Air Products and Chemicals, Inc. (APD) Earnings Call Transcript & Summary

Good afternoon, and welcome to the Air Products and Chemicals Investor Conference Call. Today's call is being recorded at the request of Air Products. Please note that this presentation and the comments made on behalf of Air Products are subject to copyright by Air Products and all rights are reserved. Beginning today's call is Mr. Simon Moore, Vice President of Investor Relations. Please go ahead, sir.

Thank you, Cody. Good Afternoon, everyone. This is Simon Moore, Vice President of Investor Relations, Corporate Relations and Sustainability. I am pleased to be joined today by Seifi Ghasemi, our Chairman, President and CEO; Dr. Samir Serhan, our Chief Operating Officer; Melissa Schaeffer, our Chief Financial Officer; and Sean Major, our Executive Vice President, General Counsel and Secretary. Air Products issued a press release this morning announcing our landmark USD 4.5 billion blue hydrogen clean energy complex in Southern Louisiana. We hope you had a chance to watch the event earlier today where Seifi was joined by Louisiana Governor, John Bel Edwards; Louisiana Economic Development Secretary, Don Pierson; Ascension Parish President, Clint Cointment; and Baton Rouge Area Chamber President, Adam Knapp, to announce and support this transformative project. The press release and the slides for this call are available on our website at airproducts.com. This disclosure contains forward-looking statements. Please refer to the forward-looking statement disclosure that can be found in our release and on Slide #2. Thank you for joining us to discuss this very exciting opportunity. After our comments, we will be happy to take your questions. We will be limiting our comments and only taking questions pertaining to this project. We look forward to discussing our quarterly results with you on November 4. Now I'm pleased to turn the call over to Seifi.

Thank you, Simon. And I would like to thank everybody for taking time from your busy schedule to join us on a very short notice. I'd like to start by telling everybody that we have been working on this project for the last 4 years. And therefore, what we are announcing today is not an intent of what we want to do. It is not a memorandum of understanding. It's not a letter of intent. It is a final investment decision that we are moving forward with this $4.5 billion investment to do something unique and create the world's largest permanent CO2 sequestration and produce blue hydrogen. And all of that is absolutely in line with what we have been telling you for the last 4 years because the project is all about gasification of natural gas, carbon capture and hydrogen. So before I get to the details, I would like to take a few seconds and say, why we are so focused on hydrogen. If you be kind enough to go to Page 3 of the slides that we have posted on our website, you'll see that we are taking the position that the energy transition, at the -- we will end up with a situation where most of our energy will be from renewables, solar, wind, hydro, nuclear and bio. But all of those sources of energy, they only produce electricity. You cannot put wind in your car to drive a bus or you cannot put nuclear in a passenger car. Therefore, all of those sources will produce electricity. Then we think about half of the electricity is practical to be used directly for cars, passenger cars, like transport, heating, air conditioning, cooling, cooking, lighting and light industry. But there are applications that cannot use electricity in order to function. And that is very heavy buses, very heavy trucks, heavy trains, ships, airplanes and steelmaking, chemicals and all of that. Those applications, they will need the energy in form of hydrogen which will be produced by using electricity to break down water. So we think that is the future. And therefore, hydrogen, in addition to electricity, will play a significant role as the energy source of the future. And we, as Air Products, being the largest producer of hydrogen today want to be the leader in the production of blue hydrogen and green hydrogen. Now what do I mean by blue hydrogen and green hydrogen and gray hydrogen. That is why I'd like you to please go to Slide #5. When we talk about gray hydrogen, we are talking about what we do today. We take the natural gas or oil or coal or other hydrocarbons, we break it down and convert it to syngas and clean up the syngas and produce hydrogen. And the CO2 in the process that is generated is vented into the atmosphere. That is what we call gray hydrogen. We make a lot of that. We make almost 9,000 tonne a day of that hydrogen. And it is used today. The principal use is obviously cleaning up the fuel that you put in your cars to take the sulfur out and all of the other applications that exist for hydrogen today. But we think the next step is on Page 6, that people are going to say, fine, you can use hydrocarbons to make the hydrogen, but we want the CO2 removed. We want to sequester the CO2 and that is what we call blue hydrogen. Because now you have removed 95% of the global warming gases, which is CO2. So that is our definition of blue hydrogen. And then obviously, when you go to Page 7, when we talk about green hydrogen is where we don't use any hydrocarbons and we use wind, solar, hydro power or nuclear as a source of energy, breakdown water and produce green hydrogen. So that is just to be clear on the definition. So if you go to Page 8, what are we announcing today? What we are announcing today is that we will build, by investing $4.5 billion, the world's largest facility to produce blue hydrogen. And by default, it will be the world's largest facility to capture and permanently sequester CO2 in the world. And as you saw in our press conference today, we obviously think one of the best places to sequester CO2 is in the ground in Louisiana because it has the pore space. And we are very happy to be vouching with the government of State of Louisiana to be given the permission to do that. So if you go to Page 9, the details of the project are pretty straightforward. We will use natural gas and gasify the natural gas based on Air Products technology, our gasification technology which is -- it is gasifying natural gas based, as I said, it's the technology we own. And when we produce syngas, 95% of the CO2 we can capture, and that's about 5 million tons a year, and we do sequester that. And then we will be producing 750 million standard cubic feet a day, approximately 1,850 tons a day of hydrogen. What do we do with the hydrogen? We are going to do -- use the hydrogen 2 ways. One is that we will compress the hydrogen and put it in our existing pipeline, which is, you can see on Page 10. We have a pipeline which is 700-miles long, it goes from Louisiana to Texas City. Currently, it is carrying gray hydrogen. We can inject blue hydrogen at one location and take blue hydrogen at another location. We have more than 50 industrial customers on this pipeline who are very interested in using blue hydrogen. So that will be one source of the sale of the product from the facility. And then, some of the -- another part of the hydrogen, we did take that and turn it into blue ammonia and we will transport that blue ammonia around the world to be converted back to hydrogen energy. That is the project, and as I said on Page 10, the use for it will be our existing customers and the future customers on our existing pipelines and also [ we form it ] into ammonia just like we do in Jazan and send it around the world. On Page 11, I think I have explained that in terms of how the pipeline will work. So as you see on Page 12, in summary, we will invest $4.5 billion to build-own-operate the world's largest blue hydrogen production facility in Louisiana. The facility will capture over 5 million tons per year of CO2, making it the largest carbon capture for sequestration facility in the world. And the expected facility to come onstream in 2026. And just to put things in perspective, as we see on Page 13, the CO2 that we capture, if it is used -- if all of the hydrogen is used for mobility, we will save over 4 million tons a year of CO2. And if it is used, the blue hydrogen is used to fuel power plants, instead of coal, we will save over 8 million tons a year of CO2. A significant impact. So on Page 14, why are we building this facility? As I said at the beginning, we believe that hydrogen will be an energy source of the future. We have been telling you in the last 5 years many, many times, that our growth strategy is based on gasification, CO2 capture and hydrogen. This project is gasification, CO2 capture and hydrogen on the largest scale imaginable. So we are doing what we have always been telling you we are going to do. And in addition, this project is in line with our higher purpose as a company, which is to bring people together to collaborate and innovate -- and come up with innovative solution to the world's most significant energy and environmental sustainability challenges that face us. And one of them obviously, is global warming caused by CO2. So this project is totally in line with our long-term strategy and our higher purpose. So on Page 15, where do we end up by doing this project. As I said before, Air Products today is the leader in producing gray hydrogen. With this project, we will be the leader in blue hydrogen, and as you know, with the project we are doing in NEOM, we are already the leader by far in green hydrogen. That is -- has always been our intention, and I'm very happy to report to you that we are making significant progress on the road ahead. With that, I would be delighted -- all of us would be delighted to answer any questions that you might have.

[Operator Instructions] We'll take our first question from Jeff Zekauskas with JPMorgan.

I was thinking about your $4.5 billion investment. Perhaps you can clarify a couple of things. Is what you're doing -- is -- are you building maybe a 1 million-ton per year ammonia facility in Louisiana and sequestering the carbon dioxide from the ammonia production. A plant like that might cost a couple of billion dollars. And so what I'd like to know is what are you spending the other $2.5 billion on? Is it infrastructure in order to transport the ammonia and turn it into hydrogen and other places as you were doing in NEOM? And then secondly, if you compare this project to the NEOM project, are the returns different as best as you can tell?

No. Jeff, I think you have your numbers, with all due respect, wrong. If we take all of the hydrogen that we are producing on this facility and convert it to ammonia, it will be 3.5 million tons a year of ammonia, not 1 million. That is, I think, there you might be -- so the $4.5 billion does not include any downstream investment for distributing it. Some of that would have already been spent with what we are doing with NEOM. The $4.5 billion is for the production -- for the gasification, production of hydrogen, clean up the hydrogen, the sequestration of the CO2 and the infrastructure, which is related to that. And the decision -- and the ammonia plant that we are going to build. So as I said, to put it in perspective, I'm not suggesting we are taking all of the hydrogen and converting it to ammonia because, as I said, we are going to put quite a bit of that into the pipeline. But if we were going to take all of the hydrogen and convert it to ammonia, it will be 3.5 million ton a year. I hope that clarifies this.

Yes, I appreciate that.

And in terms of the return on the project, we have always told you that we -- for every dollar of investment we expect $0.10 operating income, and this project's returns will be in line with that, if not bad.

We'll take our next question from John McNulty from BMO Capital Markets.

Is there any way to think about at this point how much of the blue hydrogen that you're producing, you expect will be taken off in terms through the pipeline versus how much you're actually thinking you'll actually push through on the blue ammonia front?

John, we obviously know exactly how it will be divided, but we don't want to disclose that, John.

Okay. Fair enough. And then maybe just as a follow-up, is there a way to think about the cost of production for this blue hydrogen versus what you're seeing in other regions? And also what you're -- in terms of the cost of green hydrogen production out of NEOM, like is there a cost curve for kind of -- that you can kind of lay out for us where we can get a little bit better feel on where this one would -- this particular project would fit on that cost curve?

The one thing that I can tell you is that the production of blue hydrogen in the state of Louisiana, considering the polar space and all of that, is one of the most cost-effective places in the world to do that. So actually, I think one can say that probably the best place in the world right now to make blue hydrogen is in Louisiana and also taking advantage of the 45Q program of the United States of America. So I think we are building the plant as the most economically advantageous plant. With respect to comparing this with NEOM, that's -- there is no comparison, John. I mean it's like comparing gold with diamonds. I mean, blue hydrogen is gold, but green hydrogen is diamond. There is no relationship in terms of the value between the two.

We'll move on to our next question from Kevin McCarthy from Vertical Research Partners.

Seifi, how much of the hydrogen to be produced at this new project in Louisiana is under contract today?

Kevin, first of all, good afternoon. And you know what I'm going to say to that. That's something that we obviously are not going to disclose ever. That's -- we didn't do that with NEOM. We don't plan to do it with this one either. That's kind of a little bit of a -- you should let us keep some secrets, Kevin.

Okay. And I guess as a follow-up, Seifi, could you provide a little bit more color on exactly what you're going to be building and sort of the components of the cost. For example, how many SMRs would you plan to build? And what might the size of those be and the pipeline and so forth?

We are not building any SMRs because we are not going to use SMRs. The SMRs, you can only capture 50% of the CO2. This is why in some of the people who have existing facilities who go around and say they are going to make blue hydrogen, they need to be careful about what they are talking about because you cannot capture 100% of the CO2 that comes out of SMR. You can only do probably about 50%. We are not building SMRs. We are building gasification of natural gas based on the technology that we have acquired many years ago, and we have developed further. So these things will be partial oxidation units based on our own technology. And in terms of the number of units, I mean, I really don't want to disclose the details of that. So we will build the partial oxidation units to produce syngas. Then we will have many units that will take the thing and do the shift change and produce the hydrogen, the CO2 will be captured and the pipelines will go into the areas that we have identified and we have made an agreement with the state of Louisiana for sequestration. And then we will have compressor units to compress the hydrogen into our existing pipeline. And then we will have an ammonia plant which will take the rest of the hydrogen, and then we will have an oxygen plant to feed the partial oxidation unit and the air suppression unit is also produced in hydrogen, which will be required for ammonia. So there's significant synergies there. And then obviously, we'll have the dock facility and all of that in order to be able to export ammonia.

We'll now take our next question from Steve Byrne with Bank of America. Steve, we're unable to hear you. Please check your mute function.

Sorry about that. Help me understand the logic here and building a new complex, and I understand with [indiscernible] you can get 95% of the CO2 versus however, many SMRs you have on that pipeline, whether it's a dozen, 2 dozen whatever, you could take the approach of capturing that 50% CO2 off of those units and pursue sequestration without building a new plant? Or do you need additional hydrogen production capacity on that pipeline?

There are 2 reasons. Number one, we have customers who don't want 50% blue hydrogen. They want 95% blue hydrogen, number one. And the second thing is that we can do what you suggested, and we will do what you suggested in the future, because now that we have the pore space, we will capture CO2 from our existing units and have 50% blue hydrogen. Some people would like that. But we had enough -- we have additional capacity required on that pipeline, and we have customers who are insisting because of the incentives that they will get, they want 95% blue hydrogen. And that is why we are building the new facility for those people. Our existing SMRs are totally viable and we will improve them as time goes by and the demand comes along. But you do appreciate that, as we have always said that the customers who are perfectly happy with the gray hydrogen, there will be customers who will be happy with 50% blue hydrogen, there will be people who want 95% CO2 captured blue hydrogen. And there will be customers who want green hydrogen. And we as a company, are going to provide them all of that.

And just had a follow-up with respect to the class 6 injection well. Is that a well that your products will own or is the state going to own that or some consortium? And do you have some invisibility on where in the process this application or proposal exists? I know it can take a significant amount of time to get those class 6 approvals. Perhaps that goes faster with the State of Louisiana being authorized to -- from the EPA to run that program but, who own it and what do you think that injection will be permitted?

That's a very good question. Air Products will own -- that Air Products will own everything. We will own the whole system. And one of the reasons we -- assures that State of Louisiana is that we have done -- as I said, we have been working on this thing for 4 years. We have done significant consultation and geological study and all of that to convince ourselves that the pore space not only is there, but it is accessible and it will pass the requirements for a class-6 well. We will own that and obviously the fact that the State of Louisiana will be in charge of that and the Governor very much said that today, that we hope that the process will not take 5 or 6 years, that it usually does, but may be less than 2 years. So we are very optimistic about that, but we have done a lot of homework along those lines.

We will take our next question from Bob Koort from Goldman Sachs.

Bob, how are you doing?

I'm doing well, but a little challenged. You guys aren't going to provide sufficient detail for us to really analyze the returns here...

Why not, Bob. What is missing? What can I help you with?

Well, the product split would have helped, but may be you could tell me on your blue hydrogen, what kind of pricing premium you would anticipate getting when you start selling that in 4.5 years?

Well what you're asking me is like asking Saudi Aramco that look the cost of taking oil out of the ground is $3.5, for that you're going to sell it for? You're going to sell it for what the market bears, right? I mean they take it off the ground at $3.5 and they sell it for $80 today, sometimes $200. I mean, at the end of the day we are a commercial company and we have a product, then it depends on what the demand is for the product. We will charge an appropriate amount.

But I guess to assert that you're going to get your 10% EBIT per dollar of capital you have to assume something there to cover the incremental and excess cost of turning it into blue hydrogen or ammonia or what not so. May be I will skip that one. I guess the other question I had for you is when your customers are buying that blue hydrogen, particularly off the pipeline, how do they sort of certify the integrity of what they're buying is blue versus gray, since it's indistinguishable when it comes into their plant from pipeline?

That's very straightforward. It's no different than electricity, that when people buy green electricity, it goes -- I mean the hydrogen molecules are hydrogen molecules. Blue hydrogen molecule is the same as green hydrogen molecule, the same as gray hydrogen molecule. So what we do is that we -- we do that today, Bob, this is not something new that we can put the product into the pipeline, we document that and we take the product off the pipeline at another location, and we can certify it, and that's a procedure that we are very familiar with.

Is there some reason you mentioned blue ammonia for exports? Do you think there won't be a blue ammonia market in the U.S. by 2026?

There might be. There might be. I mean, we can take the blue ammonia that we produce and transport the blue ammonia to California and crack it in California and send it as fuel. It depends on the market. I mean, whether the market wants blue hydrogen or wants green hydrogen, we can do the reverse tool. We can bring their blue ammonia from NEOM -- I mean the green ammonia from NEOM and crack it in the Gulf Coast, and put green ammonia into our pipeline and sell green ammonia along the highways. I mean, people don't fully appreciate what we have. We have an 800 -- 700-mile pipeline that we can put green or blue or gray ammonia in it and take out green, blue, green, anywhere in that pipeline, that gives us significant flexibility and significant ability to sell this stuff.

We move on to our next question from Duffy Fischer with Barclays.

So maybe I missed it, but are you not telling us the size of the ammonia plant? Or what is the size of the ammonia plant that you're building?

It can be anywhere from 0 to 3.5 million tons, right, but I'm not going to disclose the exact size.

So I didn't know it. That's what I didn't understand was whether you weren't going to tell us or not. Okay. So that's fine.

Yes, as I said, let us have some secrets here.

No, fair enough. Okay. And then do you anticipate once it's up and running, obviously, you know what the excess capacity is in your pipeline today, we don't. Will some of those 25 plants that are -- the SMRs on the pipeline today, will they need to be shut down on the back end of this when it's up and running fully?

No, we expect the demand to be such that we can absorb what we are going to put into the pipeline. Honestly, one of the beauties of what we are trying -- we are doing here is that when you have the flexibility to put the hydrogen either in the pipeline or into the ammonia plant, you can adjust based on demand, right?

Fair enough. And then just the last one. Is that pipeline easily expandable? Or is that pretty much as big as it's going to get at this point with the 1.9 you quoted there?

The pipeline has a certain diameter and a certain hydraulic capacity. That hydraulic capacity -- Dr. Serhan is here, I think I can confirm, it's about 1.9 billion cubic feet. That is the capacity of the pipeline.

And we'll move on to our next question from John Roberts with UBS.

Congratulations again. Both the Alberta project and this project are above your targeted economics, but could you compare and contrast them as one better than the other? They're different. And I think we have a more generous carbon credit structure in Alberta, but you've got an ATR there. Here you have an ammonia plant and a partial oxidation plant that's there. Should we think of them being equivalent? Or is there a difference?

No, I think the economics will be approximately the same. I think that we don't expect any significant difference in the economics between the 2 projects.

Okay. And will the price of blue hydrogen have a natural gas cost pass-through like gray hydrogen?

Again, you're getting into the details of our negotiation with the customers, and I don't really like to get there. But you would imagine that we would be looking for something like that.

[Operator Instructions] We'll hear next from Chris Parkinson with Mizuho.

The first question I had just as a corollary of Bob's question. How are you accounting for the incremental volume going through the pipeline in your return calculation, which is naturally above a 10% return?

Chris, I'm not sure I fully understood your question. You're coming along a little bit broken up.

I was just asking, in terms of how much of the return is levered by the fact that you're utilizing your own pipeline, which is already built in terms of your margin profile?

That's a very good question because our pipeline is of significant value because it's not only the cost of building the pipeline, but the huge thing is right away if somebody was going to build a pipeline from Louisiana to Texas today and -- right away, that's the big challenge. So there is a significant value to that pipeline, and that does give us a competitive advantage.

All right. That's helpful. And then the second aspect of it is, and you've alluded to this on the past few conference calls, but is there any potential play on renewable diesel on this front just given the hydrogen demand from that as well?

Yes, there is.

Is there any additional color?

Well, if I get into additional color, I'd be violating about 3 nondisclosure agreements that I have with customers. So I'd like to leave it at that. You know that renewable diesel like the project that [indiscernible] doing in Louisiana or the projects that other people are doing, they all require hydrogen and the hydrogen intensity is high. And obviously, if they get their hands on blue hydrogen, they get much more carbon credits. So that's obviously a positive for us, for sure.

Fair enough. I'll work on connecting the dots.

Thank you. You're very good at that. I'm sure you'll get there, Chris.

We'll take our final question from Laurence Alexander with Jefferies.

Very interesting announcement. I guess a couple of things, can you help us with the timing of the CapEx and the scope of government support outside the 45Q? And secondly, just on the comment around the degree of carbon capture and why this is better than the SMR approach? I thought the Danbury project, the Port Arthur project was 75% or 80% capture on the CO2. Is there a reason that technology can't scale up to -- for the scope of this kind of project?

Well, thank you for your question. Number one, Danbury project is only 48% CO2 capture because it is coming off of an SMR. So it is not 70% or 80%. And then with respect to the rest of the question.

I think timing of the capital.

The timing of the capital, I mean it's the [ standard care ] for a project like that, that -- we have already spent money on this project. I told you, we have been working on it for 4 years. If we start this year, in 2021 and escalate '22, '23, '24 and then kind of flatten out in the last 2 years. So it will be spread out during the next 4 years. A little bit beginning -- a small amount in '21, bigger '22, '23 and '24 will be most of it, and then it will flatten out. So that would be kind of the [ standard care ] for construction project of this nature.

And that does conclude today's question-and-answer session. I would like to turn the conference back over to Mr. Ghasemi for any additional or closing remarks.

Thank you very much. With that, I would like to thank everybody for being on our call. We are proud to be the leader in gray, blue and hydrogen. This project joins our NEOM and Canada project to further advance Air Products sustainability-driven growth strategy. Thank you for taking time from your busy schedule to listen to our presentation, and have a very wonderful day. Thanks again.

Thank you. And that does conclude today's conference. We do thank you all for your participation. You may now disconnect.