Eastman's Process Upset

Just before the end of 2017, Eastman Chemical Company (EMN:  NYSE) completed repair work at its coal gasification plant near Kingsport, Tennessee.  In early October there had been an explosion at the plant, which Eastman had very cleverly referred to as a ‘process upset.’  Despite the rather benign characterization of the incident, Eastman had to notify its neighbors within a half mile radius to shelter in place.  Schools were closed and roads shut down.  After over two months of repair work, the coal gasification plant is ready to restart.

The experience at the Knoxville plant, calls into question the merits of coal gasification.  The process involves blowing crushed coal through oxygen and steam while being heated or pressured.  The oxygen and water molecules oxidize the coal and produce a gaseous mixture of carbon dioxide, carbon monoxide, water vapor and molecular hydrogen.  The combination of hydrogen and carbon monoxide results in an end product called syngas. 

The ‘Syn’ in Gas

Most syngas from coal gasification is used for power generation.  However, it can also be used in other chemical processes such as the production of ammonia or conversion into transportation fuels such as gasoline or diesel.  Alternatively, syngas can be further processed into substitute natural gas or ‘SNG.’ 

Coal gasification plants often have auxiliary equipment for carbon capture to reduce greenhouse gas emissions.  Syngas is typically produced under high pressure and is not diluted by nitrogen.  Accordingly, it is less costly to remove carbon dioxide from syngas than from conventional coal exhaust streams.  It is estimated that 90% of the carbon dioxide created in SNG can be capture and stored.   

There is significant reduction in other emissions as well.  A typical coal fired power plant emits more sulfur dioxide and nitrogen oxide in a few weeks than a gasification plant produces during an entire year.

There are additional environmental savings that result from coal gasification rather than conventional coal burning.  Solids from gasifiers are half the volume of conventional coal plants.  When syngas is integrated into a combined cycle power plant, water use can be reduced by as much as 50% compared to conventional power plants.  In the integrated combined cycle power plant, syngas is burned in a turbine and excess heat from the process is captured and used to power a second turbine that makes even more electricity.

A Lesser Devil

Even with a potentially life threatening explosion like that experienced at Eastman Chemical, it would seem there is enough about coal gasification to make it appealing as the world migrates from combustion of fossil fuels to more environmentally favorable   

Most coal gasification is intended for chemicals production.  The Eastman plant in Tennessee is a typical chemical production facility.  About 25% of the world’s ammonia and over 30% of the world’s methane are now produced through gasification.  However, there is growing interest in producing liquid and gaseous transportation using gasification.

According to the Gasification & Syngas Technologies Council, there are 272 operating gasification plants worldwide with 685 gasifiers.  Thirty-three of the gasification plants are located in the U.S., but China has the largest number of plants of any single country.  There are 74 gasification plants under construction around the world, most of which are in Asia and Australia.

A stake in Eastman Chemical includes risks inherent in the chemical industry.  Environmental risk and safety certainly go with the territory.  Eastman has built a reputation for reliability and its stock price has settled into a beta volatility measure of 1.20.  The stock retreated only temporarily following the October 2017 gas plant explosion.

EMN is valued at 11.82 times forward earnings, a bit less than the average of its peers.  The forward earnings ratio of the basic chemical sector is 17.41 and the specialty chemical industry commands a whopping 29.45 times expected earnings.  Eastman also pays a tidy little dividend of $2.24 per share.  That translates into a 2.44% forward dividend yield at the current price level.  Thus in Eastman an investor gets an attractive dividend yield and a company that appears to forthrightly face up to its operating risks.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.