Helium wars: The existential battle between trillion-dollar tech giants

A daunting list of key industries the world over is now wondering where their future supplies of helium will come from. What battery metals are to gigafactories, helium is to everything from scientific research, medical technology and high-tech manufacturing to space exploration and national defense.

None can survive without helium—a non-renewable natural resource typically recovered from natural gas deposits. Helium is unique among all elements because it can reach ultra-cold temperatures making possible everything from magnetic resonance imaging (MRIs) and semiconductors (which are now suffering from a supply shortage) to fiber optic telecom, and even space exploration.

Multi-billion-dollar industries depend on this; yet, we have been in a state of helium shortage since 2016. And in 2022, the war in Ukraine effectively cut off helium supplies from Russia, a leading exporter with big expansion plans.

Now, with North America industries now experiencing a supply squeeze and geopolitical risk putting other major suppliers out of reach, Avanti Helium Corp.'s two recent discoveries and first production planned for the first-quarter of next year, is a propitious development. With helium worth hundreds of times more than natural gas, the opportunity is overripe for energy-sector investors.

Two helium discoveries amid supply squeeze
In June last year, Avanti discovered 187 million cubic feet of net recoverable helium gas, based on a raw gas estimate of 17 billion cubic feet recoverable and net helium concentration of 1.1% at its WNG 11-22 well in the Greater Knappen Property in Montana.

Then, in January this year, Avanti expanded the pool with the second well flowing 20 million cubic feet per day, also at Greater Knappen. That flow rate and helium percentage was more than double Avanti's initial expectations. The two wells will be brought into production in the first quarter of next year.

Avanti's Greater Knappen property is an 82,000-acre opportunity for North America. With 100% interest in this prospective helium play, and1-2% helium in its discoveries. This gives Avanti a clear North American advantage.

Risk-reduction with major midstream deal
Days ago, Avanti signed an agreement with a veteran helium midstream company that already has over a dozen helium plants across North America. That is the biggest de-risking driver since Avanti's two discoveries because it fast-tracks the commercialization of Avanti's helium recovery plant with raw gas from its Sweetgrass helium pool. The plant is now set to begin operations in the first quarter of 2024.

The agreement with private company IACX gives Avanti even more experience, CAPEX power, supply-chain strength, and existing component inventory because IACX already operates over a dozen helium plants across North America.

The agreement calls for the construction, financing and operations of a helium recovery plant that will process raw gas from Avanti's Sweetgrass Helium pool in the Greater Knappen project. The plant is designed to initially process 10 million cubic feet per day of raw gas beginning in Q1 2024, with the option to ramp up to 15 million cubic feet per day.

The deal is also fee-based. For stakeholders, that means it will primarily be paid out of operational cashflow from the plant, making it unnecessary for Avanti to do a major equity raise, which would dilute shares, or obtain high-interest debt.

All the steps of this process amount to ~$211/Mcf (thousand cubic feet) initially and declining to ~$163/Mcf by year three. Additional costs such as royalties and power are expected to total ~$70/Mcf or less. That means that total operational costs of marketed liquid helium will be approximately $280-$230/Mcf over five years.

While last year, helium prices spiked because of hopes for plentiful supply were dashed, selling for $500 Mcf all the way up to $1,000/Mcf depending on purity and grade, prices remain opaque and vary from deal to deal.

Some insight comes from the recent contract announced by Royal Helium in early July. That contract was for $625/Mcf, without trucking and liquefaction. With trucking and liquefaction, that would make the gross price ~$750/Mcf. Using these numbers, we can arrive at a potential netback for Avanti of $470-$520/Mcf.

With the new helium recovery unit initially producing 10 MMcfd (million cubic feet per day) and ramping up in an estimated nine months to 15MMcfd, this could potentially position Avanti to earn as much as $14.9 million annually, using a netback of $500/Mcf. When it ramps up, the earnings could shoot up to as much as $22 million or more annually.

Beacon Securities, which has initiated coverage of Avanti, forecasts the company to generate $22.5 million of EBITDA in 2024. Beacon also expects Avanti to resume exploration drilling on the Greater Knappen project once it is generating EBITDA early next year, with additional expectations that new drilling will lead to another helium recovery plant by the third quarter of 2025, with EBITDA then possibly nearing the $40 million mark.

Beacon referred to Avanti's midstream agreement with IACX as "a major de-risking step in AVN's path to production of liquified helium that should receive a price of US$750/mcf or more". Beacon's forecast is that AVN is trading at an EV/EBIDTA multiple of 2.4x for next year, and only 0.9x for 2025. "With a compelling macro backdrop in the critical helium sector, we believe that multiple should be much higher". Beacon Securities maintains its $2.25 price target for AVN.

Critical junction for American helium
Prior to 2016, helium supplies were not a concern. The US was stockpiling helium as a matter of national interest beginning in the 1960s, at the height of the Cold War. That strategic supply of helium was stored at the Federal Helium Reserve in Amarillo, Texas, with controlled pricing.

Nearly half of the US supply of helium came from this reserve. That reserve is dwindling, and earlier this month, the Bureau of Land Management (BLM) announced that all the assets of the federal helium system would be auctioned off for sale in November. To offset this lost domestic supply of helium, a pure play exploration industry is developing.

Now, with the global helium market set to hit nearly $6.5 billion in just three years, Avanti is a clear industry leader with two discoveries, much more to explore, and a midstream deal to get its first helium recovery unit up and running by the beginning of next year.

Big companies could tap into helium boom
Air Products and Chemicals Inc. is an industrial gas titan with a diverse portfolio of products that serve various sectors, from food processing to semiconductors. Their expertise in handling and delivering specialty gases makes them a key player in the realm of helium distribution. As we advance technologically, helium's role in cooling, healthcare, and electronics becomes even more vital.

The company's expansive global network enables it to deliver helium to industries across continents. Its state-of-the-art storage and delivery solutions ensure that the gas reaches its destination in the purest form, maintaining its efficacy. For APD, it's not just about supplying a gas; it's about supporting the innovations that this gas powers. Given the growing demands for helium and the company's pioneering efforts in its safe and efficient transportation, APD promises to be a major stakeholder in the helium-centric future.

Linde PLC is more than just a gas provider. It's a global leader in making our modern lives possible. From healthcare to clean energy, Linde's solutions have an expansive reach, and their ventures into the helium sector stand testament to their forward-thinking approach.

Helium, as a resource, is not just about balloons. It's instrumental in MRI scanners, semiconductor manufacturing, and even space exploration. Recognizing this, Linde has invested heavily in ensuring a steady supply chain, even as global helium reserves become harder to source. Their commitment to sustainability ensures that helium extraction doesn't compromise environmental standards. With Linde's emphasis on research, sustainability, and efficient distribution, they are poised to become indispensable in a world increasingly reliant on helium.

Exxon Mobil Corp. is synonymous with energy leadership. For decades, Exxon has shaped global energy trends, and their vast network and resources place them in a unique position to navigate emerging market shifts, like the increasing importance of helium.

While not their primary focus, helium extraction is an extension of Exxon's expertise in the natural gas sector. As helium reserves become scarcer, the capability to efficiently extract it from natural gas becomes a valuable asset. Exxon's extensive research and development facilities, like its LaBarge facility, are also constantly exploring efficient extraction techniques, ensuring they remain ahead of the curve.

Chevron Corp. is a name that resonates with energy expertise. From upstream exploration to downstream sales, their operations span the complete energy cycle. Chevron's prowess in natural gas extraction and refining offers an indirect avenue to the helium sector. Given that helium is often extracted alongside natural gas, Chevron's extensive infrastructure could provide a significant edge in capitalizing on helium opportunities.

While oil remains their mainstay, Chevron's vast natural gas operations open the doors to the world of helium. Their geoscientists, with an intricate understanding of underground reservoir dynamics, are perfectly poised to optimize helium extraction. As the demand curve for helium tilts upward, Chevron's robust infrastructure could make them a significant contributor to the global supply.

Baker Hughes Co. epitomizes excellence in oilfield services. It has consistently demonstrated an ability to evolve, ensuring they stay relevant amidst changing energy landscapes. This adaptability makes them a name to watch in the helium sector.

With the technology to handle complex drilling and extraction projects, Baker Hughes is well-equipped to tap into the helium market. As helium often coexists with natural gas, their expertise in the latter could seamlessly translate to a focus on the former. Their reputation for harnessing technology to maximize extraction efficiency might just make them a dark horse in the helium race.

-- Michael Kerr, OilPrice.com.