Introduction On Monday's conference call the Abaxx Technologies CEO Josh Crumb graciously offered to take a few questions from shareholders. In answering a question about the addressable market for Abaxx's Sign and Verify application, Mr. Crumb indicated that the goal wasn't to take market share from DocuSign per-se but to fill a much needed gap in Environmental Social Governance "ESG" contracts. This struck me as very intriguing since it overlaps quite a bit with Abaxx Exchange's goal of creating an exchange for ESG contracts--most likely carbon credits. Below I'll describe why this is so exciting, and potentialy hugely profitable line of business for Abaxx going forward. My initial thoughts here is that Abaxx Tech could could potentially net $21 - $43 million CAD from their 81% interest in Abaxx Exchange which given a price to sales of 10, would result in a value of $210 - $430 million CAD for the firm. I describe my rationale below.
Paris Climate Accord & Other Institutional Support for Climate Change In November, 2016 practically every country in the world came together and signed an agreement to take part in systemically reducing green house gas "GHG" emission substantially over the next several decades with the goal of becoming carbon neutral in the second-half of the twenty-first century. The United States during the Trump administration pulled out of the agreement, but under the Biden administration will be back in via an executive order to be signed on his first day in office.
Additionally, in an effort to reduce carbon emissions many countries around the world (and a number of US states) have already started putting a price on carbon emissions (see image from NY Times Article), and China will be implementing a carbon trading policy this decade.
These Countries Have a Price on Carbon. Are They Working? | https://www.nytimes.com/interactive/2019/04/02/climate/pricing-carbon-emissions.html |
Furthermore, many companies such as Amazon, Google, Facebook and many others have also publicly declared their goals to be carbon neutral as well. Additionally, money managers managing a collective $4 Trillion Dollars use climate change and reducing carbon emissions as a criteria in their investment decisions (see SA link below).
ESG Investing Goes Mainstream in 2021 | https://seekingalpha.com/news/3639110-esg-investing-goes-mainstream-in-2021-bofa |
With the backing of nearly every country on Earth, many of the largest companies on the planet, and some of the largest fund managers; it's no surprise that ESG investing is one of the next big macro trends. Furthermore, this trend is only likely to grow in the coming years due to the enormous political, social, and fiscal policies supporting it.
LNG's Bridge Role in Carbon Reduction Liquid Natural Gas "LNG" is natural gas which is then super cooled to -162 centigrade. Taking the gas to a liquid allows it to be shipped long distances to end users in other markets where the LNG is then regassified and used as natural gas for power, fuel or heat purposes. LNG emits approximately 40% fewer GHGs than coal for electricity generation. This is one of the reasons that LNG is often discussed as a cleaner hydrocarbon, and a fuel that can help many large industrial countries bridge to sourcing most of their energy from renewable sources (i.e., hydro, wind, solar, etc.) and away from dirtier hydrocarbons like crude oil and coal. For this reason many industry experts expect LNG demand to tripple in China by 2040 so that the country can meet its aggresive carbon reduction targets while simultaneously growing its economy and energy demands.
Asian LNG Demand Set to Rebound Rapidly | | https://www.petroleum-economist.com/articles/midstream-downstream/lng/2020/asian-lng-demand-set-to-rebound-rapidly |
But LNG is Still a HydroCarbon How Do You Make it Green? From the upstream producer of the natural gas, to the gas liquificeation plant, to the ship that carries the LNG cargo, and finally to the downstream regassification plant in the end market; all these steps produce GHG emissions. To make LNG green the seller of the LNG can purchase carbon credits to offset the carbon emissions they created to produce the LNG.
"Green LNG" a Pathway for Natural Gas in an ESG Future https://www.forbes.com/sites/thebakersinstitute/2020/10/26/green-lng--a-pathway-for-natural-gas-in-an-esg-future/?sh=441196b966e9
As mentioned earlier in this post, many countries around the world (and some states in the US) are putting a price on carbon--and those prices can vary wildly depending on the country and the individual transaction. On a high level the market for carbon credits generally pairs a carbon emitter (let's say a Natural Gas company) with a company that has an accredited carbon credit (i.e., the supplier of the carbon credit). A common supplier of carbon credits may be a timber company that will decide to grow trees on their property in lieu of forresting them.
Sadly there are many issues with carbon credit markets. While there are several organizations that certify a supplier has carbon credits to sell, these organizations generally take a large chunk of the sales as a market fee--around 15-25% according to Air Carbon (link). Furthermore, market pricing for carbon credits is opaque, so one company in the US may pay $10 per carbon credit per year, whereas another company in the US may only pay $1 per carbon credit per year.
| Purchasing Carbon Offsets FAQ |
| https://secondnature.org/climate-action-guidance/purchasing-carbon-offsets-faqs/#:~:text=Common%20types%20of%20offset%20projects,can%20generate%20carbon%20offsets%20however. |
Where Does Abaxx Come in? Abaxx can take advantage of these two macro trends (i.e., LNG as a bridge fuel, and ESG Carbon Credits) by creating efficient and liquid exchanges to trade these commodities. Remember that the blockchain technology that Abaxx will be utilizing will assist with more transparent price discovery, and largely eliminate clearing expenses by creating a distributed ledger that all market participants can view. This could revolutionize ESG carbon credit markets because right now it's very challenging if not impossible for market participants to determine what others entities are paying for similar transactions.
Furthermore, as mentioned in the introduction, Abaxx Technologies can license out its sign and verify application to ESG participants who may want to append their signed carbon credit contract to the Abaxx Exchange transaction. This would create a synergy between the Exchange business and the Technologies business and allow the application to naturally grow from there.
Lastly, speaking of synergies, LNG producers who want to sell Green LNG on the Abaxx Exchange can buy Carbon Credits on the ESG exchange prior to the Green LNG sale. These transactions would go hand-in-hand and transparently illustrate to the LNG buyer that the appropriate amount of vetted carbon credits were procured prior to the Green LNG sale.
Abaxx Exchange - Markets (see ESG section) https://www.abaxx.exchange/markets
What's the potential ESG Carbon Credit Business Worth to Abaxx? In the aforementioned article by Air Carbon, the author indicated that annual "market fees" for carbon credits are around $200 million USD. As mentioned previously, this market is likely to grow significantly in the coming years to come as more and more companies seek to purchase carbon offets. If Abaxx can succeed in creating a liquid and transparent exchange then maybe they can capture 10-20% of this growing market, or the equivalent of $20-$40 million USD per year. This would be $26.7 - $53.3 million CAD (using a $0.75 CAD to $1 USD exchange), and 81% of that for Abaxx Tech would be $21.6 - $43.3 million CAD. With a price to sales multiple of 10, that means the ESG exchange could potentially be worth $216 - $433 million CAD alone for Abaxx within a couple of years. That obviously doesn't even account for the technology business or the LNG exchange previously discussed.
*As always please do your own due diligence before making an investment decision