Pure Hydrogen’s focus on hydrogen and its belief that fuel cell powered vehicles are a better option than battery electric vehicles for heavy, long-range vehicles is a recipe for growth.

While the company retains three gas assets that it inherited from the merger of Real Energy and Strata-X Energy, its focus is on demonstrating that the hydrogen ecosystem can work and save companies money.

As such, it is looking to build plants to make hydrogen with a medium-term goal of producing at below $4 per kilogram, the point at which hydrogen becomes highly cost effective as a transport fuel in Australia when compared to petrol and diesel.

Pure Hydrogen (ASX:PH2) is also planning to build ventures in hydrogen distribution, in hydrogen refuelling stations and hydrogen fuel cell vehicles.

Additionally, the company wants to be a first mover in providing the infrastructure required to support hydrogen fuel cell trucks, buses and other large vehicles while taking a stake in the hydrogen vehicle space through its investment in H2X Global.

Shares in Pure Hydrogen are currently trading at 45.3c but Pitt Street Research has revised its valuation range for the company to 56c in the base case and up to 81c in the bull case using a sum-of-the-parts approach.

“We think the company’s achievements on the hydrogen front in 2021 can justify a market capitalisation in the higher end of the range,” the research firm added.


Emerald hydrogen player

While the company’s original focus had been on the green hydrogen produced using renewable energy, and turquoise hydrogen that is produced from natural gas using methane pyrolysis, it is becoming increasingly involved in “emerald hydrogen” through its collaboration with Singapore’s CAC-H2.

Emerald hydrogen involves the production of the gas from waste that would otherwise go to landfills.

Under their agreement, CAC-H2 will leverage its specialised technology that allows the conversion of waste wood biomass into hydrogen to fund, build and operate the plants while Pure Hydrogen will fund the associated storage and load-out facilities in these plants.

The company will also be responsible for downhole hydrogen distribution that CAC-H2 is not keen to be involved with.

Pitt Street believes the CAC-H2 agreement has the potential to be “capital light” with Pure Hydrogen buying the gas wholesale and selling it at the appropriate mark-up.

The typical hydrogen supply contract is expected to be for about six years with Pure noting that CAC-H2’s plants will be supplying at least 1,000kg of hydrogen a day with the Brisbane plant expected to start at 5,000kg per day of hydrogen with a gradual increase to 30,000kg per day expected.

The research firm also noted that the lack of an established hydrogen market meant that Pure Hydrogen and its collaborators have a great opportunity to make hydrogen available and set the initial price.

Pure Hydrogen believes it can benefit as hydrogen becomes commonplace with transport companies in Australia as the expected drop in prices would in turn encourage adoption of the technology and increase demand for the gas.


Valuation breakdown

Pitt Street derived a value of between $78m to $128m for Pure Hydrogen’s natural gas business and between $103m to $140m for its hydrogen business.

The value from the former comes from a comparison with peer companies such as Galilee Energy and Blue Energy as they are still in the development phase.

It noted that the company’s progress towards converting its best estimate (2C) contingent resource into proved and probable reserves as well as the option to convert the gas into hydrogen supported its re-rate towards the peer average enterprise value/resources+reserves value of 17c per gigajoule.

Likewise, its hydrogen business has been assessed by comparisons with comparable companies such as Hazer Group.

The expected low capital cost is likely to allow Pure Hydrogen to generate strong net present values – a measure of profitability – from its emerald hydrogen plants.

This article was developed in collaboration with Pure Hydrogen, 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.