On the Road: Advantage Energy

With the gradual easing of travel restrictions throughout 2022, we are happy that once again, we can recount our journeys and bring to life our investment process through our On the Road articles. In this edition, we are pleased to highlight a company that is positioned at the intersection of global energy security and climate change policy: Advantage Energy.

Advantage Energy (“AAV”)is a natural gas company producing from the prolific Montney Formation in Northwest Alberta. The company is a low-cost producer of natural gas and natural gas liquids, benefiting from attractive geology, internally owned infrastructure, economies of scale, and an expansive inventory of locations.

In addition to its strong position in the natural gas industry, the company is at the forefront of commercializing climate change mitigation technologies through its carbon capture and sequestration subsidiary, Entropy.

In September 2022, we had the opportunity to visit Advantage’s Glacier natural gas processing facility, of which it owns an 87.5% stake. Located between Grande Prairie and Dawson Creek on the Alberta side of the border with British Columbia, the Glacier processing plant has been a key asset for Advantage since its commissioning in 2010.

The facility purifies raw natural gas by removing contaminants including carbon dioxide, hydrogen sulphide, water, solids, and heavy hydrocarbon liquids, such that the resulting product is ready for commercial sale. Majority ownership of the Glacier facility allows Advantage to save processing expenses that otherwise would be paid to a third party midstream companies, and ensures that the company’s own production is prioritized over volumes from external parties.

The talent and expertise built over more than a decade of operating the Glacier processing plant positioned Advantage to explore opportunities in the realm of carbon capture and sequestration. As the company had already been successfully sequestering carbon dioxide generated from the processing of raw natural gas at Glacier, the idea of exploring the commercialization of broader-scale carbon capture applications was a logical progression.

In early 2021, Advantage founded Entropy in collaboration with an industry partner in process engineering, and an academic partner with decades of research in solvent chemistry. The aim: commercializing post-combustion carbon capture technology.

In the short time since its founding, Entropy’s commercial trajectory has been rapidly progressing:

• The first phase of a carbon capture and storage project at Glacier was commissioned, which will sequester 47,000 tonnes per year of CO2 emissions. “First carbon” was injected into permanent geological storage in August, with carbon capture rates between 90% and 97% and encouraging initial cost parameters.
• Subsequent expansions at Glacier will expand carbon captured quantities to 200,000 tonnes per year, representing over 90% of total emissions from the facility.
• Entropy secured a $300 million investment from Brookfield Renewable Partners, which will see Brookfield provide capital for carbon capture projects that reach final investment decision and meet predetermined return thresholds. Brookfield can earn up to a 50% equity interest in Entropy as capital is deployed. The endorsement from Brookfield serves as independent validation of Entropy’s technology and business model, and crystallizes some value for shareholders in Advantage. Brookfield’s deep pockets and industry connections will help in accelerating the commercialization of Entropy.
• Entropy has been laying the groundwork to develop carbon storage hubs in Alberta, working with midstream and pipeline companies as well as provincial regulators to connect mid-to-large sized emitters to permanent geologic storage sites.
• Recent legislation has enhanced incentives for carbon capture projects. In the United States, the Inflation Reduction Act (IRA) increased pricing paid for sequestered carbon. For the type of projects addressed by Entropy, prices increased from 50 to USD85 per ton. Importantly, the IRA provides direct cash payment for abated emissions. In Canada, the government unveiled a 50% tax credit, which reduces the upfront capital costs of carbon capture projects.

Our visit to Advantage’s Glacier processing facility galvanized our thesis that both its natural gas operations and its carbon capture ventures are poised to deliver value to shareholders.

On the natural gas front, global demand for geopolitically secure sources of supply to satisfy power generation needs will persist, even while renewable power sources continue to increase in prominence. Natural gas will play an important role in the energy transition by displacing carbon-intensive thermal coal plants, allowing for near-term abatement of emissions while green energy sources ramp up.

With respect to Entropy, we believe that a confluence of entrepreneurialism and environmental policy has propelled the company to a leadership position in the burgeoning carbon sequestration industry. Even though the commercialization of emissions abatement technologies is still in its early stages, we believe the growth opportunity ahead is profound and still not well recognized in the financial markets.

Opportunities such as Advantage and Entropy are better understood when contextualized with site visits and conversations with on-the-ground personnel. With the world settling into a post-pandemic “new normal”, we look forward to sharing with you similar learnings in future editions of Perspectives.