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Hydrogen finance maturing from day trading to M&A

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Ballard Power Systems' branding on the Nasdaq billboard in New York City's Times Square. The fuel-cell maker, which has traded publicly since 1993, has seen its share price double since the beginning of 2020.
Source: Ballard Power Systems Inc.
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Part 1: Hydrogen era no longer a distant mirage


Part 2: Europe vies for pole position in global race to a hydrogen economy

Part 3: Facing uncertain future, gas operators look to hydrogen lifeline 

Part 4: Hydrogen finance maturing from day trading to M&A

Part 5: 'This is lift-off' for green hydrogen, says veteran British engineer
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This is the fourth of a five-part series exploring the burgeoning hydrogen economy and its rise — after decades of false dawns — to the top of the energy agenda in 2020.

The stock price of Latham, New York-headquartered Plug Power Inc., a hydrogen fuel-cell maker that trades on the Nasdaq, has increased almost sevenfold since the beginning of the year.

The company is one of a small cohort of hydrogen stocks to have soared in value in 2020, as droves of investment managers flock to bet on businesses that either produce or utilize the fuel.

In London, ITM Power PLC, which develops hydrogen electrolyzers, is up 360% since January. U.S.-based Bloom Energy Corp.'s stock has tripled in that time, while Norway's Nel ASA and Canada's Ballard Power Systems Inc. have more than doubled.

Ballard President and CEO Randy MacEwen is acutely aware of the current hype around his company and others like it.

"Whether it's [venture] capital or private equity or institutional investors, there's no doubt in my mind: There's a ton of capital available now to be put to work in the hydrogen and fuel-cell space on all three levels," the CEO said in an interview.

That is encouraging news: If the world is going to capitalize on the decarbonization potential of hydrogen, big money will be required $11 trillion of investment by 2050, according to BloombergNEF. For comparison, the combined market capitalization of Plug, ITM, Nel, Bloom and Ballard, as of Dec. 3, is just over $26 billion.

But those same companies were worth just $5 billion at the beginning of the year. However, according to hydrogen advocates and members of the finance community interviewed by S&P Global Market Intelligence, the industry now sits on the verge of its next phase.

"Things are moving out of day trading ... into M&A ... and then the financing of major projects," said Daryl Wilson, executive director of the Hydrogen Council, a global membership organization for hydrogen. "There is a maturing going on here and that is reflected in the nature of the transactions."

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This maturing has seen utilities, oil majors, automakers, industrial companies and others announce strategic investments in hydrogen companies and projects.

In the energy sector, Italian gas utility Snam SpA invested £30 million in ITM as part of a £165 million capital raise by the electrolyzer maker that had to be scaled up by £15 million because of strong investor demand. Meanwhile, Norway's Statkraft AS and Spain's Iberdrola SA have collaboration agreements with Nel to work on hydrogen.

Spurred on by policy announcements, the early flag-waving of these strategic investors could be key in attracting the heavy-hitting infrastructure funds and investment managers that for decades have funneled billions into energy infrastructure globally.

An evolving financing landscape

The public markets provide the first real signs of investor interest in hydrogen. "Look at how those [listed hydrogen] companies have evolved in the past year," said Thomas Engelmann, head of energy transition infrastructure at KGAL Investment Management GmbH & Co. KG. Investment managers "are allocating capital into those stocks."

But to-date, asset managers have only had a relatively small universe of investable hydrogen companies to play with. According to JJ Traynor, managing director at HydrogenOne Capital Ltd., an investment company founded this year to invest in hydrogen, there are about 15 to 20 pure-hydrogen companies in the listed space that either produce the fuel or make related component parts.

"Globally there's not very many of them, and we expect there to be more," Traynor said in an interview.

The company foresees a wave of hydrogen-based IPOs for everything from electrolyzer makers and fuel-cell innovators to more specialist companies like developers of synthetic fuels, and is planning to launch a listed investment trust on the London Stock Exchange to capitalize on the growth of the market. "We think there's a gap," Traynor said.

Outside of the listed sphere, there is an "enormous amount of activity going on on the private side," said Traynor, a former executive at Royal Dutch Shell PLC who founded HydrogenOne with Richard Hulf, a former fund manager with Artemis Investment Management LLP. Industrial companies that are majoring on hydrogen, such as industrial-gas producer Air Liquide SA, would bring the broad universe of hydrogen stocks to more than 35, he added.

Alena Fargere, principal at Paris-based Swen Capital Partners SA, said that there is need for venture capital or private equity investment in the smaller, more innovative players in the hydrogen space. "However, I see the main challenge today in deploying and financing ... large [hydrogen] infrastructure projects," Fargere said.

"The big money is definitely going to come on the project side" rather than company-level M&A, added Astrid Behaghel, energy transition expert at French bank BNP Paribas SA, which is training its renewable energy project finance team on hydrogen in view of a wave of infrastructure deals in the coming years.

Swen has set up the Swen Impact Fund For Transition, which Fargere describes as the only infrastructure fund to include hydrogen in its investment universe. The fund raised €175 million from investors in October to invest in renewable gases, having initially targeted €120 million a barometer of the market's appetite for the fund's mandate.

Swen is yet to make a hydrogen investment out of the vehicle, but the team is pursuing several potential opportunities, mainly in the production space. For example, the company is in discussions with industrial clients that may have capital expenditure constraints, such as refineries or ammonia producers.

Industrials are responsible for much of the early strategic investment in the hydrogen space. Linde PLC, which produces industrial gases, is a major investor in ITM. Meanwhile, Chinese diesel-engine manufacturer Weichai Power Co. Ltd. is Ballard's largest shareholder, just ahead of compatriot Zhongshan Broad-Ocean Motor Co. Ltd., which makes electrical appliances, according to S&P Global Market Intelligence data.

"Industrial companies are already doing extensive work in financing hydrogen from their own pocket. However, they do not have the capacity or the desire to do this alone, so I see opportunities for Swen and others [to partner with them]," Fargere said.

ESG is 'changing the landscape'

And the payback from Swen's investments will not be solely financial, Fargere said, highlighting the role of hydrogen as a key environmental, social and governance theme in helping reduce CO2 emissions and creating jobs. Likewise, HydrogenOne plays up the ESG story in a company presentation on its website, committing to avoiding investments in any business that extracts fossil fuels, such as the oil and gas sector, and utilizing ESG ranking metrics.

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"ESG investing is changing the landscape [for hydrogen]," Ballard's MacEwen said Oct. 14. "I've had more meetings with investors in the last six weeks than in the last six years."

The Hydrogen Council formed an investor group in January "to bridge the gap between the investor community and the hydrogen industry and facilitate investment of large-scale projects." Founding members included Antin Infrastructure Partners and John Laing PLC, and later Providence Investment Management Pty. Ltd. and Mubadala Investment Co. PJSC.

BNP Paribas, another member of the group, already has more than 50 people working on hydrogen, according to Behaghel. Hydrogen is "on the desk of the CEO of the bank," she said.

But by and large, most members of the finance community are still at the beginning of their hydrogen journeys, even though they have joined industry groups. For traditional energy infrastructure investors, hydrogen remains a nascent theme.

"It is really early days for us right now. I think we will be in a better position to comment with more authority as we make progress into 2021," a spokesperson for Mubadala said in an emailed response to an interview request by S&P Global Market Intelligence.

The European Investment Bank, the EU's lending arm, thinks it can help attract investors into hydrogen, for instance by absorbing risks that private partners are unwilling to take. "In doing so [the bank] may give comfort to potential investors and crowd in private capital," a spokesperson said in an email, adding that it used a similar approach successfully in the offshore wind market.

Snam is also trying to attract third-party investors to the sector. The gas utility intends to create an investment platform in 2021 for energy transition companies and projects, with a particular focus on hydrogen. Snam will be an anchor investor and plans to transfer about half of its newly acquired 33% stake in electrodes manufacturer Industrie De Nora SpA — worth about €200 million — to the fund.

And with national and EU-wide hydrogen roadmaps being announced — "gamechangers" in helping corral big money to the market, according to Swen's Fargere — many financial investors are now keen to learn.

"Almost every day, there are calls from infrastructure funds and major investors saying, 'We need to know more about [hydrogen],'" said Wilson. "There has been a whole sea change in terms of credibility."