/Crude%20Oil%20worksite-ltd-7syIOxlLpfA-unsplash.jpg)
Occidental Petroleum (OXY) is probably best-known by investors as the oil company where legendary investor Warren Buffett owns a stake in excess of 25%.
Buffett’s company, Berkshire Hathaway (BRK.B) also owns about $9.5 billion of Occidental preferred stock carrying an 8% dividend, plus warrants to buy another $5 billion of Occidental shares at $59.62 each. Berkshire bought the preferred stock and obtained the warrants in 2019, when it helped finance Occidental's purchase of Anadarko Petroleum.
But aside from being Buffett's pet oil stock, could OXY someday also be known as the energy company that put into place one of the many solutions needed to help fix our planet’s ailing climate?
DAC: Direct Air Capture
For thousands of years, the atmospheric concentration of carbon dioxide (CO2) has held steady at or a bit below 280 parts per million. But then the Industrial Revolution began. Today, this critical number stands at 420 parts per million - a roughly 50% rise since 1850.
As this number rises, the added carbon traps heat, causing the Earth to warm to what could be dangerous levels for humans someday.
That is where direct air capture (DAC) comes in. It is the “flashiest” of carbon dioxide-removal methods, the biggest technological fix, and one that may have the greatest potential to scale up to the enormous needs envisioned by the goals set by the Intergovernmental Panel on Climate Change (IPCC).
In simple terms, direct air capture — or DAC — sucks CO2 emissions out of the air, to be buried underground or reused in making products such as building materials, agricultural products and fuels, rather than contributing to climate change by lingering in the atmosphere.
The International Energy Agency (IEA) has said the technology will play “an important and growing role” in setting the world on course to achieving net zero goals as economies continue to burn fossil fuels.
OXY Gets DAC Investments
The Inflation Reduction Act includes development monies and potentially billions of dollars in tax breaks for companies that develop or adopt direct air capture technology.
Recently, $1.2 billion was awarded to two DAC plants in southern Texas and Louisiana. One of these plants is the South Texas DAC Hub in Kleberg County, Texas, proposed by Occidental Petroleum's subsidiary 1PointFive.
In addition, construction is underway in West Texas by Carbon Engineering (recently bought by OXY) on a DAC plant that will dwarf other existing facilities. This soon-to-be largest DAC facility, called Stratos, will remove up to 1 million tons of CO2 annually, the equivalent of removing 217,000 cars off the road. Stratos is about 30% complete, according to Occidental, with commercial operations expected to begin in 2025.
The $9.1 trillion asset manager, BlackRock (BLK), recently announced a joint venture with Occidental Petroleum to invest $550 million into the world’s biggest direct air capture project. BlackRock is investing via its fourth global infrastructure fund, which focuses on climate-related projects. This is a significant sign of growing investor confidence in the nascent technology.
BlackRock CEO Larry Fink said, “Occidental’s technical expertise brings unprecedented scale to this cutting-edge decarbonization technology. Stratos represents an incredible investment opportunity for BlackRock’s clients . . . [and] underscores the critical role of American energy companies in climate technology innovation.”
OXY’s Big Future in DAC
The investment by BlackRock could be just the tip of the proverbial iceberg for OXY.
According to CEO Vicki Hollub, it wants to sell technology licenses to enable partners to build plants that take carbon dioxide out of the air. In this franchise-like model, Occidental Petroleum would charge a licensing fee, and then turn over management and construction to partners.
Hollub believes the business potentially could support over 1,000 projects to mitigate climate change effects, and create a whole new line of revenue for the company from selling direct air capture technology and design expertise.
The plan is for the company to build partnerships to make the construction of DAC plants happen at a pace that is much faster than what it could do itself. Already, state-owned Abu Dhabi National Oil Company (ADNOC) agreed to fund a preliminary engineering study for a 1 million ton-per-year facility in the United Arab Emirates.
For its part, Occidental expects to spend about $600 million per year through 2026 to build its own projects, which could eventually number 100.
I expect this to turn into a major business for Occidental. Here’s why:
A high demand for carbon dioxide removal credits has begun to create a market for DAC technology. Occidental's subsidiary, 1PointFive, recently closed a 10-year agreement to sell such credits to Amazon.com (AMZN) and a similar three-year agreement with All Nippon Airways.
The company says more than 65% of the first plant's capacity, through 2030, has already been sold to partners. This is key.
Or, as CEO Hollub put it: "There's absolutely no way that we would have the capability to provide all the capital, we can't do it."
Join Buffett: Buy OXY
This business, along with Buffett’s major interest, is enough to entice me into OXY. But now add in the company’s dominant position in the Permian Basin, the cheapest source of oil production in the U.S., which is expected to be a major growth engine in the next few years for Occidental.
Also, its conventional oil assets in the Gulf of Mexico and the Middle East complement its shale operations by generating stable cash flows from assets with a much lower base decline rate.
OXY stock is a buy anywhere in the $57 to $64 range.
