Fortescue drops green hydrogen target – Is this a good outcome for shareholders?
Fortescue is restructuring its energy business, delaying green hydrogen targets and shifting focus to renewable power.
Source: iStock
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KEY POINTS
- Fortescue is restructuring its energy business, delaying green hydrogen targets and shifting focus to renewable power, resulting in 700 job cuts
- UBS expresses skepticism about green hydrogen's economic viability in transportation, cheap electricity production, and industrial applications
- Macquarie forecasts increased earnings and dividends for Fortescue, but warns its valuation premium may erode without green hydrogen aspirations
Fortescue (ASX: FMG) was once a straightforward, low-cost iron ore producer known for its market-leading dividends and cash flow – and its poised to take a step back towards its roots this week as it re-evaluates its ambitious green hydrogen plans.
On Wednesday, Fortescue launched a sweeping restructure of its energy business and a pivot away from green hydrogen. The key changes include:
Delay its 15Mtpa green hydrogen by 2030 target
Shifting focus away from green hydrogen to renewable power
Redundancies for approximately 700 employees (4.5% of direct workforce)
Phoenix and Gladstone hydrogen projects remain in development
Brazil and Norway projects continue to work towards a final investment decision
There are over 100 projects under consideration and a considerable portion will be delayed or deferred indefinitely
"The capital discipline implied in the narrowing and slowing of Fortescue's push into green hydrogen is welcome, given myriad uncertainties facing the sector," UBS said in a note on Thursday.
Green hydrogen's use cases dwindle
The investment bank has long been skeptical on green hydrogen's economic use cases in several of the hypothesised demand drivers. The note highlighted several cases where the numbers just did not add up.
Transportation: "Hydrogen in transport needs at least 3-4 times the solar, wind, hydro and grid than battery EVs. All the while, battery technology continues to evolve rapidly with ongoing cost deflation."
Cheap electricity: "We understand the proposed Gibson Island green ammonia facility in Queensland needs A$20-30/MWh power, vs recent large solar and wind struck at long term prices of ~A$70-90/MWh." These figures suggest a 60-70% reduction in solar and wind prices would be necessary to make the Gibson facility economically viable."
Industrials: "Convincing price-taking farmers to prefer more expensive green fertiliser is not easy. In hard to abate industrial heat, we do see a market for green hydrogen, but this will take longer to emerge and need nuanced policy support."
Forecast earnings, dividend up
The lower corporate overhead costs, slowdown of Fortescue Energy spend and a simplified corporate structure translates to a respective 20% and 16% bump in FY25 and FY26 earnings estimates, according to Macquarie. The EPS outlook for FY27 and beyond was also lifted by 5-7%.
The analysts upgraded their target price by 16% to $14.50 but retained a Sell rating.
"Whilst positive for earnings and free cash flow, we recognise the short-term sugar hit to dividend yields may be received well by investors looking to harvest fully franked returns," the analysts said.
"However, ETFs seeking hydrogen exposure or long only's with strong energy transition mandates may seek to reduce positions on these developments."
Fortescue has historically traded at a 20% multiple discount to peers like BHP and Rio Tinto. In the past two years, Fortescue has managed to close this valuation gap due its green hydrogen aspirations – But without it, this premium may come under pressure.
