Carbon Capture's Permit Milestone Turns REX's Long Bet Into Cash Flow
Draft Class VI permits and stronger crush margins drive record Q2 but the stock sits 16% below its May high
REX · Earnings Call · 2026-09-02
A Regulatory Leap for Carbon Capture
REX American Resources has spent years laying the groundwork for a carbon capture and sequestration (CCS) project, a bet that hinges on securing a labyrinth of state and federal permits. That bet took a decisive step forward in August when the EPA issued draft Class VI injection well permits — a milestone that moves the project from 'maybe someday' to 'regulatory reality.' Zafar Rizvi, CEO, put it plainly: “On August 17, the US Environmental Protection Agency issued draft permits for 3 Class 6 injection wells associated with our 1 Earth carbon capture project.” — Zafar A. Rizvi, Chief Executive Officer · 2026-09-02 This is not just paperwork; it validates the technical feasibility and clears a major hurdle toward capturing the full value of the 45Z production tax credit.
The carbon capture project has been a recurring theme in prior calls, but always with heavy caveats — permits could be delayed, rules unclear. Just a few months ago, the tone was more tentative: “It has been moved to September on the EPA website at this point.” — Doug Bruggeman, Chief Financial Officer · 2026-03-26 Now, the EPA has acted. The company still needs to clear state-level hurdles, particularly the Illinois Commerce Commission's approval for a ~5-mile connector pipeline, and Stuart Rose, Executive Chairman, candidly acknowledged the lingering risk:
And that is the thing that will hold us up, I believe, the longest.
But the draft permit is a clear inflection point.
Meanwhile, the state moratorium on carbon pipelines expired on July 1, per the transcript, and the company plans to submit its Illinois EPA application soon. The regulatory clock is now largely running in REX's favor.
The Financial Reality of 45Z
Even without the CCS project online, the 45Z tax credit is already supercharging the income statement. Q2 fiscal 2026 net income came in at $1.06 per diluted share — a record for the quarter — and the company continues to carry zero bank debt. The driver? Crush margins are strong, and the 45Z credits flow directly through gross profit. As CFO Douglas Bruggeman explained: “This improvement reflects stronger crush margins together with the $18.4 million of production tax credit income during the quarter.” — Douglas L. Bruggeman · 2026-09-02
That $18.4 million in Q2 brings year-to-date 45Z credits to $26 million. On a per-gallon basis that's roughly $0.10, as analysts noted in prior quarters, and management sees room for it to rise — especially once the CCS project improves the carbon intensity score and unlocks an even larger tax credit per gallon. The 45Z credits are so material that they distort the underlying operating trend: revenue fell ~1% year over year, yet gross profit more than tripled to $53.3 million. Stripping out the 45Z benefit, gross profit still grew 144% year over year, a testament to margin strength.Net margin hit 13.9% vs 6.8% a year ago.
Management remains bullish on the near term: “we expect to remain profitable and anticipate that third quarter result will be better than the same period last year.” — Zafar A. Rizvi, Chief Executive Officer · 2026-09-02 But shareholders haven't fully embraced the good news — the stock is down ~16% from its May high, and volume has been lackluster. This may be due to concerns about regulatory timing or the broader sustainability of 45Z under future policy cycles. Yet the company is arming itself with capital to buy back shares: nearly $380 million in cash and short-term investments on the balance sheet and no debt. 45Z production tax credits are clearly the linchpin of the investment case, and phase one is working.
The biggest overhang is still the third-party sequestration opportunity. Management has repeatedly said the wells will have spare capacity beyond their own CO2, and they're open to partnerships with direct-air-capture or other carbon emitters. The draft permit is the 'clearing event' that unlocks those discussions, as one analyst put it. If the CCS project comes online as planned—targeting by early 2027—REX could raise its per-gallon credit closer to the theoretical $1, a step change from the current ~$0.10. That is a long-run lever, not yet priced in.
For now, REX is executing on the classics: strong margins, no debt, and a growing government subsidy. The regulatory milestone is a genuine event, not just incremental news. Combined with the record Q2, this quarter marks a transition from story to substance. The market will eventually have to re-rate the stock if the permits continue to clear as smoothly as the draft issuance suggests.