Is Bill Ackman's Air Products Helium Bet Full of Hot Air?

Bill Ackman is trying to find a winner. Over the past two weeks, Wall Street kept its eye on one of richest and shrewdest hedge fund managers in the game.

Speculation about his target increased as he informed investors that he was seeking to make another splash in an "undervalued" company. And he certainly did, his biggest splash ever.

Ackman's recent $2.2 billion stake in Air Products & Chemicals Inc. (NYSE: APD) is certainly a buoyant pick. His Pershing Square Capital Management acquired a 9.8% stake in the industrial gas company, which is also the world's largest producer of helium and hydrogen.

It was a lofty bet by Ackman, who had garnered attention for a quiet accumulation of $1 billion in recent weeks. Earlier this month, Ackman told investors that he was specifically targeting a large-capitalization, investment-grade company with a lot of upside.

The purchase of APD could prove to be even shrewder, if Congress is unable to address the looming shortage of helium, a critical industrial gas in the production of MRI machines, semiconductors, aerospace equipment and lasers.

And Ackman can profit as demand continues to surge around the world.

Money Morning's David Zeiler told the story last year of a helium shortage.

But Ackman's bet on Air Products and what is or isn't happening in Congress have made the entire situation even stranger... and likely far more profitable for wise investors.

How Bill Ackman Got His Fill of Hot Air

The $2.2 billion stake is the largest bet ever for Ackman, who has struggled publicly since 2012. After losing a very combative $1 billion bet against Carl Icahn over Herbalife Ltd. (NYSE: HLF), and his bet on retailer J.C. Penney Company Inc. (NYSE: JCP) turned riches into rags, Ackman needs a big winner.

Shares of Air Products have been very flat against the performance of the S&P for several years. But things started to change just a few months ago as the company's shares have increased by 30%.

What drove the stock inflation?

Air Products is the world's largest producer of helium. The industrial gas industry has seen its profits move higher over the past year as a shortage of helium is looming. According to reports, the steady global increase in helium consumption means the world could run out of the gas in as few as 25 years.

What's driving the shortage? Congress in 1996 enacted a law that essentially drove helium prices into the ground and eliminated any incentives to produce more. The Bush Dome Federal Helium Reserve will shut down as mandated under the Helium Privatization Act of 1996.

Just How Shrewd Is Bill Ackman?

Ackman's bet could center on the fact that Congress now has only 30 days to pass a new law authorizing helium sales from the U.S. strategic helium reserve for another year before such authority expires.

Air Products is also poised to engage in new exploration efforts in major natural gas markets like Russia and Qatar. In April, the company signed a long-term purchase deal with Gazprom Export LLC. This deal, however, is not without its risks. The storage and transportation of helium out of Eastern Siberia could become a difficult and expensive enterprise.

The challenge for Ackman's position over the long haul, however, centers on two major things, and only one in his control.

He can advocate and apply pressure to management for cutting internal costs at Air Products as a major shareholder, particularly as production costs rise.

But the second factor is also a big component of those production costs: natural gas.

Helium is a byproduct of natural gas extraction. But, thanks to the fracking boom in the U.S., a drop in natural gas prices has stripped incentives to produce helium in places around the globe. In addition, helium plants around the world have been struck by operational inefficiencies or significant delays in construction.

That said, natural gas prices will eventually rise, thus spurring more helium production, but it will take some time.

As Money Morning's Dr. Kent Moors has stated, the coming demand for more liquefied natural gas exports coupled with a number of other demand factors will put upward pressure on natural gas prices through the rest of the decade.

Should natural gas prices remain low and the price of helium continue to rise due to the production shortage, then Ackman's bet could prove to be shrewd if the company is able to gain market share in an industry with rising margins.

Check out this Money Morning piece to find out Why this Country is a Huge Profit Opportunity for Natural Gas Companies.

About the Author

Garrett Baldwin is a globally recognized research economist, financial writer, consultant, and political risk analyst with decades of trading experience and degrees in economics, cybersecurity, and business from Johns Hopkins, Purdue, Indiana University, and Northwestern.

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