Exxon Mobil Bitcoin Mining Partnership with Crusoe (NYSE:XOM)

Exxon Mobil Bitcoin Mining Partnership with Crusoe (NYSE:XOM)

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Thesis

of Exxon (New York Stock Exchange:XOM) The Bitcoin (BTC-USD) mining partnership with Crusoe will generate excitement and could improve the company’s image when it comes to environmental concerns, but it’s not likely to have much of a financial impact. impact. On the other hand, if this partnership makes Bitcoin mining more profitable, it could have a huge impact on the safety of Bitcoin and potentially its price.

Bitcoin Mining 101

When I first heard the news that Exxon was getting involved in Bitcoin mining, my first question was what impact this change might have, both on the security of Bitcoin and on Exxon’s revenue.

For those who are not familiar with how Bitcoin mining works, mining is done to secure transactions on the Bitcoin network. The Bitcoin network could be attacked by anyone with more computing power than “honest” miners, so the network becomes more secure when there are more miners using more computing power.

More specifically, a new block of transactions is intended to be added to the Bitcoin network every 10 minutes. It takes a certain amount of computing power to add a block, so the difficulty of solving a block is adjusted every two weeks based on the current number of miners. When there is more mining activity, the difficulty increases, which makes the network more secure.

The difficulty of the network has increased dramatically over time, although there were times when it decreased, such as when China recently banned Bitcoin mining:

Bitcoin difficulty over time

blockchain.com

Considering that the price of Bitcoin has also increased (more or less) exponentially over time, many people have noticed a correlation between the difficulty of the network and the price of Bitcoin. It makes sense that when the price of Bitcoin goes up, more miners can profitably exist, increasing the hash rate and the security of the network. It also makes sense that when Bitcoin has more miners and is more secure, more people will feel comfortable investing in it, increasing demand and driving up the price of Bitcoin. So while it’s hard to prove causality, I wouldn’t be surprised to see this correlation hold tight.

burning 101

It is estimated that 142 billion cubic meters of natural gas are burned each year during the oil extraction process. Because it is difficult to capture, transport, process, and sell this natural gas, it is simply burned—that is, wasted. After all, there is basically no demand for natural gas in isolated oil fields.

That is, there was no demand before Bitcoin. Instead of being burned, this gas can be put into a generator that powers Bitcoin miners located near the oil field. Since the main input cost for Bitcoin mining is energy to power the computers used for mining, cheaper energy means more profitable Bitcoin mining. And since oil companies would otherwise dump it, natural gas set to burn it is presumably very cheap.

There are multiple reasons why energy companies would want an alternative to burning. For one thing, burning is wasteful and bad for the environment. Also, North Dakota recently passed a law giving energy companies a tax break for not burning gas. And of course, selling otherwise wasted gasoline for a profit is an easy business decision. For these reasons and more, oil companies have committed stop routine burning by 2030.

Selling the energy to Bitcoin miners seems like a great alternative to burning. Eventually, the gas could also be used to power other high-tech solutions, such as data centers.

some quick math

142 billion cubic meters of natural gas is approximately 1,510 terawatt hours of energy, assuming a conversion rate of 38.3 megajoules per cubic meter. It is estimated that Bitcoin mining currently uses 150 terawatt hours per year. (For some perspective, the whole world used 24,000 terawatt hours of energy in 2019).

Therefore, assuming efficient use, all Bitcoin mining could run on natural gas burned 10 times more. There is a lot of cheap energy that is currently being wasted.

If the process of efficiently using natural gas for Bitcoin mining can be figured out, it has quite a few implications:

  • The security of the Bitcoin network would increase significantly, possibly correlating with an increase in the price of Bitcoin.
  • Oil companies like Exxon, which previously wasted natural gas, could sell it for more revenue and profit.
  • The argument that Bitcoin, and to a lesser extent oil companies, are bad for the environment would lose some credibility.
  • Current leading miners like Marathon Digital (MARA) and Riot (RIOT) could face increasing competition from miners using cheap natural gas and become even less profitable (both are currently unprofitable).

Impact on Exxon Revenue

Although increased mining activity could increase the price of Bitcoin based on the price-difficulty correlation discussed above, it is difficult to quantify the exact impact. On the other hand, we can try to estimate the impact on Exxon’s earnings.

Right now, it looks like Exxon is simply selling the power to miners through a partnership with private startup Crusoe. According to Crusoe, they pay exxon for the gas and then Crusoe is responsible for harnessing it and turning it into energy.

After purchasing the gas, Crusoe can use it to mine Bitcoin, either directly or by partnering with other Bitcoin miners. What Crusoe decides to do with natural gas won’t make much of a difference to Exxon. Exxon is not directly mining Bitcoin and will not have Bitcoin on its balance sheet. So what matters to Exxon is what price they can sell the natural gas for and how much they can sell.

Crusoe indicated who are buying gas at a discount:

The purchase price of gas is generally not comparable to traditional pipeline sales prices, but establishes a change of custody and an arm’s length price for gas.

Until February, natural gas was being sold at around 27 cents per cubic meter, although the price has been volatile and varies widely by country. In the unrealistic scenario where Exxon could sell the 142 billion cubic meters of natural gas being burned around the world at that price, it would generate $38 billion in revenue. For perspective, Exxon generated $317 billion in revenue in the last year, but only $26 billion in net income.

That sounds significant relative to revenue, but of course Exxon isn’t the only one burning natural gas. It appears that the Exxon-Crusoe partnership currently uses about 6 millions cubic meters of natural gas per year, which is only 0.004% of all natural gas that is flared.

Even at spot prices with a 100% markup, today’s partnership doesn’t even increase Exxon’s revenue by 0.1%. If the pilot program is successful, it is reasonable to expect this number to increase over time.

However, there are some limits to how much gas can be used efficiently for mining. For example, it is more difficult to extract in warmer climates such as the Exxon oil fields in West Texas. In addition, it can be difficult to find the necessary hardware for mining in the midst of a shortage of semiconductors.

So, in the short term, this partnership has basically zero impact on Exxon’s finances. In the very long term, if we assume that Exxon accounts for 25% of all the natural gas that is flared, half of that is used very optimistically for Bitcoin mining and is sold at 75% of spot prices with a 30% margin, could add about $1B to Exxon’s bottom line. That’s a 4% increase in current net income, so even in a very good long-term scenario, selling more natural gas to Crusoe won’t make much of a difference to Exxon’s finances.

However, aside from a small profit boost, this partnership could improve Exxon’s image with ESG investors and environmentalists, perhaps leading to better sentiment and multiple expansion. In addition to harnessing energy that would otherwise be wasted, Crusoe’s mining systems are more efficient than burning, combustion 99.89% of methane compared to 93% from burning.

The discussion would get more complicated if Exxon were to mine Bitcoin directly, as that would expose them to more ups and downs in the price of Bitcoin. However, such a move seems unlikely considering Exxon’s conservative management and the fact that Bitcoin mining is not a very proven business model at the moment.

risks

Although selling natural gas to Crusoe for Bitcoin mining is a big (albeit small) short-term win for Exxon, it could actually end up accelerating the transition to renewable energy. Many renewable energy sources have a very similar problem to burning. In times of low demand or high productivity, excess energy is often generated by renewable sources, but is wasted because there is no immediate demand and no efficient way to store it.

Crusoe plans to implement a similar solution for these renewable energy companies, where they will be able to use excess energy that would otherwise be wasted for Bitcoin mining. This solution will help renewable energy companies grow revenue faster and perhaps become more profitable, though if the impact on Exxon is any indication, the benefits may not be significant.

On the other hand, the impact of this partnership on Bitcoin seems mostly positive, as more mining activity will lead to better network security and potentially higher Bitcoin prices. However, in the long term, partnerships like Exxon-Crusoe could make mining more concentrated in a few companies that have access to cheap energy. Miners can choose which version of Bitcoin they protect, and while their choice should be governed by market forces, miner consolidation could make Bitcoin less decentralized.

conclusion

Exxon’s Bitcoin mining partnership with Crusoe generates good PR and could be a qualitative win when it comes to increasing demand for Exxon shares from ESG investors. However, it won’t make much of a difference to the bottom line and investors probably don’t need to consider this news when deciding whether to buy Exxon. I’m neutral on energy companies at the moment as the near-term supply and demand picture still looks supportive, but valuations don’t look as attractive as they did a year ago.

However, this association seeks to make Bitcoin mining more profitable and greener, which should lead to more mining activity in general and increase the security of the Bitcoin network. In the past, improved security has been correlated with higher Bitcoin prices, so the continued success of this partnership could help catalyze further Bitcoin price appreciation.

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