other developing industries. HYON AS, in which Nel are majority holder, is a provider of zero-emission maritime hydrogen bunkering solutions and the company has the intention of having its shares admitted on Euronext growth as soon as possible.
Nel has also announced it is to supply electrolysis systems for a new solar foods production facility under construction in Vantaa Finland. Nel is involved in three offshore wind projects: ERM Dolphin which involves attaining renewable energy from floating offshore wind projects, Deep Purple which is similar to ERM with subsea storage, and PosHYdon which plans to blend hydrogen with natural gas from pipe to shore. Nel also aims to start a 20-MW electrolyser in Spain by the end of the year, which will produce hydrogen for ammonia production in partnership with power company Iberdola and fertilizer company Fertiberia. This goes to show just how widely adopted hydrogen energy solutions could become and how many potential markets they could enter in the coming years. Nel is also in a position to avail of state aid from the European Commission as the EU-wide scheme for carbon contracts for difference includes improving low carbon equipment such as electrolysers.
Nel and its Competitors
When considering Nel as a potential investment it is vital that we consider the future cash flows of the company, as the growth in the sector will be the driving force behind the potential success of the company. Nel is currently losing money which may scare investors at first glance but as we delve further into the reasons behind this, whilst also comparing with competitors in the industry, we can see the growth potential and viable reasons for expected revenue growth.
The current earnings per share (EPS) of NEL is -$1.14 which I believe, alongside general analyst consensus, will be the lowest EPS for NEL for the foreseeable future. The reason for this is the investment in recent years into scaling both the electrolyser business and the hydrogen fuelling business. The company saw COVID as an opportunity to grow the business as it opened a new factory in South Korea and scaled up the production of its fuelling business, raising its total asset value to $682 million in 2021. I believe the company has also made intelligent use of its capital to finance these projects. We can see cash flow from the issuance of stock peaked at $246.8 million around the same time as the company began to start financing projects, making the best use of the inflated stock price rises during the COVID tech bubble. We then see cash flow from the issuance of stock dropped to $146.1 million after the company had gained the necessary cash to start these projects. A large proportion of the funding for these investments was off the back of loans (along with equity issuance mentioned above), a smart move as the business took advantage of lower interest rates to fund expansion.
With Nel being a more established company, they were able to get a head start on newer competitors, especially within Europe. These new companies are trying to grow but will be doing so on the back of much more expensive capital than Nel. When we also look across the energy space we can see that all of the companies are running on negative EPS figures, for example, Plug Power -a major player in the US market is with a -$0.82 EPS figure. With Nel adding so many new assets and the demand for hydrogen on the rise, I see Nel as one of the best-placed companies in the industry for the future.
Crunching the Numbers
Touching on the current economic climate, with rising inflation rates, and in my opinion, a generally inflated market, it’s important to compare Nel’s beta with competitors. Nel has a market beta of 0.55 meaning it won't be affected by general market downturns nearly as drastically as a lot of its competitors. Plug Power has a beta of 1.57 with other competitors such as ITM Power having a 1.56 and FuelCell Energy experiencing an astonishing 4.38 beta. What we can take from this is that the smaller, new companies such as FuelCell were momentum stocks that rallied with the market as liquidity was plentiful during 2020/21, whereas Nel is a safer bet coming into a potentially more risk-averse market.
Crunching the expected future revenue growth for Nel is where it really gets exciting. It is important, however, before we start looking at growth that we establish a timeframe. The EU has heavy sights and aims for the introduction and growth of hydrogen over the next 10 years with REPowerEU stating they aim to reduce the dependency on imported Russian gas by 25-50 billion cubic metres by 2030. The European Commission also aims to have 30 million EVs on the road by 2030 along with proposed 55% cuts in vehicular C02 emissions and proposals of banning the production of new fossil fuel cars from 2035. If this is the case, the largest issue could be charging stations and how to help power all of these cars. Stored hydrogen energy with hydrogen-powered vehicles could very well be the answer. That being said, I have applied rising growth rates to my stock price model (DCF) below to account for increasing consumer demand the closer we get to these targeted dates. If you would like to receive the model I used for free, which will help you decipher the intrinsic value of a stock, sign up to The Spark’s mailing list here.
Within my DCF, I have estimated higher capital expenditure in 2025 and 2029. This is because I expect the EU to encourage more hydrogen infrastructure investment in order to meet its 2030 climate targets. I’ve remained relatively conservative with revenue growth estimates, with only one year having a 50% increase in revenue after 2025. I did so as I expect sales of hydrogen vehicles to grow heavily in 2029 as a result of easier access to fuelling stations, increased electrolyser demand, and improved infrastructure.
My DCF model produces a price target of 28.26 NOK in 2030, a 108% gain from today. The current risk-free rate of 8% means there could be greater upside for the stock if inflation falls over the coming years, as this would cause a fall in the 10-year treasury and therefore a fall in the cost of capital (WACC). This target price is reliant on demand for hydrogen steadily rising, along with prices of production coming down. There is huge potential for growth in the space and I feel this target price is a fair representation of where Nel could be 10 years from today.
*All target prices are in NOK*
So why hasn't Hydrogen taken off already?
You may be wondering, and rightfully so, if there is an unlimited supply of hydrogen then why isn't it currently in mainstream use? There are a few areas we can point to that may help to uncover this puzzle. The first of which being issues around hydrogen storage.
There are currently major challenges surrounding the most efficient way to store the amount of hydrogen necessary to provide driving ranges upwards of 300 miles within vehicular constraints. We can allude to the weight and volume of the storage systems being simply too high, so the efficiency in which hydrogen is used to power these vehicles must improve in coming years. Currently, battery-powered cars are around three times more efficient in their use of energy that hydrogen fuel cell cars. So, what is the point of hydrogen if it's less efficient and more expensive? As innovation and demand for vehicles powered by green energy grow, so will the demand for their fuelling systems. People like convenience, and waiting 30-40 minutes for a car to recharge simply isn't convenient, which is currently the case for battery-powered vehicles. The mere 3-5 minutes it takes, regardless of current efficiency levels, which I believe will only improve immensely as technology develops and time goes on, is a big pulling factor for hydrogen fuel cell cars being the vehicles of the future.
However, this comes down to whether automobile companies decide to pursue hydrogen fuel cell vehicles or focus on improving their current ranges of battery-powered cars. Therefore, this is a large variable affecting Nel’s future growth and performance. There are also concerns surrounding the cost and durability of these refueling stations. These costs must come down in the coming years if hydrogen fuel cell vehicles are to explode onto the scene as Nel so desperately wants them to do.
Hydrogen Storage issues
At the minute, the majority of hydrogen extraction processes are currently running on fossil fuels through a process known as ‘steam reforming’, producing what is known as ‘grey hydrogen’. Nel aims to provide an alternative pure green hydrogen energy solution through the process of electrolysis, that will help to meet the EU's new 20 million tonne green hydrogen energy goal. However, investors are sceptical and will want to see this type of energy being implemented throughout different industries at an efficient level before jumping on the bandwagon, as we've all seen how short these climate policy goals can fall.
At present, there is significant infrastructure in place for refueling fossil fuel-powered vehicles but providing all the infrastructure for hydrogen refueling will take years. Nel has shown progress, however, with orders for hydrogen fuelling stations in the US, France, Canada, Korea, etc and doubling its pipeline of potential orders for hydrogen solutions. Jon Andre Lokke, Nel’s CEO, has stated that the cost of installing renewable power production and infrastructure was the current key factor in driving down renewable hydrogen production costs. He notes that these costs have begun to fall rapidly which is a positive sign for future operating profits and the hope is that, as demand rises for hydrogen energy production, production costs fall simultaneously. The cost of raw materials along with the overall cost of producing hydrogen fuel cell energy through electrolysers is still relatively high. These large costs are a barrier to entry for many energy companies who have considered joining the space in recent years. The current estimated price per 1kg of green hydrogen is in and around the $4-$6 mark whilst Lokke has stated he hopes that Nel will be able to produce 1kg of green hydrogen at $1.50 by 2025 based on electricity at $20/MWh.
Final Comments
I believe that Nel is a more stable company with world-leading technologies in a sector that is ready to boom. As discussed in the previous paragraph, there are many issues with current hydrogen production and it will be several years before we see any major moves in the hydrogen vehicle space. Whatever your beliefs on hydrogen fuel cell vehicles and green hydrogen production, there can be little doubt that renewable energy is the future.
The Russia-Ukraine war has highlighted that being overly reliant on oil/gas can lead to huge supply issues, soaring prices, and the realisation that change is needed. I believe that hydrogen, being the world’s most abundant resource, can be the fuel of the future. I see Nel as a candidate to lead the way in the space as a well-respected company with years of experience in the industry and a global representation. Saying that, it could be several years before we start to see Nel grow into the company it is capable of becoming. I seek long-term investments for my own portfolio, and believe that Nel will give me exposure to an exciting new energy industry, with huge growth potential. I love the unlimited potential of green hydrogen energy and I’m excited to see what the future holds for both Nel and Hydrogen!
Until next time,
Euan McNicholl
Please Note: Everything contained within this article was completely obtained via independent self-sourced resources. All of the views in this article are my own and this report is not to be taken as financial advice.*
Disclaimer
This communication is for informational and educational purposes only and should not be taken nor used as investment advice, as a personal recommendation, or solicitation to buy or sell any financial instrument. This material has been prepared without considering any particular recipient’s investment objectives or financial situation and has not been prepared in accordance with the legal and regulatory requirements to promote independent research. Any references to past or future performance of a financial instrument, index or structured product are not, and should not be taken as, a reliable indicator of future performance. I assume no liability as to the accuracy or completeness of the content of this publication.