California Resources Stock Could Be a Huge Long-Term Winner
With all the talk around AI and data centers, markets have been swooning over companies that can provide one key resource to power these trends: electricity. AI workloads run on data centers that need a lot of electricity. They must also run 24/7 to ensure users can always access the data. Additionally, companies that run these data centers vastly favor the use of renewable energy for power.
This has led to a trend of recommissioning nuclear reactor sites. Nuclear energy is renewable, but also much more reliable than wind and solar. Their energy generation ability can fall due to a lack of sunlight or wind, making it a poor choice for powering a data center. This has greatly benefited firms that specialize in nuclear energy. Constellation Energy (NASDAQ: CEG) is an example of this, with shares up over 100% in 2024.
It’s also leading investors to look at small modular reactor (SMR) stocks. NuScale Power (NYSE: SMR) stock is up over 500% in 2024. However, SMR technology is still yet to be proven. So far, no SMRs are operational in the U.S. It seems the market is running out of places to turn to when it comes to investing in powering data centers at a reasonable price.
However, there is one company that may provide an interesting solution to this problem. That company is California Resources Corporation (NYSE: CRC) It wants to power data centers not with nuclear energy, but by making a traditional fossil fuel carbon neutral. Below, I’ll detail CRC’s plan and give my opinion on the potential of the stock.
Detailing CRC’s Unique Plan for Fossil Fueled Data Centers
CRC is primarily an oil and natural gas producer. The company’s plan to power a data center involves using natural gas in conjunction with carbon sequestration. This involves injecting carbon dioxide produced when natural gas is turned into electricity deep underground into depleted oil and gas reserves. Natural gas, like nuclear, can produce energy 24/7, allowing it to fulfill the reliability needs of data centers.
This would prevent natural gas's carbon from entering the atmosphere. This contributes to the prevention of global warming caused by rising carbon levels in the atmosphere. It is CRC’s hope that data center companies will see this as a reasonable solution to power their infrastructure while also maintaining their commitment to a net-zero future.
On the carbon sequestration front, CRC has made significant progress recently. In late October, California's Kern County approved, unanimously, a permit for the Carbon TerraVault I (CTV I) carbon capture and storage project. However, it still needs Environmental Protection Agency (EPA) approval. It expects an answer by the end of 2024.
If approved, the company will begin construction on the first-of-its-kind project in the Golden State. It plans to start sequestering carbon by year-end 2025. This is one of the two key parts of the plan CRC hopes to execute. Now, I’ll examine whether the company can actually generate the required electricity to run an AI data center.
CRC Can Help Data Centers and The State of California
According to CEO Francisco Leon in the company’s Nov. 7 earnings call, it does have the required capacity. Leon said, “Having existing power required to run these centers, coupled with the desire to decarbonize that power, creates a unique first-mover advantage for CRC." He went on to say the company is in an “unrivaled” position to provide AI data center solutions in California.
The company is also more broadly set up to help California meet its legislatively mandated zero-carbon electricity goal by 2045. In 2023, 39% of California’s in-state electricity generation came from natural gas. The company can use its carbon-sequestration technology to keep natural gas relevant. However, the company still needs the state to make decisions on CO2 pipeline regulations. The state needs new pipes to facilitate large-scale carbon sequestration.
CRC Looks Attractive Long Term
Overall, CRC's carbon sequestration efforts are still in the relatively early innings. Any possible data center agreements would have to follow further progress made there. I see CRC as a company with a significant amount of long-term upside potential due to the opportunities discussed above.
Also, its average valuation vs. its sector, low debt, and solid free cash flow for its size make me feel secure in the downside risk. Wall Street sees solid 12-month upside in the stock, with the six most recent price targets implying upside of 15%.
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