Carbon dioxide emissions are a big problem. They're a contributing factor to climate change and global warming. It's leading companies worldwide to work hard to reduce their emissions and prevent the rise in global temperatures from exceeding 1.5 degrees Celsius by 2050. That's the level many fear would cause more risks to natural and human systems.
1PointFive Energy, a subsidiary of oil giant Occidental Petroleum (OXY 5.42%), is one of the many companies working toward solutions to prevent the worst impacts of climate change. Occidental, one of Warren Buffett's top holdings, is developing the first of many direct air capture (DAC) systems to pull carbon dioxide from the atmosphere and sequester it underground. The company recently signed a landmark agreement to sell carbon removal credits to Microsoft (MSFT +0.60%), which will help the tech titan reach its climate goals.
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Capturing a massive commercial contract
Microsoft wants to be a good corporate citizen. The technology company has committed to becoming carbon-negative by 2030. It has taken several steps to reach that ambitious goal. It recently signed the biggest-ever renewable energy power purchase agreement (PPA) with Brookfield Renewable (BEPC +0.00%)(BEP 0.26%). The deal will see Brookfield deliver over 10.5 gigawatts (GW) of new renewable energy capacity to Microsoft in the 2025 to 2030 timeframe. That's almost eight times larger than the biggest corporate PPA ever signed. It also added to the roughly 1 GW Brookfield is already delivering to Microsoft. That deal will help accelerate Brookfield's development pipeline while putting Microsoft closer to achieving 100% of its power needs from zero-carbon energy by the end of the decade, even as its power consumption accelerates due to the massive needs of cloud computing and AI.
However, Microsoft can't achieve its carbon-negative goals on renewable energy alone. That recently led it to sign a landmark agreement with 1PointFive, a carbon capture and storage (CCS)-focused company owned by Occidental Petroleum. It agreed to sell Microsoft 500,000 metric tons of carbon dioxide removal (CDR) credits over six years to help support its carbon removal strategy. That's the biggest-ever purchase of CDR credits enabled by a DAC facility. The landmark agreement will help support Microsoft's commitment to becoming carbon-negative by 2030.
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Occidental's subsidiary is building the world's first industrial-scale DAC facility in Texas, called STRATOS. That facility will have the capacity to capture and sequester up to 500,000 tonnes of carbon dioxide per year. Occidental and its partner, Blackrock, expect the project to be commercially operational by the middle of next year. Microsoft's CDR credits will support that facility.
Microsoft joins a growing list of commercial customers committed to supporting STRATOS. 1PointFive has also signed CDR credit purchase agreements with several companies, including Amazon, the Houston Astros, and the Houston Texans.
Capturing a potentially massive opportunity
As a leading oil company, many would likely see Occidental Petroleum as part of the climate change problem. However, the company wants to be part of the solution, seeing this issue as a potentially lucrative opportunity.
The company believes that CCS could grow into a $3 trillion to $5 trillion global market in the coming decades. That's leading it to invest heavily in the technology, which it estimates could eventually contribute as much earnings and cash flow as it currently gets from producing oil and gas.
STRATOS is the first of many DAC facilities Occidental plans to develop. It's already working on an even larger facility. The South Texas Direct Air Capture Hub would feature the first DAC plant capable of removing up to 1 million metric tons of carbon dioxide annually. Meanwhile, that hub could support several facilities that could remove and store up to 30 million metric tons annually.
Occidental also acquired Carbon Engineering for $1.1 billion last year to enhance its ability to develop DAC facilities. That company developed the technology behind its DAC projects. Because Occidetnal now owns Carbon Engineering, it could eventually license this technology to other companies.
CCS represents a massive long-term growth catalyst for Occidental. It enhances the company's already strong near- and medium-term growth drivers, which include its pending acquisition of Crown Rock, increased midstream earnings, and chemicals expansion projects. These growth drivers could add $2 billion to its annual free cash flow total by the second half of 2026. That earnings growth should create a lot of value for investors over the coming years, including leading shareholder Berkshire Hathaway. Buffett's company now owns 28.8% of the oil company's outstanding shares. It's Berkshire's sixth largest holding, at $15.6 billion, accounting for 3.8% of its investment portfolio.
A win-win deal
Microsoft is partnering with a subsidiary of Occidental Petroleum to help it achieve its goal of becoming carbon-negative by 2030. That deal will help the technology company solve a big problem. It's also helping further commercialize Occidental's first large-scale CCS project. That technology could be a needle-moving growth driver, adding to its long-term investment appeal.
