Ubben’s Inclusive sees opportunity to boost value at Dutch chemical maker and help the environment

Business: OCI produces and distributes hydrogen-based and natural gas-based products to agricultural, transportation, and industrial customers. It operates through the following segments: Methanol U.S., Methanol Europe, Nitrogen U.S., Nitrogen Europe and Fertiglobe. The company offers anhydrous ammonia, granular urea, urea ammonium nitrate solution, calcium ammonium nitrate, ammonium sulphate, aqueous ammonia, nitric acid, urea solution, bio-methanol, methanol, melamine and diesel exhaust fluid, as well as other nitrogen products. OCI also owns and operates an ammonia terminal at the port of Rotterdam. The company has operations in Europe, the Americas, the Middle East, Africa, Asia and Oceania.

Stock Market Value: ~6.3 billion Euros (29.93 Euros per share), according to FactSet

Percentage Ownership:  ~5.0%

Average Cost: n/a

Activist Commentary: Inclusive Capital Partners is a San Francisco-based investment firm which partners with companies that enable solutions to address environmental and social problems. Founded in 2020 by Jeff Ubben, who previously founded ValueAct Capital in 2000, Inclusive seeks to leverage capitalism and governance in pursuit of a healthy planet and the health of its inhabitants while creating long-term value for shareholders. As a pioneering activist ESG (“AESG”) investor, Inclusive seeks long-term shareholder value through active partnership with companies whose core businesses contribute solutions to this pursuit. The firm’s primary focus is on environmental and social value creation, which leads to shareholder value creation.

Inclusive sent a letter to Nassef Sawiris, executive chairman of OCI, expressing the firm’s belief that OCI is worth approximately 90% more than its current stock price and calling on the board to explore strategic options to unlock the company’s value.

The majority of OCI’s business relates to fertilizer for agricultural purposes and other nitrogen products with approximately 12% of revenue generated through methanol fuel products. This business does $9.7 billion in revenue and $3.6 billion in earnings before interest, taxes, depreciation and amortization. However, the opportunity here is what the future brings.

OCI is presently embarking on a $1 billion development of the largest blue ammonia facility in the United States located in Beaumont, Texas. It will be a state-of-the-art facility at the forefront of blue ammonia production and is expected to come online in 2025 and produce 1.1 million tons of blue ammonia annually. This facility will combine nitrogen with blue hydrogen to create blue ammonia. It is considered “blue” ammonia because the carbon emissions produced from the hydrogen production process are captured and stored. Blue ammonia has a number of product applications in OCI’s existing product lines as a sustainable and low carbon input for fertilizer, fuel and feed. Moreover, liquefied blue ammonia can be sold domestically or shipped to OCI’s ammonia import terminal in the port of Rotterdam, as they see European demand for hydrogen and ammonia as a major growth area fueled by the energy transition and decarbonization.

Because of the recently enacted Inflation Reduction Act in the U.S. and carbon taxes in Europe, the production of blue ammonia will have several financial benefits. First, the IRA increased the tax credit for each ton of carbon stored to $85 per ton, up from $50. OCI’s plan will produce 1.1 million tons of ammonia that generates 1.7 million tons of carbon, virtually all of which is captured and stored. Second, this blue ammonia will be sold through an ammonia terminal at the port of Rotterdam that OCI owns and operates. Because it is low-carbon fuel, it will not be subject to the $100 per ton carbon tax on competing products, allowing OCI to sell at a market price and reap an additional $100 per ton of margin. This is expected to lead to $350 million of annual EBITDA from the $1 billion of capex required. Moreover, ammonia is easier to ship than hydrogen because it can be transported at a temperature of  -33°C versus -253°C for hydrogen. For these reasons, blue ammonia can serve as an important source of decarbonized hydrogen, is poised to be a large part of a green energy future, and it has several secular tailwinds.

Inclusive believes that OCI’s methanol business, combined with its low carbon ammonia project in Beaumont, has significant strategic value and could generate interest from large energy players looking to accelerate their energy transitions. As a reference, Inclusive cited BP’s acquisition of biogas producer Archaea Energy for $4.1 billion (29x EV/’22 EBITDA) in December 2022; Chevron’s acquisition of Renewable Energy Group for $3.1 billion in June 2022; and Shell’s $2 billion acquisition of Nature Energy Biogas, which was announced last November and completed in February. Additionally, Inclusive noted that OCI’s modern, strategically located Iowa Fertilizer Company plant would be of great value to pure-play fertilizer companies, such as Nutrien, seeking nitrogen production in the U.S. corn belt. Further, Inclusive noted that Fertiglobe’s successful IPO showed the value within OCI’s portfolio, with OCI’s stake in Fertiglobe worth nearly its entire market capitalization in the past year. It is important to note that Inclusive’s Jeff Ubben sits on the board of Fertiglobe with Nassef Sawiris, executive chairman of OCI.

Ubben has always liked companies that he thought were misunderstood by the market, and Inclusive always has an impact element as a primary investment thesis. In this case, generally capex in a commodity business is viewed negatively by investors. But for all of the reasons mentioned above it could very well be a huge positive for not only OCI shareholders, but also the environment.

Ken Squire is the founder and president of 13D Monitor, an institutional research service on shareholder activism, and the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments.