Investment Highlight

• Petronas exploring hydrogen potential from existing plants. Petronas has recently signed a memorandum of understanding (MoU) with Tokyo-based ENEOS Corporation to explore "low-carbon" hydrogen production from Petronas’ petrochemical facilities and green hydrogen produced by renewable energy. The MoU also covers a technical-commercial joint study to develop a competitive clean hydrogen supply chain between Malaysia and Japan. The study, which will be eligible for funding from the Japanese government’s Green Innovation Fund, includes hydrogen production, transportation in methylcyclohexane form and conversion from its original gaseous state into a liquid form to enable large volume deliveries.

• Gaining traction. The development of liquid organic hydrogen carrier technology has gained traction due to its chemically stable nature that allows for long-term storage and long-distance transport as well as leveraging existing conventional oil and petrochemicals infrastructure. This evades the need to develop new assets, hence improving its cost competitiveness, scalability and ultimately, financial viability for established energy players. The Japanese government aims to lower the country’s use of fossil fuels while increasing the amount of renewable power in its energy mix as it targets carbon neutrality by 2050. Petronas already produces “low carbon” blue hydrogen as a by-product from its existing facilities and is looking to explore commercial production of green hydrogen in the near future as it also looks to achieve net zero Scope 1 and 2 carbon emissions by 2050.

• Global hydrogen demand to surge 5x by 2050. While green hydrogen projects account for only 30GW (14% of total renewable capacity) of announced 2020 projects, Rystad Energy projects global demand to surge 5x to 330mil tonnes per annum by 2050 (Exhibit 2). However, the current pipeline of projects in installed electrolyser capacity will only produce 30mil tonnes annually vs. demand of 250mil tonnes by 2040, in which these new developments require additional desalination capabilities. The world’s largest crude oil exporter Saudi Arabia plans to invest in a US$5bil green hydrogen facility at the site of its NEOM smart city project. The Helios project will use electricity produced by solar and wind farms with a total capacity of 4GW and initially produce 650 tonnes of hydrogen daily. This will be turned into ammonia at 1.2mil tonnes annually which facilitates overseas shipping and can be converted back into hydrogen for end users.

• What’s black, brown, grey, blue and green? The vast majority of industrial hydrogen is currently produced from natural gas through steam methane reforming processes, referred to as brown, grey or blue hydrogen. Brown hydrogen is produced from brown coal and black hydrogen from black coal via gasification that converts carbon-rich materials into hydrogen and carbon dioxide. Grey hydrogen is also extracted from natural gas using steam reforming with technologies which do not capture resultant emissions. Blue hydrogen is a cleaner version for which the emissions of carbon dioxide are captured, stored or reused. Completely emissions-free green hydrogen is made using electrolysis powered by renewable energy to split water molecules into oxygen and hydrogen.

• Declining hydrogen costs. While blue and grey hydrogen costs the lowest at US$1.50-US$2.50/kg currently, green hydrogen will become more competitive over the next decades as the global average size of electrolysers are expected to increase by over 20x in the next 3 years from the average of 3MW presently. In the absence of government intervention, Rystad Energy is projecting that green hydrogen costs could fall from US$7.40/kg to US$1/kg by 2050. Even so, policy measures could reduce the costs much more rapidly. We note that the US Department of Energy’s Hydrogen Energy Earthshot Initiative is providing funding for clean hydrogen projects to bring the cost of green hydrogen to US$1/kg by 2030 while Norway-listed Nel ASA is working to bring that to US$1.50/kg by 2025.

• Who are the beneficiaries? In our view, Petronas’ subsidiaries such as Petronas Chemicals Group and Petronas Gas have the existing infrastructure and are well positioned to begin investing in natural gas-to-hydrogen production, which could diversify their revenue stream. Support providers such as Dialog Group, which has built liquefied natural gas terminals in Pengerang and provide specialist and plant maintenance services, may also be able to participate in the value chain. While exploration and development operators such as Sapura Energy and Hibiscus Petroleum produce natural gas, we do not see their near-term involvement in this early-stage technology, which is only likely to be borne by Petronas with a much stronger capability, balance sheet and governmental support. Likewise, even though other smaller service providers such as KNM Group may have the expertise in fabricating containment vessels and processing equipment, we are uncertain of their financial capability at this juncture.
• Maintain OVERWEIGHT call. We continue to like Dialog Group for its resilient non-cyclical tank terminal and maintenance based operations and Yinson’s strong earnings growth momentum from the full-year contributions of floating production, storage and offloading (FPSO) vessels Helang, off Sarawak, Abigail-Joseph in Nigeria and Anna Nery in Brazil, plus multiple charter opportunities in Brazil and Africa. Yinson also recently signed an MoU to supply a mid-sized FPSO vessel to Enauta’s Atlanta field in Brazil. We also like Sapura Energy as its completed RM10bil debt restructuring package positions the formidable EPCIC group to secure fresh global orders. Meanwhile, Petronas Gas offers highly compelling dividend yields from its optimal capital structure strategy and resilient earnings base.

Source: AmInvest Research - 23 Sept 2021