Selected as a Main Hydrogen Distributor
The author is an analyst of NH Investment & Securities. He can be reached at minjae.lee@nhqv.com. -- Ed.
We note that the success of Korea’s hydrogen economy roadmap will likely depend upon the pace of KOGAS rolling out its hydrogen distribution network. The firm plans to make large-scale investment through 2030 in order to establish a hydrogen value chain. Of note, oil price hikes have reduced the chances of further impairment losses for overseas E&P projects.
To become main hydrogen distribution player in Korea
Reiterating a Buy rating, we raise our TP on KOGAS from W34,500 to W40,000, noting a 43% cut to the impairment loss estimate for our TP calculation on: 1) an upward revision to the oil price forecast used to calculate the value of Prelude FLNG; and 2) smooth production ramp-up at the project, as planned. Of note, fair values for individual overseas E&P projects are subject to changes every quarter depending on fluctuations in production volume and oil price forecasts, but under present accounting rules, a rise in estimated impairment value is not always reflected in KOGAS’s quarterly statements.
After being selected as a main hydrogen distributor under the government’s hydrogen economy roadmap, KOGAS has drawn up plans for construction of large-scale hydrogen production bases and hydrogen refueling stations (HRSs) in Korea, and for establishment of renewable energy power plants and electrolysis facilities abroad. KOGAS plans to create a nationwide hydrogen network connecting 25 hydrogen production facilities and 132 HRSs by 2030.
KOGAS is earmarking total investment of W4.7tn for its hydrogen project by 2030, but given the government’s goal of lowering the unit hydrogen price below W4,000/kg within 10 years, chances are that the firm’s total capex will exceed W4.7tn. In addition to its hydrogen distribution business, KOGAS is expected to engage in a fuel cell venture via utilization of LNG terminals.
Sluggish 1H21 performance versus likely 2H21 earnings rebound
On a consolidated basis, we expect KOGAS to post consensus-meeting 1Q21 sales of W7.6tn (-4% y-y) and OP of W931.7bn (-3% y-y). Looking at its city gas business, pre-tax guaranteed returns should come in similar y-y in 2021. Given a 6-month time lag between actual oil price and applied oil price, the company’s overseas OP will likely remain sluggish up until end-1H21. That said, we point out that output for Prelude FLNG has continued to rise steadily, with one cargo shipment already being seen in February