Occidental Petroleum (OXY -0.15%) believes carbon-capture utilization and sequestration (CCUS) could be a game changer. This technology could play a crucial role in reducing carbon emissions, which gives it the potential to become a multitrillion-dollar market.
That's leading the oil company, which is one of the top holdings of Warren Buffett's Berkshire Hathaway (BRK.A -0.76%) (BRK.B -0.69%), to make a bold move to enhance its ability to capitalize on this potentially massive opportunity. It's spending $1.1 billion to acquire climate solutions company Carbon Engineering. Here's a look at the deal and why Occidental Petroleum is betting big on CCUS.
Drilling down into the deal
Occidental Petroleum has agreed to acquire Carbon Engineering for $1.1 billion in cash. The climate solutions company focuses on developing large-scale technology that can capture carbon dioxide from the air, known as direct air capture (DAC). Companies can use the captured greenhouse gas to make clean transportation fuels or store it underground.
Occidental has been working with Carbon Engineering since 2019. They're currently building Stratos, which will be the world's largest DAC facility when it comes on line in mid-2025. The facility will cost the oil company an estimated $1.1 billion.
The companies are also developing another DAC facility that will be part of the South Texas DAC hub. The Biden administration recently selected that project to receive funding to help get it going.
Acquiring Carbon Engineering enhances Occidental Petroleum's ability to develop partnerships to build other DAC facilities. The oil giant aims to build 100 DAC facilities in the U.S. by 2035. That's up from its initial view of 70 after the Inflation Reduction Act (IRA) made CCUS more economical.
It has already secured the land for half of those facilities. But given the cost of Stratos, it will need to bring in financial partners to help fund this endeavor. That will be easier to do now that it will control the technology by acquiring Carbon Engineering.
A massive upside catalyst for Buffett and other investors
Occidental Petroleum's strategy has caught the attention of Warren Buffett, with Berkshire Hathaway now owning more than 224 million shares of the oil giant (25.3% of its outstanding shares). That stake is worth over $14.2 billion, which is 4% of Berkshire's investment portfolio (and its sixth largest holding).
While Occidental's upside exposure to oil prices is the primary draw, it's not the only catalyst. Its carbon capture potential also represents a massive opportunity. CEO Vicki Hollub has said that she believes CCUS will eventually become a $3 trillion to $5 trillion global market. She's not alone in that view: ExxonMobil foresees a $4 trillion global market for CCUS by 2050.
The oil companies believe that this technology can be a huge moneymaker. Hollub thinks her company can eventually make as much from CCUS as it currently earns by producing oil and gas. Meanwhile, Exxon believes it could generate a multibillion-dollar annual revenue stream with carbon solutions.
Occidental's CCUS strategy is already starting to pay off. It has signed several commercial agreements over the past year to support Stratos. For example, aerospace giant Airbus pre-purchased carbon removal credits to capture and permanently sequester 100,000 tons of carbon dioxide per year for four years.
South Korean energy company SK Trading International agreed to purchase up to 200,000 barrels of net-zero oil annually for five years. Occidental Petroleum will produce net-zero oil by capturing carbon dioxide from Stratos and injecting it into older reservoirs to produce oil through a process called enhanced oil recovery.
The company will likely sign more commercial agreements supporting its CCUS projects as more companies take steps to decarbonize their operations to help prevent the worst impacts of climate change.
A potentially massive upside catalyst
CCUS represents one solution for these companies, especially in industries that are harder to decarbonize, like aviation, manufacturing, and energy. This technology is getting a boost from government incentives, helping enhance the commercial viability of projects under development by companies like Occidental Petroleum.
The oil company could eventually make a lot of money providing CCUS services, which could provide a big boost to its stock price. That upside opportunity makes this top Warren Buffett stock look like a compelling investment for those seeking to make money while also helping to save the planet.
