"You’ll Be Timber Experts By The End Of This" Featuring Russell Hagen, Weyerhaeuser

For our COBTV viewers and listeners, it's Maynard, Mike, and Todd here with something that we're super, super excited about. We've got Russell Hagen, who's the Senior Vice President and Chief Development Officer at Weyerhaeuser, joining us. Russell leads the company's real estate, energy, and natural resources effort, and within that there is a division called Natural Climate Solutions. So if you don't know Weyerhaeuser, you probably know the name from going to the Home Depot and seeing the label on the wood, but Weyerhaeuser is the largest private owner of timber in North America. It's a huge manufacturer of wood products, but as you'll hear today, the company as it relates to carbon sequestration, renewables, climate solutions, the company has a very large footprint and all of that and is doing lots of interesting things. So Russell, let me just pause and say thank you so much for joining us. We're super excited.

Well, as we jump in here with Russell, Mike, what would you tell us about what's happening in the markets and what we ought to know before we go too crazy?

Yeah, yeah, today's been a pretty good day for the markets. I think we're up a couple hundred points. But you know, Mike, get to the point: how's Nvidia doing? That's what everyone wants to know. Nvidia is up like five or six percent, but it's been down about 10% over the last week or so. Anyways, from a bond yield standpoint, bond yields are at 4.25%. They really have moved for seven or eight trading days. You're going to have a really important number on Friday: that's going to be the PCE deflator, the Fed's one of their most looked at inflation gauges. That's going to print on Friday, so expect a bunch of fireworks on Friday in the bond markets and equity markets. From the standpoint of crude oil, crude oil is up about another three bucks in the last week or so to around $81 a barrel. You know, crude has been really stuck in a range for quite a bit of time, and it occurs to me, and I think most people realize it, it's not a supply issue anymore; it's a demand issue. In order to get out of the 70 to 90 dollar per barrel trading band that's been in for the last six or seven months, you're going to need demand to basically come through. We're going to have to have people have confidence, and they're just not there yet. So that's why energy equities are also stuck in sort of a trading band as well. I'd say from a natural gas standpoint, this week one of the things that was concerning to me is that gas prices have come down even though weather is getting hot. The second thing that concerns me is that we had talked about U.S. production had got down to sort of 97, 98 Bcf at the real real lows, down from 102, 103. We're back up to 101 to 102 Bcf a day in gas production, and with the huge surplus that we have in natural gas storage, it's going the wrong way. So that's kind of weighing on gas, so it's something to keep an eye on. I'd say from a broader market standpoint, like you said earlier, you know, it's all about Nvidia, it's all about tech stocks. Whichever way they go is which way the market goes. And you know, last week or so, S&P and NASDAQ really went sideways for a bit, but energy outperformed; energy was up around 4%. So it seems like when those sectors do poorly, fundamentals for long gas are okay, a little bit of money flow goes there, so they were up about 4% last week. You know, before we get to our guest today, we want to go ahead, since it's really a kind of a timber show, we want to go ahead and give you some idea what's been going on in those markets. If you look at the lumber futures year to date, they're down about 20%. If you look at the timber equities, Weyerhaeuser down about 16% year to date, Rayonier is down about 10%, PotlatchDeltic down about 18%. Interesting, S&P Materials is up 5% for the year. S&P Timber REITs are down about 16%, and REITs in general are down about 4-5% year to date. One last thing I really want to talk about is, I know we're going to be talking about the carbon credit market with our guest as well, just to kind of show you what the EU credit market has done over the last say year to date, one year, two year, three year time frames. You remember in the EU, EU credits were all the rage, everyone was talking about it every day. What's happened? From a year-to-date performance, they're down about 15%. Over one year time frame, it's down about 22%. Two year, it's down 20%. And three years, it's up around 20%. So right now the EU credit market is around $68 per EU metric ton. It peaked at around $100 per metric ton in March of last year. So that market is kind of gone sideways, a lot of the luster has come out of it. But we're really looking forward to hearing what our guest has to say about the credit markets, so that should be interesting.

Well, I know it's, I'm tempted to jump ahead, Russell, because I know you guys have thought quite a lot about that and how you bring credibility to those markets. But Todd, before I get carried away, what's on your mind?

Well, this isn't the newest of news, but I've been thinking about it because I read an article yesterday. But as many of you know, the EPC and engineering firm Zachary declared bankruptcy in late May, it's been about a month. That firm was engaged by the Golden Pass LNG export terminal, which is an Exxon-Qatari project. After they declared bankruptcy, they laid off like 4,000 workers associated with that project. I'm not really all that interested in the contractual disputes between the parties, but it kind of reminds you of the scale of these projects that we're building. The same article that I was reading yesterday mentioned that there are 20,000 workers employed right now in the five LNG export terminals that are under construction on the Gulf Coast. So one of the things we'll talk about with Russell is different kinds of renewable development, and it just got me thinking about how big all these projects are and the kind of inflation that we might need to think about factoring into economics and cost pressure and things like that. The same article quoted that year-on-year from the Bureau of Labor Statistics in Louisiana, oil and gas construction workers' wages have gone up 19%, and that's just in one year, 2023 versus 2022. So we talk a lot about all these projects that are getting built, whether it's Permian pipeline or power plants or carbon capture facilities on the Gulf Coast, but there are some pretty foundational inflationary items that we have to not lose sight of. Last thing I would say, when you think about this, you kind of think about how does it translate to commodity prices. I just went and looked back and wanted to know how things have moved. Natural gas is within five cents in Cal '27 and Cal '28 of where it was at the beginning of the year. Crude on the other hand has run up about five bucks a barrel. So we'll talk more about projects and these kinds of things with Russell in a few minutes, but just the scale of 4,000 workers going home is really kind of stuck with me.

Yeah, no, that is stunning. And Russell, you got a feel for us around here. We're a bunch of energy, environment, all these kind of things. We're watching them with a big dose of the markets. Thank you so much for joining us. I didn't mention in your lead-in, you're not only the Chief Development Officer, but you're running real estate, energy, and natural resources, but you were the CFO, so you've seen this from many angles. We're just delighted to have you and to learn a lot more about Weyerhaeuser today.

Oh well, you have more confidence in us than we have ourselves. But thank you, Russell. Why don't we jump in? You know, I mentioned in the lead-in, Weyerhaeuser is the biggest private owner of timber in North America, just huge amounts of acreage. I think it's 10 million in the US and 14 million in Canada, just vast activities and vast ownership of land and forest. But talk a little bit about the company, just because I don't think some of our viewers and listeners have a full sense of it.

No, it's really, as I say, we've been just enjoying getting to know you guys better, getting to know the company better. You know what's funny, Russell, is in the pregame, some of our teams have been saying, 'Well, wait a minute, this is a resource company, but the resource is growing, right?' We're used to mines and oil and gas where you've got to go find more. So it's really something.

Well, I think we started talking because we noticed your Natural Climate Solutions initiative. I think we probably all, I'll speak for our team, we probably all jumped right to the conclusion like, 'Oh, it's forest, it's carbon capture with nature,' which we're big fans of, we're very interested. But then as we dug in, there's a lot more going on than that. You have land that renewables utilize, you have sequestration going on, and yes, you are thinking about the credit business, but there's just a lot more to that division than one might think. Do you mind just talking about when you say Natural Climate Solutions, like what are all the various aspects of that division for you guys?

Well, and then I think what's striking is you guys are talking pretty ambitiously in public about the Natural Climate Solutions. The EBITDA from the business is over $40 million, and you're talking about growing it to $100 million by 2025. So that's a very sizable climate-focused business.

Well, and Mike referenced this. I think for people around the carbon credit market, you know that there's a big sort of unregulated market. I think the other thing that we all know, and you guys talk about it, is that to do everything that we're proposing to do, we're going to have to utilize more of the credit market. The White House recently put out some new guidelines on trying to improve that market. And then I'll let you explain it, but part of what I think Mike was referencing is that that unregulated market has sometimes taken a few reputational hits because it's kind of a Wild West kind of thing. And you guys have been pretty patient, saying, 'Wait a minute, we're going to really think this through before we start leaning into it.' But let me let you address that, because I think we're all very interested in carbon credits and more nature-based solutions.

I'm wondering, Russell, just if I let's say I'm out here and I would like to buy some credits to mitigate my activities. Do you mind just walking us through at a very basic level? Let's say I'm a petrochemical plant and I call you and I say, 'Okay, here's my emissions, and I really want to offset them.' Do you mind just kind of walking through the mechanics of how it's going to work and how you're going to interact with them and just what it's like to place that order, so to speak? Because I think we have a lot of people watching this who would like to understand how that really works.

So this is the voluntary market, and these credits are different based on the projects. Some projects are just not as authentic or as genuine as other projects, and they're not as certified. So you've got this voluntary market with a not commoditized product at this point. Could you just give us the rough pricing in today's world? Big picture, just talk about where these types of credits will be selling, because they are very different.

Well, it's so striking because we're around people talk about potentially what would a carbon tax, where would it come in, or people talk about various technologies and how much they're spending to capture a ton of CO2. And this is why nature-based is so attractive, because even these premium credits are so much cheaper than some of the things we're talking about. But Mike, let me get you to jump in here.

Yeah, Russ, I noticed that in one of your presentations, you guys have got about a billion dollars in M&A goals by 2025, I believe, and I think you're halfway there right now. I guess my question is, as your business is changing, your natural climate solution businesses and carbon credits and all this other stuff, when you look at M&A, how much of that purchase price is just the timber? And what kind of percentage returns are you looking on that business? And how much can you tack on the back of it with new businesses? I mean, how much of the purchase price is the other stuff that we can potentially do in the next couple years?

Think about the market right now. I think your CEO was at a recent investor meeting or some sort of conference and talked about the lumber market, just the residential market, the building markets. And I kind of found it a little bit interesting that he said it's really been underserved, it's underbuilt quite significantly. And obviously interest rates have gone up. We remember two years ago we saw prices go from 400 to 1,600, right? And now we're kind of back down there. How do you guys think about the market right now? What does it look like? What do the channels look like and stuff of that nature?

Hey Russell, I'll kind of pile on a little bit to Mike and a little bit to Maynard. But I was thinking about risk management. You have this traditional business that's tied to a pretty long-standing commodity in lumber, timber, however you want to characterize it. You've got this new business where you've got these voluntary carbon credits you're selling. There's different vintages of those. You've got to make investments around those. Talk about how you think about hedging and whether you can hedge, and maybe how it looks different in the traditional business versus the new business. I mean, there's a lot of components here to both production volume but also a price that you're going to receive for all these activities you're undertaking.

It's super interesting and I know it's developing and it's hard to manage through all that. That's kind of why I was curious. The other kind of risk-management-oriented question I had: I think you mentioned earlier that you guys develop something like 2% of your acreage every year, you harvest 2% of your acreage, excuse me. How did you come up with that? You've mentioned 25 years for some of the Southern acreage, 45 years for the Western acreage, but it seems like that's a pretty interesting number to mess around with, both in terms of your yields on any one given year but then in terms of these longer-dated projects that you might want to think about monetizing. How did that number develop?

I was thinking, Russell, it's very interesting that your background is you were the CFO of the company and you're now in this role. And one reason I say that is a lot of times around here we'll be looking at some sort of new technology or some approach or something that's going to make the world a better place, and we always ask ourselves, 'Well, this is cool, but would it pass the CFO's test?' And the CFO's test is really: 'Okay, I understand we're going to spend money on this. Are we getting the value we want to get? Does this make sense? Is this sustainable? And what's the premium we're paying for a couple of things that we're trying to do that are not necessarily just cash on cash?' What has your being a CFO brought to your role here as the Chief Development Officer? How does that affect your dealings with other companies or how you're driving the division? It's unique that you were the CFO and you're now in this role.

Did it also resonate that, as the CFO, you're always worried about the disclosure, the audits, the accountability, this type of thing? I assume that informed your thinking about your customers when that CFO is saying, 'Somebody is going to come and ask me for the backup data on our carbon footprint, on our credits.' Is that a big piece of your thinking here?

Maybe one question, Russell. Now you're running in the nature-based solutions community and going to those conferences, those gatherings. Other people who try to either provide these credits, buy these credits, middlemen, investors. Would you tell us about that community? What's your experience getting to know that world out there?

Yeah, the other thing that's interesting. So in the solar business, in the solar, wind, CCS, you're partnering with companies that are doing things in those areas. Is there anything you would observe around either the pace of interest, the intensity of interest, how long is the line to get in and see you and do some projects? And then maybe in particular, CCS, that's a space that is growing. Any comments around all that would be great.

Yeah, piggybacking on the back of that, I mean the CCS business didn't seem that intuitive to me at first for a forest company. So how are these deals structured? First of all, you said it's been slow, but what needs to pick it up besides just permitting issues? How many companies are you talking to at this point? Is it half a dozen, a dozen? Are there more companies you're talking to than you were 12-18 months ago? And where do you think that goes in the next couple of years? I'm probing the CCS backlog here with this question.

Hey Russell, last one from me. Going back to the forest carbon business. I know it's a little bit like Maynard's question of how does a contract work, but I'm going to ask more like how do you decide where good locations are? What's a good spot? What's a customer going to want? I assume there are different regions of the country with different kinds of wood, different ambient conditions, different meteorological conditions. What do you guys look at to say, 'This is the package that we think is going to make a really good project' or 'This is a package over here might be a terrible project and we need to go harvest it'? How are you balancing all that, and what are the three or four things that are critical in project development for you?

Do you, are you finding, Russell? We're going to have to let you go because you've been very generous with your time. You got to cut us off or we'll just keep going. But I think the punchline is we find this all so interesting and it seems so useful and cost-effective, and you guys leaning into it is really helping. Do you think nature-based solutions are really gaining in credibility? And what do you sense from the policy community or those most focused on solutions? Is this getting the boost we hope it's getting?

And just one last question: do you think we could see a technological innovation within nature-based solutions? Whether more and more in terms of how we approach the bioengineering, if you will. Do you see those types of things? I assume you guys are working on those types of things.

Awesome. Well, Russell, we can't thank you enough. We just cold-called you guys and got into this conversation and got started getting to know you, and you've been so responsive and thoughtful. We're just so pleased that you would spend time educating us today.

Well, fantastic. Thanks everybody.