GTLS - Chart Industries: Unproven Carbon Capture Has Huge Upside Potential

Summary

• Chart Industries, Inc. has a unique approach to capture CO2 from point sources.
• The technology has the potential to be highly profitable with the Inflation Reduction Act tax credits.
• Chart manufactures much of the equipment needed for the Cryogenic Carbon Capture system, making it a higher-margin product.
• The technology has not been proven at commercial scale, but has a current project that will test it at this level.

This is the next one of my articles on various CCS technologies, and as a reminder, my criteria for investing are as follows:

1. Market cap - The CO2 market will be in the tens of billions in this decade. A company needs a market cap small enough for this to make a meaningful impact on revenues and profits.

2. Scale - Technology Readiness Level of 6 or higher or with a currently funded project to reach that scale.

3. Economic viability with 45Q - Have to be able to produce CO2 at or under $85/tonne for point source capture, or $180/tonne for direct air capture (the subsidies that are available from the Inflation Reduction Act).

In December 2020, Chart Industries, Inc. ( GTLS ) purchased Sustainable Energy Solutions, whose Cryogenic Carbon Capture ("CCC") technology has the capability of being more cost and energy efficient than competing technologies and can hit the 45Q target price at the commercial scale.

Technology overview

Every other carbon capture company that I have covered so far has been an amine technology. CCC is something completely different. Rather than absorb the CO2 and chemically bind it to an amine, this technology takes the gas exhaust stream and cools it down until the point that the CO2 goes directly from a gas to a solid in a process called desublimation.

Most people are familiar with dry ice. As dry ice warms, it does not form a liquid, it goes straight from its solid form to its gas form. That is called sublimation. Dry ice is essentially pure CO2. This process essentially just does the exact opposite. The separation technique is a phase change in the CCC process, rather than absorbing via creating a chemical bond. The separated CO2 is then pressurized so that it can be liquefied and warmed back up to room temperature.

It may seem extremely energy intensive to cool the entire gas stream down to such a low temperature. The key to the efficiency of the system is that the system returns both the flue gas stream and the separated liquid CO2 stream back to close to their inlet temperature, recuperating the vast majority of the cooling required to run the process. Their literature claims that they can capture the CO2 "at half the cost and energy of alternative carbon capture technologies." This puts them easily under $85/tonne once they have scaled the technology.

The problem with an investment in Chart's CCUS solution is that its technology has yet to be proven at a sufficient scale yet. The largest system that has operated to date only captures approximately 1 ton per day. They do have a current project with DOE funding for a 30-ton per day system installed and operated at an industrial cement plant. This installation is large enough to be a commercial system. However, that plant will not be operational until 2024, and will most likely have operational issues as it will be a first-of-a-kind system.

Building out partnerships

Chart has also been making significant strides with commercial partners, recently signing memorandums of understanding with FLSmidth , Wolf Carbon Solutions , as well as several others. FLSmidth is a major player in the cement industry, providing plant design, financing, construction, commissioning, and other engineering and support services. Their partnership with Chart allows them to offer carbon capture solutions to their large existing fleet of cement kilns that they support as well as for me plants. Wolf Carbon Solutions is building a CO2 pipeline system, and they have agreed to join Chart to "jointly identify, develop, pursue and execute projects using Chart's [...] technology at mutually agreed upon host sites located along Wolf's recently announced Mt. Simon Hub carbon pipeline system." Wolf is already building the pipeline, so this gives them more business for their CO2 project and gives Chart another source for leads.

Chart benefits from selling carbon capture more than most

One of the core reasons that Chart acquired Sustainable Energy Solutions is because of the synergy between their core business and the CCC technology. Chart specializes in manufacturing equipment for liquefied has products like liquefied natural gas, nitrogen, oxygen, hydrogen, and, yes, carbon dioxide. This means they benefit not just from designing and selling the process, but also from manufacturing key pieces of equipment such as the cryogenic recuperative heat exchanger that is central to the CCC process. The refrigeration system that is required in the CCC process is also very similar to Chart's IPSMR refrigeration prices that they use for their large-scale liquefied natural gas plants.

The recent acquisition of Howden, which resulted in Chart's stock price being cut almost in half, actually furthers this advantage. Many of Howden's equipment offerings including blowers and compressors can also be used in the CCC process. This increases the vertical integration in their offering, decreases technical risk and reliance on outside vendors, and should result in better margins for each plant that is built. The Howden acquisition deserves an article all by itself, and I would suggest you read my colleague Long Player's article for more context. From a carbon capture perspective, this is a boon for the business.

Carbon capture could make a huge difference to Chart's business

Chart's market cap has recently been hovering around $4.5B - $5B, so it is small enough that CCUS could make a big difference in the long term. You may recall from my prior article that a single full-scale plant could cost upwards of $2B. While Chart would not be capturing that entire revenue stream, they would receive a significant portion of it, and an even bigger portion now that they are adding Howden to the fold.

Returning to the three criteria, Chart is an excellent fit on criteria 1 and 3 of the companies that I've covered. Their market cap is exactly where it needs to be for carbon capture to make a big difference, and the economics suggest they could really be profitable with help from the technology is also on track to be vetted at a commercial scale in 2024, just as the carbon market begins to mature in the second half of this decade. To underscore this point, CEO Jill Evanko recently spoke at the Goldman Sachs Energy Conference that "What we're hearing in carbon capture and storage is that the IRA just set it off. I mean we got so much more activity since the IRA on CCUS, even if it's just pre-FEED and FEED work because people actually believe, and they understand the metric, and they understand the credit system."

However, the technology is currently at Technology Readiness Level 5, although their planned project will move them to TRL 6. This makes it a riskier bet as the technology has yet to be proven at a sufficient scale to truly be commercially viable. There will be plenty of time to invest and capitalize on this opportunity after the technology has been proven.

I would rate Chart carbon capture a very speculative buy based on its potential, but I would not invest in Chart Industries, Inc. on carbon capture alone. Fortunately, Chart Industries, Inc. has structural tailwinds from its LNG and hydrogen businesses as well that make it a buy for me. It is on my list of companies that I am dollar-cost averaging into and will remain in GTLS stock for the foreseeable future.

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