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another Xebec hydrogen project and thoughts on energy ?3

21:00 25-Jun-21

There's a lot developing on the macro stage which may affect the market and will probably go into a Monday morning note.  However, Congress reversing Trump's evisceration of common-sense methane rules requiring oil & gas companies to monitor and limit methane leaks in their operations is probably the most important thing we've seen for the globe in the past few years.  It's also good for Golar and Xebec in that it will at least marginally increase domestic natural gas pricing, which closed at $3.50 today and level the playing field.

In a follow up to the last paragraph of this note, the White House is banning imports of solar materials from a Chinese manufacturer in Xinjiang and blocking exports to it and other entities involved in human rights violations there.  I see this as largely toothless, but a warning shot across the bows.  An infrastructure deal with the Senate is also supposedly imminent, but even if Washington enables local interests, ramping domestic solar production should take well over a year and possibly multiple years to gain traction.  Cue the end of yesterday's press briefing, where the question was essentially dodged, and ignores the fact that about 80% of polysilicon used in solar modules currently comes from China.

On the other hand, immediately after I expressed concern about volatility for GLNG, the NY Times comes out with a front page article about the dire state of the pandemic in Brazil.  Both factors spell opportunity for Xebec's core RNG business, not that you'd know it from the stock price.  However, already downtrodden is exactly what I'm looking for in the current market.  As I reminded again in this morning's other note, I'll look for a major market pullback before investing the currently high-flying major beneficiaries of domestic production.  This could setup nicely with ABB's scheduling of a sustainable transportation investor day in December.  The market often trades on news and misinformation without quantifying the big picture, as typified by this summary of recent subscriber Q&A:

Xebec has not shot up as a renewable energy play -- not like RUN, SEDG, or ENPH.  Was at $8/share a while ago as I recall...  Apparently Xebec does not generate its hydrogen by electrolysis.  I wonder why not, and if that will change.  Does not a large-scale hydrogen economy require hydrogen via electrolysis?

My response:

My understanding is that most hydrogen these days is generated via SMR (steam methane reforming) and that electrolysis is very uneconomical and un-green.  That will eventually change when most or all electricity is renewably generated AND dirt cheap, which is what proponents of hydrogen and ammonia are pointing toward.  Right now, though, coal is still the main electricity source, followed by natural gas, and together they still make up far more of the mix. Until that changes one needs to be careful of "green-washing" and consider most hydrogen projects as test pieces in a so-far incomplete puzzle for a truly sustainable economy.

More importantly, methane is, if memory serves, 14 times more powerful of a greenhouse gas than CO2, although its effect is more short-lived.  So, if you're preventing methane from entering the atmosphere in order to produce hydrogen, as Xebec is with dairy and other farms, that's actually carbon-negative and far better than even completely renewably sourced electrolysis.

Recall also that I was warning about a drop back when it was anywhere near $8. You have my thoughts on the prospect for the current stock price in my original note, below... the markets often do a poor job of analysis, but companies & governments sometimes do better.

On 6/23/21 10:12 AM, Esekla wrote:

Xebec has commissioned a hydrogen generation system in Turkey which it will operate under a 15-year Gas-as-a-Service contract.  This should provide an immediate trickle of revenue, and more importantly, serve as a proof point for similar corporate contracts.  That said, although has opened XEBEF up slightly, I don't expect this to be market moving for the stock.

Real momentum in RNG is looking to be a year or more off, as confirmed the dairy project schedule in Clean Energy's JV with BP.  However, it may well be that oil majors being pressured to change their ways will provide a payout sooner.  I'm happy to hold shares while we wait, given the 10% rebate rate and broad push toward sustainability.  Vodafone is the latest to announce 100% green operation in Europe, following through on a promise it made a year ago.  This is easy for fixed operations, the hard part lies elsewhere.  Even new pipelines are designing in electric compression in an effort to reduce emissions, but Aramco selling off part of its pipeline business is a signpost for deeper change.

However, I'm hearing reports of vehicle battery shortages and I still think heavy duty transportation will be powered by renewable or natural gas.  Brent is back over $75 this morning, with WTI less than $2 behind.  There have been numerous projections for $100 oil, but the market seems to increasingly understand that this is due to supply in transition.  It's still questionable to what degree China will participate in that, but other eastern nations with better global relations should certainly be targets for new Golar development as gas demand precedes electricity demand.  GLNG has risen 15% since the last report and still looks like a long-term value, but don't be surprised to see volatility to either in this environment, especially surrounding the July 15th NFE lockup expiration.  New Fortress has increased ownership of its power generation in Jamaica, and although my prediction for a short-lived Fed reaction was on target, substantial concern over high yield debt is still lurking in the market.

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