ExxonMobil (NYSE:XOM) made a splash in the Carbon Capture and Underground Storage-CCUS business last week with news of its $4.9 bn acquisition of Denbury Resources (NYSE:DEN). XOM had $32 bn kicking around on its balance sheet, and it was itching to put some of this cash to work. The much-rumored tie-up between XOM and Pioneer Natural Resources (NYSE:PXD) had not materialized (discussed in an OilPrice article here), so XOM moved to their next priority. Denbury will be folded into XOM’s existing Low Carbon Solutions business and provide some of the first real assets to be deployed by the company in this effort. Darren Woods, CEO of XOM, commented in the release.
“Acquiring Denbury reflects our determination to profitably grow our Low Carbon Solutions business by serving a range of hard-to-decarbonize industries with a comprehensive carbon capture and sequestration offering.”
For the first time, the word “profits” appears in official commentary regarding the CCUS business, signifying to me that it is moving out of its nascent conceptual phase toward execution. In this article, we will have a look at what this means for XOM as they further these ambitions.
Carbon Capture and Underground Storage
Let’s be sure we understand exactly what’s transpiring with the CCUS business before diving into the specifics of the XOM/DEN deal. Pipelining CO2 from emitters to injection sites is one of the more ambitious because of its scaling potential but practical forms of sequestering atmospheric carbon deep in the ground. I say practical because the core technology has been largely perfected over many decades in a form of oil extraction known as Enhanced Oil Recovery-EOR. At a high level in the CCUS scenario, the CO2 is injected into porous rock strata, where minerals in the connate water react with the gas forming a calcium carbonate scale or precipitate. This permanently fixes the carbon in situ, subject only to geologic forces. Recent legislation promotes this technology and provides tax credits to incentivize its widespread adoption. XOM will not only be able to take advantage of federal tax credits for supplying this service but will be able to charge emitters up-front fees. Burying carbon in this manner is set to be wildly profitable, and the market is huge in the area they propose to serve.
The ExxonMobil/Denbury combination
ExxonMobil has decades of experience constructing and operating CO2 injection fields, mostly in West Texas, in EOR projects. In 2021 the company organized its low-carbon activities into a new business unit, branded as Low Carbon Solutions. It immediately set about looking for suitable injection sites along the Texas/Louisiana Gulf Coast, an area with which was very familiar from decades of oil production on land and in the Gulf of Mexico. As part of that initial effort, it formed a consortium of emitters to study the feasibility of collecting CO2 from plant sites along the highly industrialized Gulf Coast.
XOM’s acquisition of Denbury was the next logical step in the roll-out of its CCUS strategy. As the slide below highlights, Denbury supplies some key infrastructure elements of this plan. The blue-colored bubbles in the slide denote the concentration of emitters in a particular area. In addition to a ready market for carbon sequestration, Denbury pipeline assets (green lines) connect existing EOR and Carbon storage assets with 1,300 miles of pipeline designed for transporting CO2, which is very corrosive to untreated steel and requires exotic metallurgies. The red lines denote step-out lines the company plans to construct to bring more emitters into their service area.
With this infrastructure already in place, XOM side-steps one of the more contentious and divisive elements of the energy transmission conundrum-pipeline building. An article in the Wall Street Journal documents the implied value of the Denbury assets.
“By snapping up Denbury, Exxon will inherit 1,300 miles of pipelines used to move carbon dioxide from smokestacks to underground reservoirs, a prized asset as building new infrastructure to transport CO2 has often been met with local opposition. Denbury owns more than 900 miles of pipelines on the Gulf Coast running near the region’s manufacturing hubs.”
Denbury also brings cashflow with existing CO2 injection business and 47K BOEPD of 97% oil production from the numerous EOR sites currently online in the three state-Texas, La, MS, region. Debt-free Denbury is generating $600 mm in operating cash flow-OCF from oil production, implying an EV/OCF multiple of 6.5X. That’s a pretty decent number, particularly when the optionality of the EOR sites are taken into account as the XOM slide notes below.
The CO2 injection business is still in its investment phase with no direct revenues disclosed by Denbury as yet. Their forecast below sees volumes and EBITDA rising in the 2025/26 time frame, with 2030 EBITDA between $900 mm and $1 bn.
Your takeaway
XOM has a solid move toward establishing a resilient CCUS business. It is favored in tax law and in geographic emitter concentration. There may be more come in this area. Dan Ammann, president of Exxon’s low-carbon solutions business, commented in the WSJ article-
“Exxon would consider accelerating its build-out of its low-carbon business via an acquisition if it found other compelling targets. “When it’s an exceptional opportunity, we will look at that,” he said. “We’re focused on building this business.”
The current $600 mm of Denbury cash flow adds an infinitesimal 0.007% to XOM’s cash flow of $78 bn in 2022, so the real value lies in the exploitation of the combined entity’s CCUS resources.
From 45Q credits rising to $85 per ton, as shown in the Denbury slide below, you can see that CCUS, at scale, outperforms all other carbon sequestration technologies. At a forecast scale of 75 mpta in 2030, this credit would result in $6 bn in revenues. A significant number, even to XOM.
Investors should take note of this deal as it establishes XOM as a leader in an emerging business with a number of logistical and tax advantages. Long term, this secures the company’s place in what will be a lucrative business with multiple revenue streams.
Oilprice.com