Sanjiv Lamba, CEO of industrial gas producer Linde, serves both environmentalists and investors. Neither group has cause to complain.
By William Baldwin, Senior Contributor
Linde PLC puts the heavy in heavy industry. It furnishes industrial gases to the world’s smokestacks: fertilizer plants, steel mills, glassworks, oil refineries. It spews 38 million tons a year of carbon dioxide into the atmosphere.
This is a repentant sinner. Sanjiv Lamba, who has been running the firm from a Danbury, Connecticut, office for the past two years, reels off the many things Linde is doing to save the environment. He says it’s going to get its own operations down to net zero carbon (eventually), and in the meantime, for every pound of greenhouse gas it emits, its products and its know-how enable customers to avoid more than two pounds of their own emissions. He talks about the $2 billion Linde will put into a Beaumont, Texas, hydrogen plant that will stick the resulting CO2 in the ground.
“Hydrogen energy is our future, and Linde is leading the way,” declares the company’s website. When trucks, buses and ships need hydrogen fuel, Linde will be equipped. It knows how to handle gas under a pressure of 10,000 pounds per square inch.
And when is the world turning green? Well, someday. Not too fast. The words “a question of time” come up when Lamba talks. And the words “sanity check.” He’s not going to let a climate diversion cause Linde to miss an earnings estimate.
The green energy revolution is having a rough patch. In the past three years the Invesco Wilder Hill Clean Energy fund has lost 72% of its investors’ money. Tesla’s unit sales have fallen. The big windmill makers (Vestas and spinoffs from GE and Siemens) are either barely profitable or losing money. Wall Street is littered with red-ink hydrogen companies.
In this environment, Linde is something of a freak. It netted $6.2 billion last year on revenue of $33 billion. Whatever Lamba’s admiration for Greta Thunberg, it is greater still for his operaÂting margin (27.6% if you exclude merger-related accounting charges).
Lamba, 59, came up through the financial side, starting in his native India. His rapid-fire conversation is thick with numbers, either of profit margins or chemical formulas. Consider the numbers he attaches to the production of hydrogen, for which the International Energy Agency exuberantly envisions, for 2050, a 420-fold increase in low-emission sources.
There are two good ways to get your hands on this abundant element. One is to send an electric current through water, a method beloved of environmental dreamers if the electricity comes from a solar panel or wind turbine. The other method is to cook methane, usually in the presence of steam. That’s the technique that Linde uses for most of its hydrogen production, releasing, in this chemical reaction, ten pounds of carbon dioxide for every pound of hydrogen.
Hydrogen can be made from methane at a cost not much higher than $1 a kilogram. Double that if the waste carbon dioxide is to be stuffed underground, which is what Linde aims to do in Beaumont, beginning at the end of next year. The carbon sequestration will entitle Linde to a federal subsidy worth roughly 80 cents per kilo, bringing the net cost of producing hydrogen the nice way to $1.10 or so. That’s a bit more than the cost of dirty hydrogen, but the good hydrogen should command a premium from industrial customers who want to advertise their own good deeds. If all goes well, the Beaumont hydrogen will be as profitable for Linde as the dirty hydrogen it now makes.
The numbers don’t look so good for hydrogen made from renewable electricity. That stuff costs $5 to $8 a kilo. A federal credit of $3 isn’t enough to make it economic, at least not now. The killer is the capital outlay.
Here’s another sanity check. Electrolyzers take up five times the acreage that would be needed by a hydrogen plant that starts with methane and sequesters the carbon, Lamba says. And if your electrolyzers are powered by solar panels, make that 500 times the acreage.
Linde pays due worship to the renewable gods. It is investing in electrolyzers, including high-tech ones that use proton exchange membranes to make the process more efficient. When will these things be cost-competitive? Perhaps in five to seven years, Lamba answers. This may be simply a diplomatic way of saying, “Don’t hold your breath.”
Important detail in the Elysian fields of fuel made from water: getting the juice. Linde is not above a little puffery here, describing the output of an electrolyzer it has under construction near Niagara Falls as “green hydrogen,” even though the hydroelectricity to fuel it is being diverted from other uses.
Given the strains on the U.S. electric grid, a big shift into electrolyzing might just force the construction of yet more power plants fueled by natuÂral gas, defeating the purpose. Lamba injects some realism here: “We’re going to be competing with AI data centers for electricity.”
HOW TO PLAY IT
By William Baldwin
Linde is an ancient industrial outfit that has done a nice job keeping up with the times. Alas, investors know this: Shares are priced at 28 times likely 2024 earnings. Now look at Deere & Co., another venerable industrial. It’s in a very different line of business but sports a similar emphasis on technology and a profit margin almost as good. John Deere invented a slick plow in 1837; now his company sells exotic forestry equipment and $963,000 computer-guided combines. It spends $2.2 billion a year on R&D. Sales will be down this year but will recover. Deere’s price/earnings ratio is half Linde’s.
William Baldwin is Forbes’ Investment Strategies columnist.
The environmental prosperity promised by the splitting of water molecules always seems to be just around the corner. In 2005, the George W. Bush administration envisioned that, by 2015, renewable energy–fired electrolysis would yield hydrogen at a cost of $2.75 a kilo, delivered.
That goal remains elusive. Perhaps there will be a technological breakthrough, or a dramatic reduction in manufacturing costs when electrolyzers are mass-produced. Linde is wisely playing a defensive game. To work on electrolyzers it has engaged a partner to do the cutting-edge research, the British firm ITM Power. ITM is losing money.
Here’s a hydrogen idea, one that appeared in a book by scientist J.B.S. Haldane 100 years ago: Use intermittent renewable energy to split water and stockpile the hydrogen for later use. To environmentalists who are good with abstractions but weak with numbers, this looks clever. It doesn’t survive Lamba’s green eyeshades. What if your electrolyzer is working only a third of the time? Then the cost of amortizing the capital investment triples. The uneconomic green hydrogen becomes even more uneconomic.
Stockpile precious clean fuel? Linde has been doing that for a long time, but the effort has nothing to do with decarbonizing. It stores hydrogen in a Moss Bluff, Texas, cavern attached to a 340-mile network of pipes connected to customers on the Gulf Coast. Objective: Make gas feeds 100% dependable. A tiny blip in a gas going to a plant making steel, semiconductors or gasoline forces a costly shutdown.
Talk sustainability. Sell reliability.
Listicle
’70s BABIES
The Industrial Revolution was in full swing by 1879, when Carl von Linde, a professor in Munich researching refrigeration techniques, founded his preÂcursor to Linde plc as Gesellschaft fĂĽr Linde’s Eismaschinen Aktiengesellschaft (“Linde’s Ice Machine Company”). Here are a handful of big businesses around the globe that also got their start in the 1870s.
Brown-Forman (Market cap: $23 bil)
Founded: 1870 • Louisville, Kentucky
Industry: Spirits and wine
Famous products: Jack Daniel’s, Woodford Reserve, Old Forester
Weir Group ($6.8 bil)
1871 • Liverpool, England
Industrial equipment
Mining and infrastructure machinery
Eli Lilly ($737 bil)
1876 • Indianapolis
Pharmaceuticals
Trulicity, Cialis, Cymbalta
Henkel ($36 bil)
1876 • Aachen, Germany
Adhesives, consumer goods
Dial, Purex, Loctite
The E.W. Scripps Company ($360 mil)
1878 • Cleveland
Broadcasting, local news
Scripps Networks, Court TV
Linde’s inception dates to a late 19th-century thermodynamic device. German engineer Carl von Linde figured out how to chill air to a liquid state by first compressing it, then letting it expand rapidly. The liquefaction is followed by a distillation in which oxygen and nitrogen, which have different boiling points, can be separated.
Linde’s first big gas market was for oxygen to be used with acetylene welding, a technology that revolutionized the building of ships and skyscrapers. Soon after, two German engineers found a use for the nitrogen: Combine it with hydrogen to make ammonia and thus nitrate fertilizer. Be thankful for these three inventors. Half the nitrogen in your body came there by way of a chemical plant.
The Von Linde family had stakes in air separation businesses in the U.K. and the U.S. that in time went away, in the case of the U.S. assets during World War I. (Nitrates make explosives.) The three pieces of Linde completed their reunification in a 2018 merger.
Oxygen and nitrogen are still mainstays of the Linde product lineup, but the firm has managed to rise above the poor economics of industrial commodity production. It invented the technology to make stainless steel cost-effectively with the inert gas argon, which makes up 1% of the air going into its 250-foot-tall air separators. Its liquefied-gas skills enable the flash freezing of 2 billion pizzas a year. It sells the exotic gas mixtures needed to run chip foundries. It occasionally overreaches; the home-oxygen division paid $29 million last year to settle a charge of chiseling Medicare.
“We are a technology company at heart,” Lamba says. “There’s $3.70 of my gas and chemicals in the iPhone.” Linde employs 435 people with Ph.D.s. It has a $3.6 billion backlog of custom engineering contracts. Price cutters can’t dive into this industry without being able to handle a product that might be asphyxiating, flammable, explosive or useful only at 99.999% purity.
Linde’s archrival is Air Products & Chemicals, an Allentown, Pennsylvania–based company that is in the same line of work and espouses the same kinds of environmental aspirations, only more emphatically. A press release boasts of Air Products’ $8.4 billion joint venture to produce green hydrogen.
Wall Street has its favorite of the two. Linde’s enterprise value—market capitalization plus debt minus cash—is 6.7 times revenue, compared to 5.5 for Air Products. Since the 2018 consolidation, Linde’s stock has climbed 157% to Air Products’ 60%. (Air Products did not respond to requests for an interview.) Going green will pay off someday, but it’s important not to get ahead of the timetable.
Lamba’s timeline includes this goal: a gradual increase in that operating margin, at the rate of 0.3% to 0.5% every year. It’s a stretch, but no greater than the idea that the planet will be at net zero in 2050.
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