Carbon storage is gaining favor. These are the companies investors need to know

Published Tue, Aug 15 20231:20 PM EDTUpdated Tue, Aug 15 20232:30 PM EDT

This summer has brought more evidence of a changing climate as floods soaked Vermont, drought provided the fuel to stoke the devastating fires in Maui and scientists declared July the hottest month ever recorded on the planet. The building evidence could prompt more action to mitigate carbon emissions. Action is being taken by the federal government , major oil companies and even Big Tech. Carbon capture, utilization and storage processes have been around for half a decade, but are currently gaining momentum. Known as CCUS, it is considered a key part of the clean energy transition by helping to balance out emissions that are considered all but impossible to avoid, according to the International Energy Agency. For investors, the trend could be a win-win. The value of these companies could rise over time, as investments help power the transition. Though CCUS had a slow uptake at first, the IEA tracks more than 500 projects now in the works. Some focus on modifying already-standing power as well as industrial plants that work on carbon capture. 'Simple in theory' Just last week, the U.S. Department of Energy announced more than $1 billion in federal grants for projects in Texas and Louisiana that are expected to remove more than 2 million metric tons of emitted carbon. The Louisiana plan, called Project Cypress, is run by privately held Battelle with technology from Climeworks and Heirloom Carbon Technologies. Texas' hub is in Kleberg County in the Rio Grande Plain. It has a better known backer: Occidental Petroleum 's 1PointeFive subsidiary, which is working with Carbon Engineering and Worley . To be sure, even an increased volume of projects is not enough to reach a net zero future, the IEA warned. Energy research firm Wood MacKenzie estimated the global capacity for CCUS should rise to 1.7 billion tonnes per year by 2050, up from the current capacity of around 63 million. Truly helping curb climate change would take even more. Wood MacKenzie estimated it would require 7.75 billion tonnes per year to keep global warming to 1.5 degrees above preindustrial levels. That's more than 450% above the capacity expected to be in place by 2050. Wood MacKenzie noted that CCUS projects are currently focused in power and gas, though it could expand with help from the "hub" or "cluster" concept, which essentially means that carbon would be taken from many sources and stored in a shared space. The firm pointed to cement and steel production as industries that could lead the way, given few alternatives to fossil fuel use for these companies. (Part of CCUS popularity stems from it being an alternative to completely removing dependency on oil and gas.) Still, researchers and analysts alike have pointed to carbon pricing as a key obstacle. And a carbon tax or requirement for businesses to use cleaner energy could lead to inflationary pressure depending on how these processes are executed, according to Goldman Sachs chief economist Jan Hatzius. "Companies might see hedging their supply chains against potential future geopolitical problems as prudent or see reducing their carbon footprint as important for the planet," Hatzius said. "But in a competitive market, it is hard for companies to incur large short-run costs to make such changes unless their competitors do so too, because otherwise their competitors might undersell them." But Hatzius said many economists still support the use of carbon taxes, which have been implemented in many countries including Denmark and Switzerland. The European Union also recently approved the world's first carbon border tax, Hatzius noted. Put more succinctly, Deutsche Bank analyst James Hubbard called carbon capture "simple in theory" but "capital intensive and divisive" in reality. However, Wall Street analysts see the clear need for increased carbon capture capacity — and are keeping an eye on the companies jumping on the CCUS business opportunity. 'Uniquely positioned' Earlier in the year, Goldman's Brian Singer screened for stocks with buy ratings from the firm that also have a direct connection to Inflation Reduction Act 's benefits for carbon capture, use and storage. He found two: Baker Hughes and Occidental Petroleum. Energy technology company Baker Hughes has outperformed the broader market this year, gaining nearly 20% year to date. Wall Street sees more upside ahead, with the average analyst holding a buy rating and a price target that implies an upside of around 12.5%, according to Refinitiv. BKR YTD mountain Baker Hughes shares are up nearly 20% year to date. A Goldman team led by Ati Modak named Baker Hughes one of its top oil services buys through year-end, citing its order backlog and new energy commitments. Occidental, which won Department of Energy support for the carbon capture project in Texas last week, hasn't had such a good year. The stock is up just 3.5% year to date, underperforming the broader market after more than doubling its share value during 2022's bear market. Wall Street sees similarly muted gains ahead, expecting an upside just under 5%, according to Refinitiv. The average analyst surveyed by the data provider has a hold rating on the stock. OXY BKR YTD mountain Occidental Petroleum and Baker Hughes, year to date Not everyone is on the sidelines. Stephens analyst Mike Scialla initiated coverage of the stock at overweight in late June, citing the carbon capture opportunity as a top reason driving his investment thesis. "OXY is uniquely positioned within the E & P sector to capitalize on emerging opportunities in low carbon markets," he said, using the shorthand for exploration and production. Scialla noted that Occidental has more than half a century of experience with carbon management and is building the world's largest direct air capture facility with proprietary technology. He also noted the company has one of the industry's largest carbon capture positions. 'More balanced risks' Analysts are also looking at companies outside of traditional oil names as potential winners. Bank of America analyst George Staphos upgraded shares of Weyerhaeuser to buy from neutral in July, putting him with the majority on Wall Street, according to Refinitiv. As America's largest private landowner, the company controls vast acres of timberlands, which it says remove tons of carbon dioxide from the atmosphere. It also has been leasing its land for solar panels, wind turbines and geologic sequestration. Staphos cited the potential of its carbon capture operations as a long-term reason to be optimistic, even as its more traditional end-market, homebuilding, faces near-term pressure. "We are still leery that housing fundamentals will cyclically slow on the impact of higher rates and other macro considerations," he said. "But WY provides more balanced risks than, say, Boise or Louisiana-Pacific , given its timber exports, land values and carbon capture/ESG narrative." That's just one name in a longer list of public companies that Bank of America sees as winners from the IRA's tax credit . The other seven: Bloom Energy , CF Industrial , Honeywell , KBR , Linde , Nutrien and Teledyne . Though this crop of stocks range from chemical names to professional services providers, they share some commonalities when it comes to stock performance. First, they've all underperformed or are about in line with the S & P 500 this year. And second, all are expected to rally at least 10% in the year ahead, based on the average price target of analysts surveyed by Refinitiv. — CNBC's Michael Bloom contributed to this report