One valve would release pressure at Air Products

Linde

18/10/2024 13:00

(The author is a Reuters Breakingviews columnist.  The opinions
expressed are his own.)
    By Robert Cyran
       NEW YORK, Oct 17 (Reuters Breakingviews) - Clean
hydrogen has been highly reactive at Air Products and Chemicals
 APD.N . The industrial gas producer opted to plow $15 billion
into the unproven energy source, anticipating that demand will
outstrip supply. For now, the decision has weighed on the
company and attracted two pushy investors. There’s a way for
80-year-old boss Seifi Ghasemi to ease some of the pressure:
sell more of the first element on the periodic table.
    The world uses about 100 million tons of hydrogen, according
to the International Energy Agency, largely for refining,
chemicals and fertilizer. Nearly all of it is made from fossil
fuels, but it’s possible to use natural gas and sequester excess
carbon dioxide or with water powered by renewable electricity.
Moreover, because green hydrogen might help decarbonize
industries from steel to shipping, governments are championing
its development.
    Demand should reach about 6 million tons annually by 2030
based on current polices, the IEA estimates. Projects underway
will produce less than 4 million tons. Air Products is working
on projects in Louisiana, Canada and Saudi Arabia. Its capex
last year was $4.6 billion, more than double the 2019 sum. The
investment has been harmful. Its shares, including reinvested
dividends, returned 70% over the past five years, less than half
as much as rival Linde’s  LIN.DE .
    Two hedge fund managers, D.E. Shaw and Mantle Ridge, have
taken notice. They’re griping about capital allocation, but also
the corporate governance and strategy at Air Products, which
dominates a hard-to-enter market alongside Linde and Air Liquide
 AIRP.PA .
    Suppliers usually only break ground on new factories after
securing big and long-term buyers for most of the production.
Anything extra is sold on spec, but at higher prices. The
approach leads to high, steady returns on capital.
    Air Products reckons it will secure better deals by waiting
and taking advantage of shortages. It’s a risky approach,
especially following a Harvard University study published last
week suggesting green hydrogen’s potential may be smaller than
assumed.
    Such uncertainty argues for signing contracts sooner rather
than later. Air Products already has conceded it will hold off
on any additional chunky investments until it finds agreed
buyers for the bulk of the hydrogen production capacity already
under construction. French oil company Total agreed to buy a
third of what the Saudi facility will generate, at a rate that
implies a roughly 10% return on investment, according to a
person familiar with the plan. A few more similar sales would
enable Ghasemi to take some air out of the arguments from
activist investors.

    Follow @rob_cyran on X
         
    CONTEXT NEWS 
    Hedge fund manager D.E. Shaw sent a letter on Oct. 10 to Air
Products and Chemicals, urging the industrial gas producer to
limit capital expenditures, restructure its board and articulate
a clear succession plan for 80-year-old Chief Executive Seifi
Ghasemi.
    Mantle Ridge, another activist investment firm, has similar
concerns and also wants the company to overhaul its strategy,
Reuters reported on Oct. 4, citing an unnamed source. Paul
Hilal, Mantle Ridge’s CEO, helped install Ghasemi as CEO in
2014, when he was at Pershing Square Capital Management.
    Hilal is working with two former top executives at Linde on
the campaign, Reuters reported on Oct. 15, citing unnamed
sources.

    <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
Hydrogen weighs down Air Products shares    https://reut.rs/4eOhY2F
    ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
 (Editing by Jeffrey Goldfarb and Pranav Kiran)
 ((For previous columns by the author, Reuters customers can
click on  CYRAN/ 
robert.cyran@thomsonreuters.com))