It doesn’t take a genius to figure out that the world is ‘Going Green’—and that’s great…because there’s not too much genius going on here at Ticker Talking!
You’ve likely heard the term ‘net zero’, referring to the elimination/offset of greenhouse gas emissions (of which Carbon Dioxide is the most prevalent). Much of the world is participating in the Paris Agreement, which dictates that countries need to be net zero by 2050 in order to limit global warming to 1.5°C.
I’ll admit I had to do a fair bit of Google-ing there…so what’s all this talk about the environment for, anyway? This article covers Origin Materials (Ticker: ORGN), a company that I believe will be a leader of the net zero charge.
Origin has created a system that converts the carbon found in biomass (e.g. wood chips) into a wide range of useful materials (such as plastics), while capturing carbon in the process—thus the company calls itself the world’s leading Carbon Negative materials company.
Most people are familiar with the major role petroleum and natural gas play in the energy sector; however, few are aware that fossil resources have historically powered countless industries such as chemicals, materials, and products. As seen in in Exhibit A, nearly half of all global emissions come from making products.
Exhibit A
Therefore, Origin believes that there is a lot more to reducing greenhouse gasses than simply focusing on green energy. For the most part, the chemical industry, responsible for producing the world’s materials, is completely supported by the fossil economy platform. There are companies that buy carbon offsets, or install solar panels, or come out with innovative and sustainable new products and classes of materials aimed at bettering the situation, but Origin’s thesis is that you need a fundamental solution to solve the materials problem. Specifically, one that addresses the root of the problem, the fossil platform itself.
ORGN believes the only way businesses can make a material difference (you like that pun??) is to actually change the materials flowing through their business. They say this can be achieved by creating solutions that are: a) carbon-negative enough to solve for climate; b) flexible enough to transform many industries; c) economically sustainable.
So how does this technology work? I’m going to give a dumbed-down explanation, mostly because that’s all I can understand, myself! Traditionally, carbon has come from petroleum extracted from underground, but Origin’s method uses atmospheric Carbon Dioxide (a greenhouse gas), which is captured by trees and plants through photosynthesis and packaged up as cellulose (I’m even starting to lose myself here…think that’s a sign to wrap it up!!). That covers the first of the three-pronged solution – Carbon Negative.
Origin then converts this cellulose (things like woody residue) into chemicals that can be used to build molecularly identical materials used by a wide range of end markets, including clothing, textiles, plastics, packaging, car parts, tires, carpeting, toys and much more. Clearly Origin’s system has the ability to revolutionize countless industries – the second part of the solution.
The other factor that must be considered is the economics of the proposition. It is commonplace for sustainable products to be priced higher, which typically makes inducing meaningful demand rather difficult. That’s not the case with Origin, though; using inexpensive feedstock (like the wood residue we talked about) allows them to be cost-competitive with petroleum-based products and 10x cheaper than bio alternatives. Further, in addition to being readily available at scale, these feedstocks see much less price volatility than oil—a big advantage for the carbon negative materials company. Evidently, ORGN has positioned themselves as an economically sustainable alternative to the fossil economy platform.
Now let’s get to growth prospects. As seen in Exhibit B, investors are demanding that public companies all over the world outline when and how they will achieve their net-zero goals.
Exhibit B
Origin has already partnered with PepsiCo, Danone, and Nestlé, and they hope to play a vital role in the net zero strategies of plenty more companies in the above graphic. They estimate that total plastics demand from these three customers alone to be about 4.75 million tons, which capacity-wise is equivalent to 20 commercial facilities (for reference ORGN just opened their first plant in Sarnia, Ontario). There’s no question that the customer demand for Origin products is there – as seen in Exhibit C ORGN has lined up close to $10 billion in future contracts with companies such as the three previously mentioned, Ford, LVMH, and more.
Exhibit C
Evidently, companies are lining up to begin working with ORGN, it’s just a matter of how quickly they can build new plants and add capacity (they expect to have 5 facilities up and running by the end of the decade).
Given Origin is an early-stage company (where 2023 will be the first year of revenue with the plant opening) without much of a financial track record, valuing the business is a bit of a challenge (and quite speculative). If we look at the company’s revenue projections (See Exhibit D), Origin is forecasting just under $1.5 billion in sales in 2027. The median Price/Sales multiple of five comparable companies is 0.9x – when applied to the ’27 sales figure you’d have an annual return of about 20% per year over the next 5 years.
Exhibit D
I could certainly see a scenario in which the stock performs better than that, but the downside is also significant with this investment. I would be remiss if I didn’t acknowledge the risk associated with young companies like Origin that are a ways away from profitability. That being said, if you have a higher risk tolerance…I do believe that this company will be successful. While there are questions in the near-term regarding the economy, Origin has sufficient financing with a large cash pile; they say they won’t need to tap the debt/equity markets until they begin construction on their third commercial facility. Moreover, they’ve secured billions of dollars in contracts with some of the world’s most biggest companies. Governments have made commitments to international committees, and public companies to their investors, about achieving net zero, so these parties don’t have much choice – they need to do business with companies like Origin. It’s in the US government’s best interest if ORGN and other carbon negative companies succeed, and as such they’ve been quick to provide Origin grants and help support their growth plans.
At this point in time, investing in ORGN starts to toe the line between investing and gambling – I have a small position in the stock (I’m feeling like a bit of a Gambling Man!!). As with any young company, there’s no doubt a lot that can go wrong for Origin as they attempt to scale the business, but I’m encouraged by the strong demand and the opportunity to impact and transform so many industries with their proprietary technology. For those who don’t quite have the risk appetite to invest in ORGN today (likely the vast majority of experienced investors), I think it might be worth following the company’s progress and revisiting the proposition when they’re a little more established and closer to profitability.