Fortescue Metals’ hydrogen arm is touted to be already worth $US20bn and it is still at least three years away from first revenues. That gives investors some idea of the value upside potential in the juniors that are also pursuing hydrogen ambitions.

The International Renewable Energy Agency (IRENA) estimates that climate urgency and countries’ commitments to net zero will see hydrogen make up to 12% of the global energy mix by 2050.

IRENA also predicts that over 30% of hydrogen could be traded across borders by 2050, a higher share than natural gas today.

Feasibility study results announced by Pilot Energy (ASX:PGY), and recently confirmed by additional work undertaken by  a consortium comprising Pilot, Warrego Energy (ASX:WGO) and energy infrastructure heavyweight APA Group (ASX:APA) provide a good early indication on the profit potential of hydrogen production.

$10.4m market cap Pilot is leveraging its existing oil and gas assets in Western Australia’s Mid West to pursue the development of a three-stage clean energy project comprising carbon capture and storage, hydrogen and ammonia production, and renewables.

Importantly, this strategy of utilising existing assets keeps the capital costs down for Pilot and its partners and could also see hydrogen production and sales not long after Fortescue Future Industries.

Both Pilot’s and the consortium’s studies have confirmed the Mid West as an ideal location to produce blue hydrogen using carbon capture and storage (CCS).

Pilot’s Cliff Head Oil Field is the only late-life offshore reservoir located in the WA Mid-West region with a Commonwealth regulatory pathway to CCS.

Studies show Cliff Head could safely and permanently store up to 16 million tonnes of CO2 storage at an injection rate of up to 1.1 million tonnes each year.

CCS cashflow to fund hydrogen

Now the key here is that this initial stage of the project would have the potential to generate revenue, around $20m each year starting in 2025, to fund the development of stage two – blue hydrogen production.

Utilising the industrial scale 8 Rivers clean hydrogen technology (8RH2), Pilot has estimated it could initially produce 43,000tpa of globally competitive blue hydrogen at $2.13 per kilogram.

Hydrogen sales are anticipated to potentially generate revenue of about $215m each year assuming a sales price of around $5/kg. Pilot has identified an opportunity to integrate renewable energy to produce oxygen (for the 8 Rivers process) and further hydrogen expanding hydrogen production by 18,000 tpa, expanding production capacity to 61,000 tpa .

Then there’s the ammonia advantage. The low-cost blue hydrogen can be used to produce about 240,000tpa of clean ammonia for less than $400 per tonne and $398 per tonne by when the renewables are integrated which increases production capacity to 345,000tpa (consuming the 61,000tpa hydrogen).

Ammonia sales, anticipated from 2027, could  potentially increase revenues to $244m to the coffers. And Pilot already has an interested buyer.

As part of an investment commitment MoU, US-based 8 Rivers Capital is to be granted the option to enter into a long-term ammonia offtake agreement for up to an initial 172,500tpa of zero-carbon ammonia production from Pilot’s Mid West Clean Energy Project.

The company has also received significant interest from other parties in the CCS, hydrogen, and ammonia components of the project.

This has a few analysts watching Pilot closely and anticipating a significant re-rating as it advances its Mid West Clean Energy Project.

Boutique and independent research house Volte Corporate said last month Pilot had “been quietly kicking goals while the hydrogen and renewables sector has been having a breather” and that the emerging clean energy producer was “coming off a very low valuation”.

Meanwhile, back in February, Research as a Service (RaaS) analyst Andrew Williams placed a valuation of $130m, or 26c per share, on Pilot. That’s a 15-fold increase over the current share price.

This article was developed in collaboration with Pilot Energy, a Stockhead advertiser at the time of publishing.  

This article does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.