One valve would release pressure at Air Products
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.
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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
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