Key Takeaways
- Exxon Mobil will be purchasing specialist oil and gas producer Denbury for $5 billion
- The key driver of the acquisition is Denbury’s 1,300 miles of CO2 pipeline, which will allow Exxon to bolster their carbon capture and storage business
- Carbon storage and carbon credits are becoming big business, with the Inflation Reduction Act including many tax incentives for companies
One of the biggest oil companies in the world, Exxon Mobil, is purchasing a company that specializes in operating pipeline transport carbon dioxide (CO2). It’s a bet on the future of carbon management and provides the company with the potential to capitalize on massive government tax incentive schemes.
The company in question, Denbury, has had a massive turnaround in recent years after coming out of bankruptcy in 2020. The $5 billion purchase price offered by Exxon is a slight bump for Denbury shareholders, with the market cap of the company at around $4.4 billion just prior to the announcement.
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What does Denbury do?
Denbury is an oil and gas producer, specializing in using carbon dioxide to extract petroleum in areas that have already been used. In short, they’re able to go into oil fields which are ‘dry’ and use their specific resources to continue to extract oil and some gas.
It’s big business, but the focus of the deal has been on Denbury’s extensive CO2 pipeline network, with coverage all across the US Gulf Coast including major centers of oil exploration and extraction across Texas, Louisiana and Mississippi.
Because Denbury’s method of extraction requires significant CO2, the company has significant infrastructure in place to transport the gas safely and efficiently across large distances. Not only that, but it has an actual use case for the gas at its end destination.
Why is Exxon buying Denbury?
And this is the main reason why Exxon has decided to make a play for the company. Carbon capture and storage is becoming significantly more important in the US, with President Biden’s Inflation Reduction Act providing tax credits for companies that do it.
The infrastructure required for carbon utilization on a large scale is significant, and new pipelines are often met with intense opposition. That makes Denbury’s 1,300 miles of existing pipeline infrastructure highly valuable, and this deal places an implied value of $3.1 billion on them.
In layman’s terms, it means that Exxon can capture carbon emitted from the smokestacks of manufacturing plants, send it through the Denbury pipelines and then store it underground. The idea being that it reduces the carbon emissions by trapping them below the earth’s surface, rather than allowing them to dissipate into the atmosphere to contribute to global warming.
Exxon won’t just be looking to do this for their own plants either. Over the last nine months, Exxon has inked deals with fertilizer manufacturer CF Industries, steel company Nucor and gas producer Linde to capture, transport and store carbon from their factories over the coming years.
The carbon credit future
This acquisition will allow them not only to deliver on these deals, but to seek out more of the same off the back of their continued investment in the space. But the potential revenue sources go even further than direct capture as the carbon credit market matures.
While still in its relative infancy, carbon credits allow industries who can’t easily switch to alternatives to offset their carbon emissions. It’s the industrial equivalent of paying $10 to plant a tree when you book a flight.
The airline industry is a good example, as there are no viable alternatives to using massive amounts of fossil fuels to power airplanes. A typical flight from New York to London would emit around 2 tonnes of carbon.
At the same time, down in Texas, Exxon could capture 2 tonnes worth of carbon and use Denbury pipelines to transport and store it back underground. The airline could make a payment to Exxon for that to offset the carbon that they’ve emitted into the atmosphere.
There are now even facilities being designed to pull carbon directly from the atmosphere, rather than from manufacturing plants. It’s a growing sector and definitely one to watch closely for investors.
It’s not just Exxon Mobil who are putting money towards carbon capture. It’s becoming an area with increased focus, with companies such as Chevron and Occidental petroleum also looking to pump billions into increasing their own carbon capture capabilities.
The strategy is not without its critics, with some questioning the feasibility of the industry, and others believing it incentivizes the continued reliance on fossil fuels.
How did the market react?
The initial reaction wasn’t a positive one, with Exxon stock falling 1.8% on Thursday. Denbury stock responded more positively and the stock is up 3.4% over the past 5 days.
Exxon shareholders may be concerned about the potential return on investment for these large investments. While carbon capture does look to be a promising new area of investment, it isn’t part of the core business of an oil producer like Exxon and it is heavily reliant on government legislation.
Without tax credits and incentives, there is little to no value in the carbon credit system. Variations of carbon legislation are being introduced all over the world, so it’s unlikely that a single change in government would undo that, but nevertheless it is a risk. Particularly with an election coming in 2024.
The bottom line
Exxon’s purchase of Denbury for $5 billion sees them plant a major flag in the carbon capture space. The move will allow them to scale up their low-carbon business, but it’s just one part of a significant investment in making the oil producer a cleaner and greener company.
All in all they plan to spend a total of $17 billion on low carbon initiatives and acquisitions, as well as reducing their own emissions.
Carbon tax credits are looking to become a much bigger asset class in the future, as recent government legislation makes it a far more attractive sector for investment. For investors, it’s creating a wave that appears to be growing larger all the time, though that’s not to say it doesn’t come without risk.
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