L'Air Liquide S.A. (AI) Earnings Call Transcript & Summary

Good afternoon, everyone. Aude Rodriguez speaking, Head of Investor Relations. Thank you very much for attending this quick call despite a very short notice. Francois Jackow will make a short presentation of the project, then Adam Peters, [ Group ] CEO of Air Liquide North America from the U.S. and Jerome Pelletan, CFO, will join for the Q&A session. Let me now hand you over to Francois.

Thank you very much Aude and good day, good afternoon to all of you and thank you very much for attending this conference call despite indeed the very short notice. It is quite unusual to make such a call, but we have some very good news to share. You have probably seen the announcements about Air Liquide's success in partnering with ExxonMobil in a game-changing project to decarbonize industry. So I will briefly highlight a few points of this project in the following slides before opening the call to Q&A with Adam Peters, who is in the U.S. today. With this project, the group is supporting ExxonMobil low carbon hydrogen project, leveraging Air Liquide's strength. Subject to final FID, ExxonMobil is planning to build the largest low carbon hydrogen platform in the world. So just to detail a little bit, they plan to invest 2 ATR, autothermal reformers and related carbon capture units to produce 1 billion cubic feet of low carbon hydrogen daily. This hydrogen will be used to replace fuel and to feed the ethylene plant and the refinery. Low carbon hydrogen will be also available to produce blue ammonia and for exports through the Air Liquide pipeline system to customers. This flagship project is a great illustration on how hydrogen could enable decarbonization of the industry. Oxygen will be needed to produce hydrogen in the ATR. Given the size of hydrogen production, it represents the largest oxygen production platform in the Americas with the added benefit of being low carbon oxygen. This investment of $850 million marks potentially the largest industrial CapEx in the history of Air Liquide. Let me explain it a little bit in more details. So Air Liquide plans to build, own and operate 4 large modular air separation units, LMAs, through a long-term contract, which has been signed with ExxonMobil to supply low-carbon oxygen and nitrogen to support ExxonMobil's low carbon hydrogen project in Baytown, Texas. We will leverage, of course, the scale of this oxygen platform to provide significant volumes of argon and rare gases such as krypton and xenon for Air Liquide industrial merchant customers. I am now on Slide 3. And I really want to reinforce the fact that it's truly a game-changing project with a top-tier global customer first low-carbon hydrogen project. It is opening a new era on the U.S. Gulf Coast and globally. Through this partnership, we will enable ExxonMobil ambitious decarbonization goals. As the world's largest low carbon hydrogen project ExxonMobil's refining and petrochemical facilities will capture up to 7 million tonnes of CO2 per year and permanently store it underground. ExxonMobil already has existing infrastructures to transport and store the CO2. Building on the existing Air Liquide's #1 leadership position in oxygen production in the U.S. Gulf Coast, this project will bring an additional 50% capacity while reducing by 2/3 the overall CO2 footprint per tonne of oxygen compared to the traditional methods of production in this location. Additionally, this will become another and the largest and the largest source of argon in North America, as well as a strategic source of rare gases, such as krypton and xenon. Air Liquide will also get access to significant volumes of low carbon hydrogen, which will service customers through our extensive pipeline and storage facilities. Now let's move to Slide 4. With this project, we seize all opportunities to leverage on Air Liquide's strengths. Let me outline some of the key success factors. First, our innovative technology, offering flexible, large modular air separation units, the largest in the industry. They are standardized, pre-manufactured and assembled on-site, thus reducing on-site construction needs and local labor resources. And of course, also, they allow to provide a better control on CapEx and lead time. These highly efficiency units consume 25% less electricity than comparable production capacity. The efficiency of production, coupled with sourcing of low-carbon electricity will reduce by 2/3 the overall CO2 footprint per tonne of oxygen. I do believe this is a very good illustration of Air Liquide's innovation capabilities and sustainability commitment. Second, with Airgas, we will also leverage the #1 position of our industrial merchant distribution network and marketing capabilities to sell the significant volumes of argon and rare gases. Third, this partnership provides Air Liquide access to large volumes of low-carbon hydrogen. We will sell it through our hydrogen pipeline network and significant storage capacities. We will utilize existing capacity in our pipeline network, which has been invested in and in anticipation of such a development. Fourth, our long-term relationship with ExxonMobil was key, of course, to conclude this partnership on such a strategic game-changing project. I'd like to remind that this is a standard core business project. The supply of oxygen and nitrogen is through a long-term large industry contract, including monthly fees and take-or-pay clauses and meeting our return on investment criteria. This shows how we want to be leading the energy transition, but in a structured, disciplined, innovative and profitable way. To conclude, I am on Slide 5. Being selected for this project is, of course, a tremendous success and a key milestone for the group and potentially the largest industrial CapEx in the history of Air Liquide. We are leading the way with regards to decarbonization on the U.S. Gulf Coast. This is the first large energy transition project of a series to materialize in the next few years. Together with energy transition projects, making solid progress in Europe, this is an illustration of Air Liquide's leadership in the energy transition. These new investments will contribute to an acceleration of the growth of the group after 2025, the next strategic period after our current advanced plan. Again, a great news for the future of Air Liquide. I will stop here. Thank you very much for your attention and I would like now with Adam Peters to open the call to Q&A.

[Operator Instructions] The first question comes from the line of Alex Stewart from Barclays.

Congratulations on signing the project. I have actually quite a few questions, but I'll try and ask the most important ones first. To what extent is this project dependent on the 45V tax credits related to the Inflation Reduction Act? If they were withdrawn, would the deal still progress as far as you're aware? The second one is about your strategy. Historically, Air Liquide has taken a much more diversified approach to new projects. And as you mentioned on the call, this is one of the largest or the largest project you've announced. Why do you feel that this is the right time to depart from that strategy and to commit close to $1 billion into one site, in one location? And related to that, perhaps if you could confirm that this project was in your backlog. In other words, it will drop out of your backlog -- sorry, in new opportunities, and will drop out of that now that you've signed it. And is it within the EUR 16 billion of aggregate contract signings that you targeted in 2022? I think I'll leave it there and give other people an opportunity to ask questions, but would be interested to hear the answers to those.

Right. Thank you very much. Thank you for your questions. So I will ask Adam to talk about, I mean, the context in the U.S., taking into account that, as I mentioned, this project is subject to FID by the customer and we are not in a position to speak for the customer. But Adam can provide some background and I will come back to the question about the strategy and the portfolio. Adam, please.

Yes. Thank you very much and good afternoon. Alex, thanks for your questions. So we've been involved in this project with Exxon for over 2 years in the development phase. And obviously, the question around 45V is something that has come up consistently over time. This is something that, obviously, Exxon has been working very, very closely with the U.S. government and obviously, we've been very much attuned to that. Exxon is moving forward in a big way with the ongoing development of this project. And as Francois said, I don't think we can comment necessarily on how they will ultimately take an FID decision based on the outcome of that. But the IRA regulations are obviously important.

And to confirm also what we said, I mean, today we have a firm signed contract with our customer and we are, as the ExxonMobil, moving full speed on the engineering for this project. Regarding your question, Alex, on the strategy and the size of the project, this project is fully aligned with our strategy and what we outlined in advance. As a matter of fact, that was part of the portfolio of project that we have identified in the past couple of years. Of course, I mean, looking at the probability as the project developed being higher and higher. So this is well in line and we stick to our strategy to have extremely, I would say, solid projects, starting with strong commitment from a customer or customers and this is the case. We have been waiting to firm up everything with our customer to be in a position to announce this project and this is the case. And as I mentioned, the fundamental business model and commercial setting with the customer is the -- one of the large industry with long-term contract with take or pays and with the proper indexation. So I think that's very much in line. The difference probably with other projects is the fact that given the size of the commitment of the customer and the size of the project, it's a game-changing project. The requirement for our scope, the oxygen, nitrogen especially, is quite significant. So we are completely focused on our core business, our core model with something which is large. It's not unusual for us to consider this kind of equipment as a matter of fact. And as I mentioned, the main investment for us will be 4 air separation units, which are our modular large plant, the largest of the industry. Those are already referenced in different parts of the world, including on the U.S. Gulf Coast. So it's a way for us to manage the risk in term of CapEx. But again, the size is due to the size of the commitment of the customer, fully in line with our strategy. Being of course, with a prime customer is something which is very important for us. We have an extremely solid and serious customer, which is extremely committed to this project, which is going to be probably a catalyst for the decarbonization on the U.S. Gulf Coast and probably also globally. Finally, as I mentioned, I do confirm that this project was in our portfolio of opportunities. And part of this project we will -- will be included in the backlog, meaning the project, which we consider in the backlog as we reported to. We will take probably a stage approach as we go and we'll probably put between EUR 100 million and EUR 150 million in the backlog in the next report.

If I could sneak in one final question. You obviously won the oxygen contract for the ATRs, which needed dedicated O2 feed. But has ExxonMobil found a partner to build the ATRs and to run the units? Is that something that you could also win? Or is it -- or has it already been allocated?

Heard your question -- the sound was quite low, but I think your question relates to the ATR. So in this project, ExxonMobil has decided to build by themselves the ATR, to invest, to own and to operate. That's their choice. We have, as you know, technologies for the ATR, but in this case, the customer preferred to have this as part of their scope. Next question, please.

And the next question comes from the line of Alex Jones from Bank of America.

Two, if I may. One, sort of following up on the prior discussion. Could you help us understand a bit more why you chose to sort of announce this project now rather than after Exxon had taken FIDs? Is there a specific reason for that? And then the second question about the sort of hydrogen sales opportunity. Could you help us understand whether you've signed any offtake contracts from Exxon that bind you into offtaking hydrogen from this project? And if you have, have you been able to sign yet any contracts on the other side to sell that hydrogen to your customers?

Thank you very much, Alex, for your question. I think clearly the reason why we have announced this project today is based on the own timing of the customer. So they have their own reason to announce the project today. As mentioned by Adam, we have been working on this project for some time. We have done already quite a bit of work in term of feasibility and engineering. And we believe that was the right time to announce the project because of the visibility that we have on the final decision and also because of the signal being sent to the market and also to the customer. I think many people are waiting for, I would say, capabilities to decarbonize the U.S. Gulf Coast operation. It's a little bit the chicken and the egg. They are waiting for low carbon hydrogen being available in large quantity at an affordable price and this is exactly what this project is delivering. So the signal to the market, again, as a catalyst to really trigger more decarbonization on the Gulf Coast, we thought that was a very good thing to do right now. Regarding the hydrogen sales opportunity, I cannot disclose all the details, which are covered through commercial and confidential information. This being said, it's clearly for Air Liquide a source of low-carbon hydrogen at, I would say, extremely competitive cost, given the fact that there are large economies of scales in this facility and it's a very efficient facility. So for us, it's a way to develop our business, taking into account that we have our existing pipeline system. We have existing customer that we can switch to low carbon hydrogen and it's also a way to address new needs, as I mentioned, as customer will see that there will be low carbon hydrogen available in the U.S. Gulf Coast.

Great. Can I just follow up on that briefly? I guess, maybe not talking specifically about this project, but more strategically, given your excitement about the long-term sort of decarbonized hydrogen opportunity, you would be happy to sort of lock in or procure in advance cost competitive supply in order to hopefully then supply that market opportunity in the long term? Or would you want to have any such agreements back to back with customer contracts, if that makes sense?

Absolutely. This has been our strategy and still is our strategy to make sure that we advance in parallel between the customer requirement and the supply. In this case, we've got enough optionalities to do so if we like. And again, I cannot disclose all the agreements that we have today, including with end customers. So that's exactly, I mean, how we are going to develop this low carbon hydrogen business, taking into account also that there is a growing demand for low carbon ammonia. And there, that's part of the plan of ExxonMobil to be in a position to use some of the hydrogen to make a large quantity of so-called blue ammonia. Thank you very much. Next question, please.

And the next question comes from the line of Jean-Luc Romain from CIC.

Given your usual capital intensity, should we expect this large investment to generate about $200 million to $250 million of turnover?

Jean-Luc, I think you know our business model quite well. Indeed, I mean, the capital intensity is in the higher range of what we typically do, but your estimate is probably right. Next question, please.

And the next question comes from the line of Sebastian Bray from Berenberg.

My first one is on the CapEx figure that is given, the EUR 850 million or so. Is that gross of all subsidies? And is there anything available upfront that may be the subject of negotiations currently that could cut the figure? I'll pause there and then I'll ask the rest of them.

All right. Sebastian, thank you very much. I will ask Adam to comment on the CapEx and potential subsidies. Adam?

Yes. So thanks for the question. There are no subsidies attached to this right here. So the CapEx is pretty pure. It basically is covering all of what we need to do from our standpoint to build the ASUs, as Francois mentioned, and all the support equipment associated with that. And so it's a gross amount, but not expected to have a major CapEx subsidy associated with it.

That's helpful. And if I might follow up, if this is a project that follows the rule of thumb, 3 to 1 for CapEx to sales for the wider industry? I was just trying to back out some of what might be an oxygen price associated with this. And to be open, it looks rather low compared to other projects of this kind. Is then by rather low, I'm thinking 30%, 40%, 50% lower than what we may have seen in the past? Is the estimate wrong? Or is it just because there's so much sold that Air Liquide can hit its ROCE criteria? Is there quite a big bulk discount here? And to what extent can Air Liquide still not only meet, but also exceed its ROCE target on the project?

Thank you, Sebastian. I will not comment on the price of oxygen in this case, because keep in mind, this is a project where there's different products. We talk a lot about, of course, the oxygen and the nitrogen going to ExxonMobil's operation. Part of it is also the hydrogen. And as I mentioned in the introduction, we see also, I mean, significant synergies. Probably not all of them have been included yet in the merchant business being very significant, the largest argon source, but also a strategic source of krypton and xenon. So we look at the profitability of the deal as an Air Liquide investment with upside, as I mentioned, on the merchant. And all in all, I can tell you that it meets the criteria on return on the capital employed that we set for our projects. So I think this is well in line. Maybe one of the difference compared to other projects is, given the magnitude of the investment, the project will take probably close to 4 years to be completed in terms of execution, compared to traditional projects, which are more in the range of 2 to 3 years for the construction phase. That's the main difference.

That's helpful. And can I ask, what is the nitrogen getting used for in clean hydrogen? Because I can understand that the oxygen is there to make sure the CO2 is nice and pure, so it can go beneath the ground. The other more minor gases or lower volume gases like argon can be sold on the merchant market and there's demand for them in electronics and so on. But why does one need bulk nitrogen in this type of quantity to make clean hydrogen?

So I will ask Adam to quickly answer this because I can see that we have a list of question also. So Adam, go ahead.

Very quickly, it's used in the ammonia loop for the creation of ammonia.

That's helpful. [ We have ] nitrogen requirement also for the rest of the refinery and petrochemical site. [indiscernible] Sebastian. Next question, please.

And the next question comes from the line of Peter Clark from Bernstein.

Yes, I've got 3 quick questions. I mean, you always said you were close to signing some big U.S. signatures in the green energy space. I'm assuming, judging by the scale of this, this is definitely one of the bigger ones that you have in the foreseeable future. And then on the Baytown relationship with ExxonMobil, all the majors are in Baytown, but you're sort of indicating that you have this strong relationship with Exxon there. So I just want to clarify how competitive it was to get this actual deal. And then thirdly, on the merchant business, which you're aiming to leverage a lot to get the returns et cetera, just in terms of that, there's going to be quite a lot of quantity of, particularly argon, by the sounds of it coming off this for the merchant market. Just wondering about the risks of some disruption in the market with that amount of argon coming off. Those are the few questions.

Thank you very much, Peter, and good evening to you. I will answer the first 2 questions, and I will ask Adam to speak about the merchant business and argon. So, regarding, I mean, what we see in our portfolio, we have several other projects in North America regarding the energy transition. You mentioned green hydrogen. It could be blue hydrogen, of course, let's not be restrictive. This one is a very significant one, but we have a few others which are also significant projects. So more to come, probably. We need to be a little bit patient. But we have, as we mentioned before, a very strong portfolio of projects. This is true for the U.S., by the way, but also in Europe, as you have seen, and as you will see, and you will continue to see. Regarding the relationship with Exxon, I cannot comment, of course, regarding the quality of the relationship of our competitors. I can tell you and assure you that indeed that was extremely competitive deal. And what I outlined as being the key success factor were really absolutely key for us to win over fierce competition on this deal. Adam, do you want to comment on the argon and the quantity of argon and how we are going to manage that?

Yes, absolutely. So, today we're in a very good position, I would say, along the U.S. for argon production. And as Francois mentioned, we have a very good distribution channel that's very comprehensive with our Airgas subsidiary. The argon production that we will produce with these 4 LMAs is significant. It basically will -- basically add around 25% capacity increase versus where we are today in terms of argon production in the U.S. We've taken a very conservative, measured approach, I would say, in the placement of that argon in the market and over what period of time that we need to make that happen. So I would say that we're looking at this prudently to make sure that we follow the normal demand increase in the market and address that with this capacity in that same time frame.

I think what is quite interesting is that this facility will benefit, clearly from the economy of scale of the production and the very efficient production. By the way, that would be probably, I mean, the first and largest low carbon argon production in North America. So it's up to us to find the full value for this. But that could, in fact, turn to be a clear advantage due to the low carbon content of the argon production there. So thank you very much. Next question, and I think we are reaching the end. I believe this is the last question. Next question, please.

Yes. The next question comes from the line of Jonathan Chung from Morgan Stanley.

I've got 2 questions, please. The first one is whether there is any premium in this project to Air Liquide versus a more traditional air separation unit? And the second question is whether you'll be involved in selling the hydrogen.

Adam, do you want to speak about the first question?

Absolutely. So let's see, in terms of premium versus a traditional ASU, I would say that what we have here is we've leveraged our infrastructure well. We've leveraged what we have in terms of Gulf Coast supply well. And so I would say that when we combine everything together, there's a nice premium associated with that right there. Francois, I don't know if you want me to talk to the hydrogen piece or if that's something you'd like to take.

Go ahead. You can comment on the hydrogen, of course.

Sure. So, without going into too many details around the contractual arrangements that we have with ExxonMobil, obviously we've positioned ourselves well in terms of securing a low carbon hydrogen source going forward, which we see as important for our business. We've also made sure that we did not obligate ourselves in a manner that would put us in a position of risk, if you will, given the fact that this market is still developing. So I'd say that our teams have done a good job to manage the risk and opportunity associated with this, while giving us a favorable price on hydrogen going forward in terms of what we can buy from this world-scale production of hydrogen. So I think it really leverages well what we have in place along the Gulf Coast for hydrogen. As Francois mentioned, we've got a lot of things that we can provide to the market in terms of value differentiation. We have a large cavern to provide storage capability. And we also have multiple hydrogen sources to ensure that we have good reliability of supply for our customer base. So we feel very good in terms of how this will play out in the coming years.

Yes, thank you very much, Adam. So I think clearly, this is giving us a competitive advantage in term of access to low-carbon hydrogen and again, to address the needs of existing customers, but also new customers. As you know, we have more than 500 kilometers of hydrogen pipeline along the Texas Gulf Coast, and we can reach to many existing, but also new locations. So, again, that's why I mentioned this as being a catalyst and an enabler to decarbonize existing facilities, but also allow, I mean, the installation of new low-carbon production sites on the U.S. Gulf Coast. We will finish here. Again, thank you very much for your attention. Thank you very much for taking the time with a short notice. I hope that now with this discussion, you appreciate even more this extremely positive news for Air Liquide, but also for the industry. I am looking forward to talking to you again now for the H1 publication on July 26. Bye now and thank you very much. Please take care.