Advantage Energy to the Rescue

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Disclosure: The following represents my opinions only. I am long AAV.TO and WCP.TO (Image credit to veeterzy on Unsplash)

Lately there’s been a lot of talk around our (virtual) office about energy markets, energy policy, the electrification theme, and carbon. When I say we discuss carbon, I’m not talking about debating the drivers of climate change, but rather carbon’s role as a new “commodity” coming to a market near you. Personally, my thinking on carbon is partly based on what we just witnessed/are witnessing with respect to the creation of the marijuana market. Before legislation officially brought weed into the capital markets, marijuana was “external” to the formal economy. The market existed, but there was no money to be made in it without breaking the law. Once the laws changed, *poof*, a new market appeared; a market that made a lot of early investors a lot of money. Now, with a growing chorus, shifting global government policies (and “net zero” commitments with respect to fighting climate change) mean that carbon dioxide, which until relatively recently had no value associated with it, now does have a value. This is no “niche market”. The size of the global carbon market is expected to meet or exceed that of the largest commodity market in the world today; the oil market. This is a seismic market event in progress.

As they say, “one man’s trash is another man’s treasure”; and carbon is no exception. Emitted for centuries by human industrial and agricultural activities without any apparent cost or consequence, carbon dioxide is clear, colourless, odourless, and, until relatively recently, largely worthless. Today, as more countries and companies around the world set “Net Zero” emissions targets in the hopes of trying to limit humanity’s impact on the Earth’s climate, “carbon” (carbon dioxide) is being priced in a variety of markets, at levels largely set by governments. Ultimately, the “cost” of carbon will be paid by the consumers of goods and energy (which should come as no surprise) and I can’t see how the inclusion of that cost won’t be broadly inflationary, but that’s beside the point. The point is that these policy changes are more or less baked in the cake now, so I’m just going to roll with them, which means that I want to think of how I can play this from a market perspective. There are two ways to reduce carbon dioxide in the atmosphere… you can try to pull it out of the atmosphere (“sinks”), or you can stop it from going into the atmosphere in the first place (“sources”). These are not mutually exclusive options, but for this note I’m only going to focus on the “source” side of the equation. If you’re running a gas-fired power plant today, or burning gas in an industrial process, your “trash” is CO2, and now, like it or not, you’re going have to deal with it. That’s a lot of trash looking for a home.

Enter Advantage Energy (AAV.TO, last at $4.96). Advantage has been one of my favourite Western Canadian gas companies over the years (not that it’s made me much money) and a few months ago, they announced the formation of a wholly-owned subsidiary called Entropy Inc. Around our office, we think this looks like a game-changer. Entropy’s focus will be the global deployment of its groundbreaking carbon capture technology for point source industrial emitters. To quote Advantage directly:

“Advantage Oil & Gas Ltd. and Allardyce Bower Consulting Ltd. (ABC) have jointly developed breakthrough carbon capture and storage technology capable of commercial profitability at a carbon price below $50 per tonne. The first deployment of the technology will occur at Advantage’s Glacier gas plant near Grande Prairie, Alta., and is expected to enter service by March, 2022.

The modular carbon capture and storage (MCCS) technology can be retrofitted to most point-source industrial emissions, including sectors that are difficult to decarbonize like power generation, blue hydrogen, liquefied natural gas, oil and gas processing, and production of cement and steel. In partnership with ABC, Advantage has established Entropy Inc., which will own the technology with the intent of deploying it widely in the global effort to decarbonize.

The modular technology is extremely versatile, applicable to projects as small as 8,000 tonnes carbon dioxide equivalent per year, allowing decarbonization to occur in easily financed increments. There is no upper limit to the scalability for larger projects. MCCS recovers approximately 90 per cent of carbon emissions.”

(Modified from Entropy Inc., showing Entropy’s carbon capture cost vs existing technology)

For those not aware, being able to profitably capture carbon at a price of $50/tonne is a Big Deal. Look at where Entropy is on the cost curve (linked here and shown above). This is Holy Grail-type stuff. Right now, as the world rushes to put up wind and solar farms which are materials-intensive, land-intensive, intermittent and/or battery dependent, and of limited lifespan, I feel like we can all take a collective breath; because when it comes to gas-fired power generation (as one example), Entropy’s got us covered… or so the story goes. Entropy’s modular units capture CO2 by running combustion gas through a proprietary fluid that extracts the CO2 in a cyclic process (the fluid is “gassed up and degassed” in a loop). Once the CO2 is captured, it is injected into suitable underground rock formations/reservoirs (North America has no lack of these) where it will remain sequestered for geologic time… or perhaps used for enhanced oil recovery projects like the one that Whitecap (WCP.TO, last at $6.25) operates at Weyburn, Saskatchewan. Meanwhile, pipeline companies are already positioning for the scale-up of CO2 capture, distribution, and injection networks. The mechanism of the market never ceases to amaze in its ability to respond and allocate resources, does it?

The first full-scale deployment of Entropy’s modular carbon mousetrap will be at Advantage’s flagship Glacier gas plant and is scheduled to be operational in March of 2022. I can’t believe this wasn’t front page news when it came out and the more I think about it, the more I think there’s a huge opportunity here that the market hasn’t figured out yet. Imagine being able to economically capture 90% of the CO2 emitted from gas-fired power generation or cement production… ninety percent! That’s huge, just huge. It seems almost too good to be true, but the scientists and engineers from Alberta and Saskatchewan who came together to make this happen are among the brightest minds in this sector, so maybe it’s not so surprising after all. Canadians tend to be modest by nature, but I think that this advancement might be worthy of a little bit more excitement. Maybe even some socially-distanced chest-thumping. I mean, come on, this is the definition of manna from heaven from a climate change perspective… and it will let us use the extensive, and installed global generation/transmission capacity that we’ve got, carbon-guilt free!

I’m not breaking out the champagne yet, but I’ve got it in the fridge and I know where the glasses are, and I mean that. If Entropy’s carbon capture tech is anywhere close to as good as advertised, the market is going to be hearing a lot more about Advantage Energy and Entropy going forward. Advantage’s share price has generally moved up in lock-step with the rest of its gas producing peers as part of the greater move in the energy sector, but with an embedded story like Entropy’s, I start looking at clean-tech stocks like Ballard Power with a $6.5 billion market cap and wonder a little about what Advantage could be worth over time (I’d argue that Entropy’s technology is as important and scaleable, if not moreso). Today, Advantage’s market cap is roughly $1 billion and I’d argue that the gas assets are easily worth that on their own, so am I still getting a free call option (or at least a very modestly priced one) on Entropy in my Advantage position? I think so. To be sure, there’s a lot of story to be written here yet, but I sure am liking how this chapter reads…

Time will tell.