Last week I wrote about Oxy's purchase of direct air capture (DAC) technology provider Carbon Engineering for $1.1 billion. A billion is a lot of money in a field which has generated no material revenue. My reaction based on any hope of payback was that the only way to cash in on that scale of investment is for Oxy to enter the field in a big way.
There is another interpretation whose implications are worth considering, which is that Oxy expects the Carbon Engineering transaction to bolster its stock price. It's difficult to bet on a market a decade before it scales, not just because of risk, but also because the returns should be heavily discounted by time. But the stock market has a recent history of rewarding early bets, whether or not they ever pay. And a relatively decent chance of short term returns might be enough to justify the risk.
The direct air capture business is non-existent now, and Oxy's planned 500 kT/yr plant will not generate a material amount of revenue even when operating full tilt. Its second plant - a 1 MT/yr effort already underwritten by the DOE - would bring its low carbon division close to $250M in annual revenue when both operate at capacity. That's about 1% of Oxy's current income, and it won't happen for years. Worse still, These initial plants are likely to operate at a loss into the next decade, and it is far from clear that they will be competitive with other, newer technology. Or ever reach positive cash flows in their own right.
But the stock market values the future in someitmes magical ways, especially when the narrative of inevitable change is pervasive. As a point of reference for DAC, pre-revenue battery companies SPAC'd in 2021 based on plans to go to market in 2027. The inevitability of batteries was real, though it far from inevitable that any of the new technologies would be successful. This was a bubble - as I write this, most of those companies are down about 80% over the last two years. But the investments were very real.
Oxy and its executives wouldn't mind if a bubble occurred in the direct air capture business. Six years from today, Oxy is far more likely to have revenue than these early stage battery startups. Even if Oxy isn't profitable by 2029, six years from then, in 2035, Oxy publicly claims it will build a business of similar scale to its oil and gas operations. Investors will plausibly believe a story of large success, even if it keeps being pushed back. The possibility of a bubble seems very real.
The Carbon Engineering purchase had no impact on Oxy's short term price, which has been more or less flat during both the two weeks before the purchase, and in the two weeks since. This is the right answer today for a company with a market cap of $55B. But a bubble could very easily inflate even a stock as large as Oxy's. Stay tuned.
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