Hydrogen companies have been attracting the attention of both investors and energy firms seeking a stake in the sector. Share prices have boomed in 2020 while the wider market, and especially oil and gas valuations, has languished, which is working against corporate activity.

“The challenge for M&A is spectacular valuations, so it is hard to find a metric that looks in any way sensible,” says Sean McLoughlin, Emea head of industrials research at bank HSBC.

“In a very thematically driven market, hydrogen ticks an awful lot of boxes. But technology acquisitions in the sector are very expensive because you would have to likely put up an amount well in excess of the market cap in order to convince the shareholders.”

In October, Italian gas transmission company Snam invested $39mn in hydrogen electroylser company ITM Power and agreed a commercial alliance for the development of projects for 2021-25. “Snam has recently put a big chunk of money into ITM Power—had it done the same deal two years ago, it could have taken a much bigger stake in the company,” adds McLoughlin.

Daniel Grosvenor, partner and UK renewables leader at consultancy Deloitte, says we are at the start of a big investment cycle into hydrogen. “Almost everyone is making an announcement about hydrogen but most are about investments, partnerships or looking at projects,” he says. “[But] we are not necessarily seeing the M&A transactions come through yet, and I think we will see that [continue] for a while.”

One reason is that the kind of projects needed to bring substantial economies of scale are not ready, he says. The other challenge is that hydrogen is not yet economically viable as a low-carbon energy source or for many of the myriad possible industrial applications.

As governments firm up their hydrogen strategies as part of their efforts to decarbonise, big energy companies could be incentivised to more actively seek exposure to hydrogen.

“The interesting thing will be how government policy links subsidising its support for hydrogen to the net-zero agenda, whether it is through tax breaks or decommissioning,” says Oliver Holder, partner and UK oil, gas & chemicals ­leader at Deloitte.

“By looking at the strategies in the UK for hydrogen and most of the developed world, the volume is going to come, the projects will arrive and then we will see those transactions happen. As we move to net-zero carbon, we will see many more hydrogen projects come through and investment and M&A opportunities will grow significantly.”

Green priorities

Oil and gas industry capex and M&A switched off overnight in April. But in the past few months, some big North Sea companies with capital available have been reprioritising to a greener agenda, notes Holder.

“If the North Sea operators are seen to be doing things in carbon capture and hydrogen that are positive for the net-zero agenda, that will attract government policies and subsidies,” he says. He also thinks that hydrogen will likely be of interest to private-equity backed businesses as they adopt a green agenda similar to the ­majors.

Deloitte’s Grosvenor believes there are natural opportunities for the majors in blue hydrogen as well as carbon capture and storage more widely. “They could integrate that with some of the plants in oil and gas as well, and use some of their upstream skills. It is such a natural strategic move for the oil and gas companies that I would think they are all going to be interested in it,” he says.

Oil and gas companies are likely to look to own hydrogen infrastructure, according to HSBC’s McLoughlin. “There is an opportunity for refiners to think about how they produce hydrogen, and there is a sustainability story around making blue hydrogen with carbon capture, or offsetting to improve the overall carbon footprint of production. I see that as oil and gas companies’ natural involvement with hydrogen,” he adds.

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Author: Stephanie Baxter