Company With 290% Gain This Year Aims For Green Deal Riches

(Bloomberg) -- Some of the companies that make machines that can split water into hydrogen and oxygen are having a stellar year.

Companies dedicated to the technology, which could be key to Europe's plans to reach net zero greenhouse gas emissions by 2050. ITM Power Plc in Sheffield, England, has gained 290% this year, beating pharmaceutical stocks including Moderna Inc. that's developing a vaccine against the coronavirus.

“Clean hydrogen is one of the top priorities in our energy transition and we will be investing a lot in making clean hydrogen part of our energy mix in the future,” Frans Timmermans, European Commission Executive Vice President, told reporters in Brussels Thursday. “It's got huge potential.”

Stocks are also up for ITM's competitors. Norway's Nel ASA has gained close to 70% this year, while the French McPhy Energy SA is up about 50%.

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Those companies use electricity to turn water into hydrogen, which can be used as a fuel, and oxygen that can be safely dumped into the atmosphere. Hydrogen can help cut greenhouse gas from some of the most-polluting parts of the economy like steel and chemical production that rely on coal or natural gas.

“There's greater recognition that hydrogen is fairly core to achieve our decarbonization agendas going forward,” said Marc Elliott an analyst at Investec Securities Ltd, ITM's corporate broker. “It could be bigger than the natural gas industry.”

The rapidly increasing valuations of the companies that make the machines known as electrolyzers reflect an assumption of massive future growth spurred by government spending.

While ITM is currently valued at more than $1.5 billion, the company reported total income of just 3.8 million pounds ($4.7 million) in the six months ending Oct. 31, the most recent period of published earnings.

‘Lot of Hype'

“There's a lot of hype in the market and anything with hydrogen in the name seems to be buoyed by some very exciting valuations that aren't really connected with financial fundamentals,” said Bruce Huber, chief executive officer of Alexa Capital, a specialist investment bank focused on the energy transition.

But there is a growing pipeline of electrolysis projects across Europe involving some of the world's biggest companies in both the fossil fuel business and green power. ITM is working with Royal Dutch Shell Plc on a project in Germany, while it has also joined forces in the U.K. with the world's biggest developer of offshore wind farms, Denmark's Orsted A/S.

The $100 billion German gas giant Linde Plc took a minority holding in ITM last year and Electricite de France SA has a stake in McPhy.

ITM's chief executive officer Graham Cooley said that he was surprised that his company had been undervalued. It's not the revenue that matters, but the longterm potential, he said in an interview.

“We're valued on the market potential, valued on the fact that we're a pure-play hydrogen company and that the market now realizes the need for electrolysis,” Cooley said. “Energy companies around the world have realized you cannot get to net zero without renewable hydrogen made by electrolysis.”

Precursors

If Europe delivers on plans to spend billions to scale up hydrogen in the coming years, the small-scale projects and pilots of today could be precursors to industrial-scale developments at the forefront of a new global energy market.

The cost to produce hydrogen with electrolyzers is set to plummet in the coming decades as the production of the machines scales up and renewable electricity is cheap and abundant, according to BloombergNEF.

The trend could be similar to solar panels and wind turbines, that have fallen in price over the years as governments supported industrialization to the point that green power became competitive with fossil fuels.