Occidental Petroleum Stock To Benefit From $507 Million A Year Carbon Management Business

Occidental Petroleum Stock To Benefit From $507 Million A Year Carbon Management Business - Carbon Herald

Occidental Petroleum Corporation (NYSE:OXY) stock took a big hit in the last couple of years. In 2019, before the pandemic, the company announced an aggressive acquisition of oil producer Anadarko for $57 billion. That added a huge debt on its balance sheet and had analysts saying the company is biting more than it can chew. Of course, things got worse when Covid-19 took a hit on the oil and gas market nobody could have predicted. 

The low energy prices made it much harder for the company to pay off the debt that has piled up and as a result, the Occidental stock took a big hit. Eventually, the oil producer was forced to sell assets, cut the dividend, and write down the value of some of its energy properties. At the beginning of 2021, the company still had a pretty high debt to equity ratio compared to other major oil producers, as the oil and gas business is recovering from the pandemic slump. 

It has much more work to do to clean up its financial statements but things might be starting to look brighter for the company. At the last quarterly earnings report, net loss came in at half of what analysts were predicting a year ago at $346 million. A surprisingly strong free cash flow of $1.6 billion was announced which was the company’s highest quarterly free cash flow in a decade.

It was also twice the analysts’ expectations a year ago. Production from the Anadarko acquisition did not disappoint. Its chemicals business – the second-largest source of pretax income – is also driven by strong chloride demand due to a rebound in the construction industry. 

Occidental Petroleum Stock Long-Term Growth Opportunity

The strongest case for the long-term growth of Occidental Petroleum stock, however, is developments into clean energy technologies. The stock is attractive for investors looking for cheap and undervalued stocks to buy right now with high risk high reward potential, willing to assume the risk of dead money or even capital loss in a default scenario. 

Occidental is accessing a market – carbon capture storage and utilization, that is projected to grow exponentially in the next few decades. It is embracing the transition into a low-carbon economy and announced it is pivoting its business into a carbon management company. Occidental’s goal is to achieve its net zero target to help the environment while also making revenue to keep shareholders happy. It founded Oxy Low Carbon Ventures (OLCV) in 2018 to develop CCUS and other carbon capture technology to help lower emissions across the industry. 

However, the company is not giving up on oil as well, as the Anadarko deal is pointing out. It has one of the largest CO2 management operations in the world, sequestering underground more than 20 million tons of emissions per year. But all of that captured and stored CO2 is used for enhanced oil recovery or to pump more oil from the ground. In other words, the company is going greener to extract more oil. 

Enhanced Oil Recovery

It is true that the EOR process is storing permanently anthropogenic emissions but it also incurs some additional CO2 from increased oil production. The company says its operations and its use of power, heat and steam emitted 28.4 million tons of carbon dioxide equivalent in 2019 – that is not too bad compared to permanently storing 20 million tons of CO2. The development of more carbon capture facilities for EOR will lower the carbon intensity of its final products but it won’t eliminate completely the total GHG emissions the company generates.  

Occidental offers a good case for using CCS technologies for EOR. It lowers oil production costs over time as it exploits existing oil and gas developments and prevents future ones in environmentally sensitive areas of the world. It creates value for shareholders and attracts investments needed for future deployment of CCS especially when the technology’s costs go down. 

It helps carbon capture utilization and storage reach economies of scale as the more carbon capture infrastructure is being built, the more economical it gets, much like the case with renewable solar and wind energy. The low carbon or carbon neutral oil that is produced is necessary for the aviation, maritime and other industries that would otherwise have a very difficult time cutting their carbon footprint. 

Low Carbon Projects Portfolio

One of the biggest low carbon projects that is expected to bring future revenues is called 1PointFive. It is under the OLCV hat of clean technology initiatives spreading across the organization. When completed it will be the world’s biggest direct air capture facility in the world, expected to take out 1 million ton of CO2 per year. The company uses Carbon Engineering technology and it hopes to become a leading DAC facilities provider globally. Occidental plans to offer DAC to other companies in need of lowering their CO2 emissions. The captured GHG will be used for EOR and some of it could be sold to other companies that create low-carbon products. 

The company’s portfolio includes a wide list of clean energy projects. Some of them are: NET Power plant with CCS for EOR, partnerships for development of carbon neutral fuels, Project Interseqt utilizing 45Q tax credits to accelerate carbon capture infrastructure development, Midwest CO2 Superhighway, TerraLithium, EPA-approved carbon monitoring, reporting, and verification tools and other carbon management services for potential clients. 

Carbon Management Business Growth Potential

According to the Occidental CEO Vicki Hollub, the carbon management business will equal its chemicals business in approximately 10 to 15 years and make around $507 million of profit an year. Beyond 15 years, it is expected that the carbon management division will exceed the oil and gas operations and what they are bringing in as profits today. That could be the boost the Occidental Petroleum stock needs to recover from its 10 years of downward slump.

That growth is fueled by the world’s need to eliminate the accumulated GHG emissions. According to EIA data, globally 5 gigatons of CO2 per year by 2050 have to be captured in its Sustainable Development Scenario and 7.5 gigatons per year in its Faster Innovation Case. Some scientists say that we need to remove around 10 gigatons every year by 2050 and 800 gigatons in total to avoid the worst consequences of climate change. Right now the world is storing a mere 40 million metric tons of CO2 from plants currently in operation.

According to the biggest carbon capture market report, the CCS industry is projected to reach $6.15 billion by 2027, growing at a CAGR of 7.88% from 2020 to 2027. ExxonMobil also forecasts that carbon capture will reach $2 trillion by 2040. Furthermore, the global carbon emissions offsets market is projected to be on the rise to $200 billion by 2050 compared to a tiny $0.6 billion in 2019.

It has been estimated that a capital requirement of $3.6 trillion per year is needed to meet Paris Agreement goals, which is a pool of investment money bigger than any oil and gas capital influx. The net zero economy targets that countries and corporations, including Occidental have set by mid-century, are expected to create a new market for carbon management and trading that will completely change the way industries operate today. CCS and CCUS are shaping as critically important technologies for the energy industry. 

Occidental is not staying behind this new wave of innovation. The company plans to build hundreds of DAC facilities and become a Tesla of the direct air capture industry. According to its CEO, the company is aiming to build DAC infrastructure where needed at clients’ sites and combine it with EOR to aggressively drive forward the carbon capture industry in the way Tesla did with the electric vehicles market. 

Conclusion

In summary, Occidental is one of the oil and carbon capture companies to position itself at the forefront of the direct air capture and other CCUS technologies market. It is leveraging the experience it has with carbon capture for EOR to expand its market share and become a provider of carbon capture and management services in the future. This way, the Occidental Petroleum stock has the potential to recover and the company can cover up its large long-term debt and pay dividends down the road. At the current price of $25, it is an attractive opportunity for investors looking for bargain carbon capture technology stocks.

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Carbon Herald). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock, you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.

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