Thanks to higher prices, ExxonMobil (XOM +0.85%) made record profits producing oil and gas last year. However, it sees an even bigger potential profit opportunity in lower carbon energy, including carbon capture and storage (CCS).
Exxon believes CCS could become a multitrillion-dollar market opportunity within the next decade. That leads the company to foresee the potential of generating hundreds of billions of dollars in annual revenue from its CCS investments. Furthermore, they could produce steadier profits for the company than its traditional oil and gas businesses. And that means an investment in ExxonMobil stock could deliver lucrative returns in the coming years.
NYSE: XOM
Key Data Points
Drilling down into the CCS opportunity
CCS is a process of capturing carbon dioxide emissions from the source or the atmosphere. The captured carbon then moves by pipeline to an underground storage site for permanent sequestration.
ExxonMobil is investing in infrastructure to capture, transport, and sequester carbon dioxide. Those investments will enable the company to help customers decarbonize their operations by moving captured carbon dioxide via pipelines to sequestration hubs. It believes CCS could be an enormous commercial opportunity that could fuel exponential growth for its low-carbon solutions platform:
Image source: ExxonMobil Investor Relations Presentation.
As that slide shows, Exxon believes CCS could be a massive growth driver in the future. It sees an enormous and growing total addressable market opportunity that could reach trillions of dollars within the next 10 years. That could enable the company to generate hundreds of billions of dollars in annual revenue as it scales this business.
However, that assumes future regulations and energy policy support higher carbon pricing. Carbon prices would need to triple from their current level to make more projects commercially viable and achieve the high end of Exxon's forecast.
An early mover in capturing commercial opportunities
The current carbon pricing framework is starting to make more projects economically viable. That's enabling Exxon to start securing commercial contracts for its decarbonization services.
Last year, it signed a landmark agreement with CF Industries (CF +2.80%) to capture and store up to 2 million metric tons of carbon dioxide per year from an ammonia plant it's building in Louisiana. Exxon is developing a 125,000-acre carbon dioxide storage location in Louisiana to sequester the greenhouse gas. EnLink Midstream (ENLC +0.00%) will provide the pipeline services to move the captured carbon dioxide from the CF Industries plant to ExxonMobil's sequestration hub.
Meanwhile, the company recently signed a long-term agreement with Linde (LIN +1.20%) to take the carbon dioxide produced at a new clean hydrogen production plant it's building in Texas. Exxon will transport and permanently store up to 2.2 million metric tons of carbon dioxide each year from that facility. That's equivalent to the emissions of nearly half a million cars each year.
The company recently stated that contracts like this should generate multibillion-dollar annual revenue streams within the next 10 years under current carbon pricing conditions. Exxon thus expects its investments to build out carbon sequestration hubs and related infrastructure will generate double-digit returns. This business will also produce steadier cash flow, making it less cycle than its base oil and gas business.
A gigantic market opportunity for Exxon
Exxon believes CCS could grow into a massive and extremely lucrative market. That's leading the company to start making investments to build out foundational CCS projects. It has already begun to secure commercial contracts to support these projects, which could grow into a multibillion-dollar annual revenue stream for the company.
Those more stable commercial agreements will help offset some of the volatility of the company's oil and gas business, which means CCS can potentially be a game-changer for Exxon. It could provide the company with significant and more sustainable cash flows. That makes it a major upside catalyst for the stock.
