Occidental Acquires Canadian DAC Technology Firm Carbon Engineering for $1.1 Billion

Houston based oil and gas producer Occidental Petroleum reported on Tuesday agreed to pay $1.1 billion for Canadian direct air capture (DAC) supplier Carbon Engineering Ltd to help it develop a string of carbon-capture sites it hopes will profit from tackling climate change. Occidental said it has been working with Carbon Engineering on DAC deployment since 2019. The deal is another from oil majors looking to add to participate in energy transition. In early July Exxon Mobil (XOM) bought Dallas based pipeline operator Denbury (DEN) to offer potential customers in the hard-to-decarbonize industries such as cement and steel a mode to capture carbon.

Direct Air Capture (DAC) facility is currently under construction in Ector County, TX.

The OXY deal comes four years after Berkshire Hathaway made a substantial investment in the company to support its takeover of Anadarko Petroleum. Significantly OXY has gone from a debt-ridden company to one making acquisitions and paying dividends. Occidental cash flow has been benefiting from its foothold in the shale-rich Permian Basin of West Texas and New Mexico with higher energy prices, which are now well off their peaks.

The deal is for a total cash consideration of approximately $1.1 billion Payments will be spread over three approximately equivalent annual payments, with the first due at closing, which is expected for before the end of 2023, the companies said. Upon closing, Carbon Engineering would become a wholly owned subsidiary of Oxy Low Carbon Ventures. Carbon Engineering’s research and development activities and as its innovation center, will remain in Squamish, British Columbia, Canada.

The announcement comes after it was announced last Friday, the U.S. Department of Energy said sites in Texas and Louisiana will get over $1 billion in federal grants. Some of that money will fund Occidental’s 30 proposed DAC plants in Kleberg Country, Texas.

Those two sites will be the first funded by a $3.5 billion authorization for regional DAC hubs funded by Congress from the bipartisan infrastructure bill.

“The acquisition enables Occidental to catalyze broader development partnerships for DAC deployment in the most capital efficient and valuable way,” said Occidental CEO Vicki Hollub.

Occidental is the second biggest oil and gas producer in the US’s prolific Permian basin. Rising costs mean scale is becoming increasingly important.

Direct Air Capture (DAC) Project

The acquisition fits in with Occidental’s focus on carbon capture. Occidental subsidiary 1PointFive will “rapidly advance DAC technology breakthroughs and accelerate deployment of DAC as a large-scale, cost-effective, global carbon removal solution”, according to the OXY press release.

“We expect the acquisition of Carbon Engineering to deliver our shareholders value through an improved drive for technology innovation and accelerated DAC cost reductions”, Occidental President and CEO Vicki Hollub said. “The technology partnership also adds new revenue streams in the form of technology licensing and royalties. Importantly, the acquisition enables Occidental to catalyze broader development partnerships for DAC deployment in the most capital-efficient and valuable way”.

Early in the year OXY worked with its 1PointFive subsidiary to lease more than 100,000 acres at the King Ranch in Kleberg County for potential development of up to 30 direct air capture plants earlier in the year. The historic, 825,000-acre ranch south of Corpus Christi has access to underground geologic reservoirs that could be used to store captured carbon. 

That plan and the acquisition build on Occidental’s net-zero goals that rely on traditional carbon capture technology and direct air capture plants. 

Occidental said costs have increased by about 22% its estimated investment for the world’s first large-scale direct air capture (DAC) project and disclosed plans to build others. The company now expects to spend $1.1 billion on the project under construction in Ector County, Texas, up from the previous estimate of $800 million-$1 billion.

“Inflationary pressures felt across the economy, especially for construction materials and labor,” explain the added costs, Chief Executive Officer Vicki Hollub told analysts in a webcast back then.

Much of that cross pressure has been lifted with 1PointFive selected to receive a grant from the U.S. Department of Energy’s Office of Clean Energy Demonstrations (OCED) for the development of its South Texas DAC Hub.

Occidental’s first large-scale project started construction in September last year and is on schedule to begin operations in late 2024.

OCED funding supports 1PointFive’s development of the DAC Hub through the advancement of planning, detailed design, environmental permitting, and procurement of long-lead equipment, according to the release.

“We appreciate the U.S. Department of Energy’s leadership to advance Direct Air Capture and look forward to our partnership to deploy this vital carbon removal technology at a climate-relevant scale and establish the United States and 1PointFive as global leaders in demonstrating the commercial viability of DAC”, Hollub said. “We believe this selection validates our readiness, technical maturity, and the ability to use Oxy’s expertise in large projects and carbon management to move the technology forward so it can reach its full potential.”

The company has expanded future plans for DAC. Government incentives and passage of the Inflation Reduction Act allow it to plan 100 DAC facilities by 2035, from 70 before, Hollub said. Land for half of them has been secured.

“It’s not as well recognized yet. But when the world realizes how much the transition will cost, I do believe that this will become the preferred option to ensure that we can continue the production of low carbon fuel for those that need it,” Hollub said.

Paying Down Debt

Looking back at Occidental’s strategy to use its ample free cash flow from the high energy prices to pay down debt, it cut debt levels by $10.5bn, or 37 per cent, during 2022. It met its short-term target that would enable a potential upgrade to investment grade by rating agencies.

In 2019 Occidental took on around $40 billion in debt in its acquisition of Anadarko, which closed in August 2019, just months before the pandemic sent the industry into a downturn in 2020. The company slashed costs, sold off assets and laid off workers to stay afloat and make debt payments. After losing $15.7 billion in 2020, Oxy began to turn a profit again last year thanks to rising oil prices.

The company had paid down almost half of the debt it took on to win Anadarko by the middle of 2022. Having soared to $39bn after the takeover, long-term debt levels had been halved to $19bn as of September 2022. The company’s market capitalization, which collapsed to less than $10bn after the Covid-19 pandemic, has recovered to $54bn higher than pre-deal levels. It is a stark turnround for a company that many feared was facing bankruptcy just three years ago as it led the US shale patch in slashing its dividend and cutting spending.

Occidental will focus more on returning cash to shareholders than in paying down debt the company has stabilized. Most energy companies are paying considerably higher dividends to holders than Occidental.

In 2023 Occidental is able to start paying down the high-rate Berkshire preferred. Under a formula, the company must start paying off the preferred if it returns more than $4 a share to its common holders in a given year.

OxyChem’s First Big Investment in 5 Years

In the second quarter of 2022 the chemical subsidiary of Occidental Petroleum announced it is going ahead with its first big project in five years, bringing $1.1 billion of investment to its Deer Park manufacturing complex. Oxy is expanding and overhauling the technology of its chlor-alkali production unit, CEO and President Vicki Hollub said during Oxy’s second-quarter earnings call with investors Aug. 3.

The chlor alkali unit is part of the Deer Park chemical complex OxyChem calls Battleground, which borders the San Jacinto Battleground National Historic Site on Independence Parkway. Construction on the project will start in 2023, and the investment of $1.1 billion will be spread over three years while the unit continues to produce chlorine and caustic soda, Hollub said.

“The Battleground project represents the first sizable investment we’ve made in OxyChem since the construction and completion of the 4CPe and ethylene cracker that we completed in 2017,” Hollub said.

OxyChem, which says it is the largest chlor alkali producer in the U.S., uses diaphragm-cell technology for at least some of its production at Battleground. Now the company will replace that production process with a newer technology known as membrane cell. In addition, the complex’s chlorine and caustic soda production capacity will increase by 8%, and the chemical production process will be more energy-efficient after construction finishes, thereby decreasing the carbon intensity of those products, the company said.

While OxyChem would not disclose the Battleground unit’s production capacity, Hollub said it is the company’s biggest chlor-alkali unit.

Looking further ahead, Hollub said the company is working on front-end engineering and design studies that explore similar tech switches at two more sites: chlor-alkali units in Convent, Louisiana, on the Mississippi River and in Ingleside, Texas, near Corpus Christi. Both units use asbestos diaphragm technology.

If or when OxyChem moves ahead on those projects, they won’t involve any capacity expansions, and the price tags might not be as high as the $1.1 billion slated for the Battleground project, said Rob Peterson, Oxy’s CFO and senior vice president.

Based on its full-year 2021 revenue of $25.96 billion, Oxy is No. 8 on the Houston Business Journal’s 2022 Largest Houston-Area Public Companies List.

Buffett Moves into OXY as Icahn moves out

Berkshire’s holding of 181.7 million Occidental shares represented a 19.5% stake at the end of June. Berkshire also owns holds warrants to buy 83.9 million Occidental shares at $59.62 and owns $10 billion of 8% preferred stock. In a battle of Wall Street scions, The Wall Street Journal reported at the time Buffet was increasing his stake early in the year Icahn, who began building a stake in Occidental three years ago when he disputed the group’s $38 billion acquisition of Anadarko Petroleum, sold the last of his shares in the group and pulled two executives Andrew Langham and Gary Hu from the board of directors. 

Berkshire’s stake is now over 20% after Occidental completed a $3 billion buyback program. A 20% stake allow Berkshire to include in its earnings a proportionate share of Occidental’s profits. That would boost Berkshire’s reported earnings by about $2 billion at this time.

About Occidental

Occidental is an international energy company with assets primarily in the United States, the Middle East and North Africa. They are one of the largest oil producers in the U.S., including a leading producer in the Permian and DJ basins, and offshore Gulf of Mexico. Our midstream and marketing segment provides flow assurance and maximizes the value of our oil and gas. The chemical subsidiary OxyChem manufactures the building blocks for life-enhancing products. The Oxy Low Carbon Ventures subsidiary (OLCV) is advancing leading-edge technologies and business solutions that economically grow our business while reducing emissions. They are committed to using our global leadership in carbon management to advance a lower-carbon world. Visit oxy.com for more information.

About 1PointFive

1PointFive is a Carbon Capture, Utilization and Sequestration (CCUS) platform that is working to help curb global temperature rise to 1.5°C by 2050 through the deployment of decarbonization solutions, including Carbon Engineering’s Direct Air Capture (DAC) and AIR TO FUELS™ technologies alongside geologic sequestration hubs. More at 1PointFive.com.

AIR TO FUELS™ is a registered trademark of Carbon Engineering Ltd.

About Carbon Engineering

Carbon Engineering (CE) is a climate solutions company. CE is focused on the global deployment of large-scale Direct Air Capture (DAC) technology that captures carbon dioxide out of the atmosphere so it can be permanently stored deep underground or used to produce clean, affordable transportation fuels. With its partners, CE is working to deploy large-scale, commercial DAC facilities in multiple markets around the globe. More at carbonengineering.com

Source: TC, Occidental

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