Hydrogen will play a key role in the energy transition as a clean energy source that helps industry to decarbonize, Antje Shiffler, an editor for Morningstar, writes on the company’s website
It’s unclear how the new U.S. administration under President-elect Donald Trump will handle the Inflation Reduction Act of 2022, which includes incentives for clean hydrogen. But hydrogen investments are worth keeping on your radar as an important element in the carbon transition, Shiffler wrote.
Hydrogen has not been the best investment up until now. The sector recorded three down years before finally picking up in 2024, according to Morningstar data. The Morningstar Global Hydrogen Index has gained around 4.9% year to date, still underperforming the broader market.
The index tracks various companies that are positioned to benefit from hydrogen production, storage, and transportation as well as fuel-cell technology, including industrial companies, utilities, basic materials, and energy companies.
Morningstar analysts see industrial gas companies as the main beneficiaries of the hydrogen boom. “Amid the energy transition toward a low-carbon economy, hydrogen has emerged as a key pathway to reducing carbon emissions,” wrote Krzysztof Smalec, equity analyst at Morningstar, in “The 2024 Industrial Gas Industry Landscape” in September.
“We expect industrial gas firms to participate across the entire spectrum of hydrogen production (including gray, blue, and green hydrogen) and distribution (including trucks, pipelines, and shipping). We anticipate the transition from gray to blue and green hydrogen to be gradual, and we think that industrial gas firms can leverage their well-established conventional hydrogen businesses to capitalize on new opportunities created by the energy transition.”
Gray hydrogen is generated from natural gas using a process called steam reforming. In blue hydrogen production, the carbon generated by the process is captured and stored underground. Finally, green hydrogen, also called “clean hydrogen,” is created using surplus renewable energy, Shiffler explained.
The International Energy Agency’s “net zero by 2050″ scenario assumes that global demand for hydrogen should increase to around 430 million tons per year by 2050, which is 4.5 times higher than in 2022. While the transition to a hydrogen economy is not exactly smooth, Smalec expects growth opportunities in blue and green hydrogen.
But the market is still in its infancy. In its October 2024 Global Hydrogen Review 2024 study, the IEA said that politicians are slow to create measures to boost demand in key sectors such as heavy industry, refineries, and long-distance transport.
3 top hydrogen stocks
Where are the investment opportunities emerging for long-term investors? Industrial gas companies, in particular, are poised to benefit from new opportunities in hydrogen. The global industrial gas firms covered by Smalec — Air Liquide , Air Products & Chemicals APD and Linde LIN — all have wide Morningstar Economic Moat Ratings—the ability in the opinion of analysts to keep competitors at bay over the long term.
The three companies account for about half the global industrial gas market.
“The outlook for blue hydrogen remains solid,” Smalec said. “As far as green hydrogen is concerned, some of the early excitement has slowed down due to higher capital costs and regulatory uncertainty. There have been some green hydrogen project delays and cancellations, as companies are taking a more realistic and selective approach, but industrial gas firms tend to pursue higher-quality projects, so we still expect them to capitalize on opportunities in green hydrogen in the long run.”
One caveat: The three stocks are currently trading in overvalued territory, as are those of other major players in the market. So you may want to wait for a better entry point.
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