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A new era of cleaner hydrogen production

Reducing the carbon dioxide generated by various industries is a major focus of governmental efforts to fight climate change, and the passage of the U.S. Inflation Reduction Act of 2022 in August provides corporate tax credits to reduce the cost of producing clean-burning hydrogen without emitting carbon dioxide into the atmosphere.

“Suppliers of industrial gases play a key role in this effort because of their ability to produce hydrogen, which is a clean-burning fuel,” says David Wagner, portfolio manager of Fidelity® Select Chemicals Portfolio (FSCHX). “It’s a compelling opportunity for them.”

For industrial gas producers, such as Linde (LIN) and Air Products & Chemicals (APD), two sizable holdings in the fund, the key is to produce hydrogen in a way that avoids the release of undesirable carbon dioxide.

The traditional way of making hydrogen, known as “gray hydrogen,” uses natural gas in an energy-intensive process that emits huge amounts of carbon dioxide. However, there are two other ways to make hydrogen—which are known as “blue” and “green” hydrogen—that, until now, have been too expensive to adopt on a large scale, Wagner says.

Blue hydrogen is essentially produced the same way as gray hydrogen, except that the carbon dioxide emitted during production is prevented from escaping into the atmosphere.

From an environmental standpoint, the best way to produce hydrogen is simply to pass electricity through water, according to Wagner. If you generate the electricity with clean, renewable energy like wind or solar power, then the process of producing the hydrogen is generally clean, and that’s called green hydrogen.

U.K.-based Linde produces a variety of atmospheric gases, including hydrogen, and helps third-party customers build gas-processing plants.

“Linde is a leader in the transition to clean hydrogen,” says Wagner, noting that the company has installed about 200 hydrogen fueling stations and 80 hydrogen electrolysis plants worldwide. In September, Linde announced it will build a new plant to produce green hydrogen in Niagara Falls, N.Y., which will more than double the company’s green liquid hydrogen-production capacity in the U.S. and is expected to be the first of several new plants planned for development.

As of October 31, Linde is by far the fund’s largest holding, representing 26% of assets. The stock also was the fund’s largest overweight position relative to its benchmark. In the third quarter of 2022, Linde delivered better-than-expected earnings growth and guidance, according to Wagner.

“With increased financial incentives and the world’s growing commitment to fight climate change, I believe certain companies in the industrial gases industry are well-positioned to add a source of dynamic, long-term growth to their businesses,” says Wagner.

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David Wagner, Fidelity Sector Portfolio Manager
David Wagner is a sector leader and portfolio manager in the Equity division at Fidelity Investments. In this role, Mr. Wagner manages the Fidelity Select Industrials Portfolio. Additionally, he is responsible for analyzing and rating stocks and supporting portfolio managers. His research coverage is primarily focused on multi-industrial companies in the industrials sector. Previously, he covered global chemical companies within the materials sector and co-managed the Fidelity Agricultural Productivity Fund and Fidelity Select Chemical Portfolio. Prior to joining Fidelity in 2014, Mr. Wagner was an analyst at PAR Capital Management and a consultant at Putnam Associates. He has been in the financial industry since 2013. Mr. Wagner earned his bachelor of arts degree in economics from Yale University and his master of business administration degree from the Wharton School of the University of Pennsylvania.

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