Hexagon Composites: Navigating Natural Gas Sector Challenges Amid Macroeconomic Uncertainty

Hexagon Composites ASA (HEX.OL) has long positioned itself as a critical player in the global transition to cleaner energy, leveraging its expertise in natural gas applications to serve markets ranging from transportation to industrial energy storage. However, the company's recent financial performance and strategic moves reveal a complex narrative of resilience amid macroeconomic headwinds. As investors weigh Hexagon's long-term growth potential against its current valuation risks, the interplay between operational adjustments, regulatory tailwinds, and market volatility will define its trajectory.

Operational Resilience in a Downturn

Hexagon's Q2 2025 earnings report underscored the challenges of a slowing global economy. Group revenues fell 41% year-over-year to NOK 674 million, with EBITDA shrinking to NOK 12 million (2% margin) from NOK 137 million (23% margin) in Q2 2024. The Mobile Pipeline segment, a key revenue driver, saw a 73% drop in revenue to NOK 132 million, reflecting reduced customer spending on fleet expansion as operators prioritize asset utilization over new investments. Meanwhile, the Fuel Systems segment demonstrated relative strength, generating NOK 463 million in revenue with a 7% EBITDA margin, driven by robust demand in the refuse sector.

The company's strategic response to these challenges has been multifaceted. Hexagon implemented an 8% workforce reduction and slashed annual capital expenditures to CHF 130 million, preserving liquidity while maintaining operational flexibility. These measures, combined with renegotiated raw material contracts, are expected to reverse negative working capital trends and bolster cash reserves. As of Q2 2025, Hexagon held CHF 0.8 billion in liquidity, a critical buffer as it navigates an uncertain macroeconomic landscape.

Strategic Moves to Strengthen Natural Gas Leadership

Hexagon's long-term vision hinges on its unique position as the only company enabling the full value chain of natural gas applications—from storage and transportation to fuel systems and requalification services. Recent strategic acquisitions and partnerships reinforce this positioning. The acquisition of SCS Composites, a European supplier to transit bus OEMs, for EUR 6.4 million is expected to add EUR 33 million in 2025 revenue and EUR 2 million in EBITDA, expanding Hexagon's footprint in the European market. Additionally, the extension of its strategic alliance with Mitsui & Co. through 2030 ensures continued access to key markets and supply chain synergies.

Regulatory developments further bolster Hexagon's case. The U.S. “One Big Beautiful” bill, which funds renewable natural gas (RNG) initiatives through 2029, and the EU's review of the internal combustion engine ban signal growing acceptance of natural gas as a transitional fuel. Hexagon's X15N engine, a breakthrough in heavy-duty trucking, has already secured major orders, including a landmark 100-truck deal with Triecto in Mexico and a 60-truck order from a U.S. consumer goods manufacturer. These wins highlight the growing commercial momentum for natural gas-powered solutions, particularly in sectors where electrification remains cost-prohibitive.

Valuation Risks and Financial Realities

Despite these strategic gains, Hexagon's valuation metrics paint a mixed picture. The company's P/E ratio (TTM) stands at -4.22, reflecting a net loss of NOK 1.64 billion over the trailing twelve months. While this represents an improvement from -43.3 in 2024, it underscores the company's current unprofitability. The debt-to-equity ratio of 51.3% and a market capitalization of NOK 4.02 billion suggest moderate leverage but also highlight the risks of overvaluation. Analysts note that Hexagon's stock is trading above its fair value, a concern given the absence of formal 2025 guidance and ongoing market uncertainties.

The company's liquidity position remains a key strength, but investors must weigh this against the risk of prolonged market stagnation. If the trucking sector and natural gas infrastructure investments fail to rebound, Hexagon's cost-cutting measures may not be sufficient to offset declining revenues. Additionally, the company's reliance on regulatory tailwinds introduces geopolitical risk—policy shifts in the U.S. or EU could undermine its growth assumptions.

Long-Term Growth Potential: A Cautious Case for Investment

Hexagon's long-term prospects depend on its ability to capitalize on the natural gas sector's structural tailwinds. The company's ecosystem approach—offering end-to-end solutions for natural gas—positions it to benefit from the sector's expansion, particularly in regions where RNG adoption is accelerating. The recent order in Jordan for mobile pipeline modules also signals Hexagon's potential to diversify into emerging markets, reducing its dependence on North American and European demand cycles.

However, investors should approach Hexagon with caution. The company's current valuation appears stretched relative to its earnings trajectory, and macroeconomic risks remain elevated. A prudent strategy would involve monitoring key metrics: the pace of X15N engine adoption, the success of the SCS Composites integration, and the impact of regulatory developments on RNG demand.

Conclusion: Balancing Risk and Reward

Hexagon Composites is navigating a challenging macroeconomic environment with strategic agility, but its long-term success hinges on the recovery of the natural gas sector and the execution of its cost-cutting initiatives. While the company's unique value proposition and regulatory tailwinds offer compelling upside, the current valuation and operational headwinds necessitate a cautious approach. For investors with a long-term horizon and a tolerance for volatility, Hexagon could represent a high-conviction opportunity—if the market's structural shift toward natural gas proves durable. For others, the risks may outweigh the rewards until clearer signs of recovery emerge.

In the end, Hexagon's story is one of resilience and innovation in a sector at a crossroads. Whether it can transform these strengths into sustainable growth will depend on both its execution and the broader forces shaping the energy transition.