On July 13, Exxon Mobil (XOM) agreed to buy Denbury (DEN) for $4.9 billion. Denbury shareholders will receive 0.84 shares of Exxon for every share of Denbury stock they owned. This acquisition will accelerate Exxon’s energy transition business, thanks to Denbury’s established carbon dioxide (CO2) sequestration operation.
And far from being too late, this marks a great time to get in on Exxon…
Texas-based Denbury is an oil and gas producer (47,000 barrels of oil equivalent per day) that owns and operates a 1,300 mile CO2 pipeline network in the U.S. This includes pipelines that span the Gulf Coast’s petrochemical industry heartland, where Exxon has sought to build a carbon hub. Of the 1,300 miles, 925 miles stretch across Texas, Louisiana, and Mississippi.
Denbury gets most of its revenue from enhanced oil recovery, which involves pumping CO2 into wells to force out more oil. The company is using carbon captured from industrial sources and injects approximately 240 million cubic feet of CO2 from industrial sources per day. It exited bankruptcy in September 2020, and its stock has jumped nearly fivefold since, as U.S. oil companies increasingly embraced carbon sequestration to cut greenhouse gas emissions. These oil companies include Exxon, Chevron (CVX), Shell (SHEL), the Warren Buffett-backed Occidental Petroleum (OXY), and a company similar to Denbury—Talos Energy (TALO).
Exxon’s latest effort at making carbon capture a profitable business is just one more effect of the Inflation Reduction Act (IRA), under which, providers of carbon sequestration can obtain sweetened Federal tax credits. The company’s CEO, Darren Woods, said the Denbury deal: “…reflects our determination to profitably grow our low carbon solutions business.” So, let’s take a closer look at the deal and if it makes Exxon a more interesting company in which to invest for investors looking for dividends.
What Denbury Brings to Exxon
Two years ago, Exxon set up its Low Carbon Solutions business with the aim of generating hundreds of billions of dollars in revenue from cutting its and customers’ emissions. The company has said the business, which includes carbon storage, hydrogen, and biofuels, could outperform its traditional oil and gas operations as soon as a decade from now.
Exxon considers CCUS (carbon capture, utilization, and storage) a significant business, estimating that it will be a $4 trillion global market by 2050. This presents a multibillion-dollar income opportunity for Exxon and a revenue stream that will be more valuable and stable than oil and gas over time. The purchase of Denbury builds on the foundation of long-term contracts that can provide Exxon with a more predictable cash flow stream.
Last year, Exxon Mobil struck its first commercial carbon storage deal with the major fertilizer and ammonia maker, CF Industries Holdings (CF). It also struck deals with steel manufacturer Nucor (NUE) and industrial gas producer Linde AG (LIN) to capture CO2 from their factories, and transport and store it.
Denbury’s extensive 1,300-mile carbon pipeline network—the largest in the U.S.—and 10 sequestration sites (Exxon’s own offshore storage sites are years away) give Exxon Mobil a way to quickly provide carbon removal services to existing and future carbon reduction customers in the Gulf Coast region.
A key part of Exxon’s strategy—and the gem in Denbury’s pipeline network—is its Green Pipeline, which was completed in 2010. This pipeline allows for the delivery of CO2 to oil fields all along the Gulf Coast. At the present time, the CO2 flowing in the Green Pipeline is delivered from either the Jackson Dome natural CO2 source or existing industrial facilities in Port Arthur, Texas and Geismar, Louisiana.
Currently, Denbury is only utilizing about 25% of the pipeline’s capacity. Based on the current and future potential volume of emissions in close proximity to the pipeline, the expansion of this pipeline to transport two or three times the current capacity, up to 50 million metric tons per year of CO2, is likely coming soon.
In simple terms, the acquisition is a logical and straightforward way for Exxon Mobil to build on its existing business strength in carbon management technology.
Keep in mind too that the Gulf Coast is one of the biggest markets for CCUS in the U.S. The combined Exxon-Denbury system can potentially reduce CO2 emissions in the Gulf Coast region by over 100 million metric tons per year.
I see Exxon’s move into CCUS as a key part of the company’s long-term viability. Its cash flow stream from these projects will help to offset any drop-off in oil demand. That is good news for dividend investors.
Exxon’s Dividend Is Safe
Exxon stock currently has a yield of 3.6%. It raised its quarterly dividend in the fourth quarter of 2022 from $0.88 a share to $0.91 a share.
Concerns over Exxon’s dividend have been effectively put to rest, as spot prices for crude oil, which have stayed in the $70+ per barrel range, have replenished the company’s coffers.
The stock—like most oil stocks—remains cheap. Exxon Mobil trades at a price/earnings ratio of less than 7, and its forward p/e is less than 11.
With the company building for a low carbon future, the stock is a buy anywhere in the $95 to $105 range.
