Liberty Energy targeting data centers needing rapid deployment: Severson

Key Concepts

• Liberty Energy (LBRT): Company with an emerging business segment, Liberty Power Innovations (LPI), focused on distributed power generation using natural gas.
• Liberty Power Innovations (LPI): A business unit launched by Liberty Energy in April 2023, specializing in distributed power generation.
• Distributed Power Generation: On-site power production, often at the point of consumption (e.g., data centers).
• Natural Gas as a Bridge Fuel: A transitional energy source that can help bridge the gap between current energy systems and fully renewable ones.
• Rex American Resources (REX): Company involved in renewable fuels and carbon capture, specifically expanding into low-carbon ethanol production.
• Low-Carbon Ethanol: Ethanol produced with reduced greenhouse gas emissions, often facilitated by carbon capture technologies.
• 45Z and 45Q Tax Credits: U.S. federal tax credits that incentivize the production of clean fuels and carbon capture.
• E15 Initiative: A U.S. policy aiming to increase the blend of ethanol in gasoline from 10% to 15%.
• Gevo (GEVO): Company focused on renewable aviation fuel (SAF).
• Sustainable Aviation Fuel (SAF): A type of jet fuel derived from renewable sources, designed to reduce the carbon footprint of air travel.
• Drop-in Fuel: A fuel that can be used in existing infrastructure without requiring modifications to engines or distribution systems.
• Alcohol-to-Jet (ATJ): A process for converting alcohols (derived from renewable sources) into jet fuel.

Energy Generation and Renewable Fuels: Hot Picks

Sean Severson, CEO and co-founder at Water Tower Research, presents three investment ideas in the energy generation and renewable fuels sectors. He highlights a key advantage in this space: predictable contracted revenue streams, often supported by major corporations and federal government policies.

1. Liberty Energy (LBRT) and Liberty Power Innovations (LPI)

• Main Topic: Transformation of Liberty Energy's business mix through its emerging distributed power generation segment.
• Key Points:
  • The trend of increasing power consumption driven by AI and data centers has led to interest in companies like Oaklow, Constellation, and NRG.
  • Liberty Energy is attractive due to its emerging business, Liberty Power Innovations (LPI), launched in April 2023.
  • LPI is developing a significant presence in distributed power generation, primarily driven by natural gas.
  • Natural gas is viewed as a crucial bridge fuel and bridge technology in the transition to cleaner energy.
  • Liberty Energy is making strides in this area, fitting into the broader power demand equation.
• Technical Terms:
  • Distributed Power Generation: On-site power production, often at the point of consumption.
  • Bridge Fuel: An energy source used as a temporary solution during the transition to more sustainable energy sources.
• Real-World Application: Liberty Energy's LPI is developing on-site power generation solutions for data centers, utilizing natural gas. They have also struck a deal with Oklahoma concerning Small Modular Reactors (SMRs) and nuclear power, but natural gas plays a role as a bridge technology.

2. Rex American Resources (REX) and Renewable Fuels

• Main Topic: Rex American Resources' expansion into renewable fuels, specifically low-carbon ethanol and carbon capture.
• Key Points:
  • The agricultural ecosystem is an important, often overlooked, contributor to fuel production.
  • Rex American Resources is an ethanol company that is expanding into carbon capture to create low-carbon ethanol.
  • The company benefits from regulatory tailwinds, including 45Z and 45Q tax credits, which incentivize clean fuel production and carbon capture.
  • The E15 initiative in the U.S., which aims to increase the ethanol blend in gasoline from 10% to 15%, is driving significant demand for ethanol, particularly low-carbon varieties.
  • Ethanol is considered a key component of the U.S. fuel infrastructure.
• Data/Statistics: The E15 initiative aims to expand the mix of ethanol from 10% to 15%.
• Technical Terms:
  • Carbon Capture: The process of capturing carbon dioxide emissions from industrial sources or directly from the atmosphere.
  • 45Z and 45Q Tax Credits: U.S. federal tax credits designed to promote clean energy and carbon capture technologies.
  • E15: A gasoline blend containing 15% ethanol and 85% gasoline.
• Arguments/Perspectives: The initial uncertainty surrounding the implementation of 45Z and 45Q tax credits under a new administration caused some investor hesitation. However, the extension of these credits and strong business fundamentals have since gained investor attention in the renewable fuel and ethanol sectors.
• Stock Information: The stock chart showed a significant drop, which may be distorted by a recent two-for-one stock split.

3. Gevo (GEVO) and Renewable Aviation Fuel (SAF)

• Main Topic: Gevo's involvement in the sustainable aviation fuel (SAF) market.
• Key Points:
  • The airline industry's primary method for reducing carbon emissions is through fuel alternatives, as other measures like recycling are insufficient.
  • Sustainable Aviation Fuel (SAF) is presented as the only viable solution for airlines to achieve their carbon reduction targets.
  • Jet fuel demand is growing (estimated around 9%), while refining capacity is shrinking, creating pressure on the system.
  • Gevo is positioned to capitalize on this trend by producing SAF.
  • The company utilizes an Alcohol-to-Jet (ATJ) process, converting renewable sources like corn (or carbohydrates in general) into jet fuel. This is described as a "field to the wing" process.
  • SAF is a drop-in fuel, meaning it can be mixed with existing petroleum-based jet fuel and used with current infrastructure without modifications. This is a critical advantage for widespread adoption.
• Data/Statistics: Jet fuel demand is estimated to be growing around 9%.
• Technical Terms:
  • Sustainable Aviation Fuel (SAF): Jet fuel produced from renewable sources.
  • Drop-in Fuel: A fuel that is compatible with existing infrastructure and equipment.
  • Alcohol-to-Jet (ATJ): A process that converts alcohols into jet fuel.
• Real-World Application: Gevo's SAF can be blended with conventional jet fuel, allowing airlines to reduce their carbon footprint without significant infrastructure changes. This is a critical solution for the airline industry's decarbonization goals over the coming decade.
• Feedstock: Corn and other starchy plants are the essential feedstocks for Gevo's SAF production.

Conclusion

Sean Severson highlights three companies poised to benefit from significant trends in energy generation and renewable fuels. Liberty Energy is transforming its business with a focus on distributed natural gas power generation. Rex American Resources is leveraging regulatory incentives and growing demand for low-carbon ethanol. Gevo is at the forefront of the crucial sustainable aviation fuel market, offering a drop-in solution for the airline industry's decarbonization needs. The common thread across these opportunities is the backing of major corporations, government policy, and the growing demand for cleaner energy solutions.