HJEN - HYDR: The DOE's H2 Hubs Spell A New Era For Hydrogen

2023-05-26 11:46:51 ET

Summary

• Down 68% from its high, the Global X Hydrogen ETF looks washed out.
• Of the original 79 bids for DOE-subsidized hydrogen hubs, 22 were allowed send full applications before April 7th, and the final “7 to 10” will be chosen this fall.
• The DOE will disburse $8 billion for the buildout, giving the hub's corporate partners --HYDR's primary holdings -- a much clearer glide path to profitability.

Down 60% to 80% from their meme highs in November 2021, the publicly traded hydrogen stocks appear washed out and could be ready for an inflection this fall.

Yes, green hydrogen remains an unprofitable business, with earnings for most companies two years away. But huge subsidies disburse next year that will affirm a viable earnings glide path for the industry, one that is finally consolidating around a few clear titans and seeing higher revenues. The technology's promise is starting to come to real fruition in Europe, and even looks downright subversive to the EV orthodoxy here in the US.

Elon Musk once said hydrogen-powered vehicles are "incredibly dumb," but he might have been "talking his book." And that was back in 2020. A very practical roll-out of hydrogen-blended fuels and vehicles is now occurring which might soon give the Great Doge pause.

Late last year, Houston-based HIF Global started producing a carbon-neutral green hydrogen and CO2 hybrid fuel that can be used by existing internal combustion engines ((ICE)). The company, partnering with Porsche among others, received a permit for a US facility in Texas in late April.

Hydrogen -via blended fuels or fuel cells-may well end up providing a far less expensive transition to a "zero-ish" emissions future than electric vehicles (EVs) themselves. Rolls Royce is ramping up a hydrogen-powered jet engine. Alstom's (ALSMY) diesel-less trains now roll through Lower Saxony; and JCB's fuel cell-powered backhoes are now hard at work on British construction sites. Electrification was never going to be a solution for planes -the batteries are too heavy-- or the power and long operational times needed for a train or backhoe.

What is interesting to the investor is that US hydrogen industry is about to see a decade of major federal-level support, starting next year. The Department of Energy, with $8 billion to be disbursed via the Jobs Act, is subsidizing hydrogen hubs nationwide.

Of the original 79 bids for DOE-subsidized hydrogen hubs, 22 were allowed send full applications before April 7th. The final "seven to ten" will be chosen this fall.

The Inflation Reduction Act 's $13 billion in tax credits will drop "green hydrogen" to a price as competitive as "grey hydrogen" -- from around $4 per kg to $1 per kg. In addition, there are now 300 green hydrogen projects under construction worldwide. This feels like a full court press.

At its present cost of $25 a gallon, hydrogen-blended e-fuel is not competitive for passenger cars. But that price will come down fast. And if eFuel can make existing cars carbon neutral while keeping the several trillion dollars of existing ICE infrastructure in the US from been scrapped for pennies on the dollar, then maybe hydrogen becomes (pardon me here, Elon) a "incredibly astute" solution. And it's worth kicking the tires on a pure play ETF, now priced for oblivion.

Investing in Hydrogen with ETFs

Global X Hydrogen ETF ( HYDR ) is a passive fund, with an expense ratio of .50% and $34.4 AUM. It launched in July 2021, a few months before the Nasdaq's feverish top during which it hit $28.47 (November 8, 2021). It now trades at $8.94. Its weekly chart is a thing of utter carnage, though the stochastics are looking deeply oversold.

HYDR tracks the German-based Solactive's Global Hydrogen Index. It can buy publicly traded companies in any market but India which has a $30 million market cap or more, choosing those involved in hydrogen fuel cell production, electrolyzers, generators, and H2 vehicles.

The Index then classifies each component depending on its hydrogen-related revenues: "Pure-Plays," which derive at least 50% of revenues from hydrogen; "Pre-Revenue" hydrogen businesses; and "diversified" -i.e., companies where revenues from Hydrogen activities make less than 50%.

It then constructs its portfolio based on the following "Jenga"-like operative logic:

"All Pure-Play com panies are included as Index Components, up to a limit of 40 components. If there are fewer than 25 Index Components after all Pure-Plays have been included, Pre-Revenue companies are included until the index reaches 25 Index Components. If there are fewer than 25 Index Components after all Pre-Revenue companies have been included, Diversified companies are included until the index reaches 25."

At present, the ETF is well-balanced in its international weighting: 34% Europe (mostly Norway), 30.2%% US, 16% Great Britain, 8.7% Canada, %10 Japan and South Korea.

HYDR has two immediate competitors - Defiance Next Gen H2 ETF ( HDRO ) and Direxion Hydrogen ETF( HJEN ).

HDRO, passive fund that mimics the BlueStar Global Hydrogen and Next Gen Fuel Cell Index, also tracks the performance of a wide group of globally listed equities, specifically those companies that generate at least 50% of their revenue from their involvement in the development of hydrogen-based energy sources and fuel cell technologies. The ETF is also quite diversified: the maximum weight of each holding is 10%, and it is very international in scope, with 77.5% of the portfolio non-US.

HJEN uses the Indxx Hydrogen Economy Index, which, like HYDR, allows purchases of not just pure plays but so-called "quasi-plays" and "marginal plays" (where less than 50% revenues, and less than 20%, respectively, come from hydrogen). These marginal plays allowed HJEN to pick up energy players like Shell and British Petroleum, as well as Air Liquide, a very diversified French conglomerate providing many industrial gases.

Major US Subsidies Ahead

Here is a map of some of the states that have had bids accepted, with a few of the major hubs highlighted:

Of the 22 that have been waved in to submit complete submissions for subsidies, there are a few that look like guaranteed: California's ARCHEs, the Midwest Alliance, and the Northeast hub.

The Louisiana's HALO hub -with its connection to the chemical industry-- and Northwest's focus on aviation fuel, could also be winners for their industry specificity. Corpus Christi's submission, which is now links El Paso, also has legs. Texas creates the most non-fossil fuel energy in the country, when its wind, solar, and nuclear are included. HIF Global just placed its US eFuel plant in Matagorda County, TX, just north of Corpus Christi. Southern Texas has excellent wind energy potential -with Starr County a veritable mecca for wind farms and solar, with many of Duke Energ y 's (DUK) wind farms located there. This could also eventually be used to decarbonize NAFTA's Mexico-to-US trucking system.

Corporate Partners for the Hubs

Which hydrogen companies are partners in the 22 run-off bids? Those companies that are bringing the expertise and actual development of these public-private partnerships will see a new legitimacy and a new threshold of revenue. Though some states are keeping their bids (and partnerships) secret, a few are available to the public.

Nel ASA (NLLSF), HYDR's top holding, is a 106-year-old Norwegian electrolyser manufacturer with deep expertise from the European hydrogen market. It is affiliated with the Northeast and Midwest bids. In fact, earlier this month, the company announced an agreement with the state of Michigan to construct a $400 million, fully automated gigawatt facility.

Bloom Energy (BE) is included in CA's hub proposal, which includes PGE, Toyota (TM), Michelin (MGDDF), AECOM (ACM), BOSCH, Plug Power (PLUG)and Avantus. Plug Power is a partner in six of the final submissions, including the Northeast, Pacific Northeast.

Whichever regions are chosen for immediate subsidies, these H2 hubs will give the industry a government-sanctioned infrastructural backbone. It will give the publicly traded hydrogen firms engaged in the effort a much clearer glide path to profitability.

The DOE's choices this Fall spell a clear inflection point for the industry.

For further details see: