In a multi-billion US$ deal that will expand and accelerate the growth of its strategic bioenergy business, global energy major bp plc has announced that it has reached an agreement to acquire Archaea Energy Inc., a leading producer of renewable natural gas (RNG) in the United States (US).
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The agreed acquisition, which is subject to regulatory and Archaea shareholder approval, will be for US$3.3 billion in cash, as well as around US$800 million of net debt.
Bioenergy is a strategic transition growth engine
Bioenergy is one of five strategic transition growth engines that bp intends to grow rapidly through this decade.
bp expects investment into its transition growth businesses to reach more than 40 percent of its total annual capital expenditure by 2025, aiming to grow this to around 50 percent by 2030.
Global biogas demand is growing rapidly. In bp’s Energy Outlook 2022, biogas grows more than 25-fold from 2019 to 2050 in both the Accelerated and Net Zero scenarios.
Archaea’s operations process biogas – that would have been flared or vented if it were not captured – to produce pipeline-quality RNG or to generate power. They also have the potential to be integrated with technology such as carbon capture and storage to further reduce lifecycle greenhouse gas (GHG) emissions.
Acquiring Archaea will expand bp’s presence in the US biogas industry, enhancing its ability to support customers’ decarbonization goals and also progressing with its aim to reduce the average carbon intensity of the energy products it sells.
bp aims to reduce that carbon intensity to net zero by 2050 or sooner. It has set an interim target to reduce this carbon intensity by 5 percent by 2025 and aims to reduce it by 15-20 percent by 2030, both against a 2019 baseline.
Increasing sales of RNG will support bp’s net zero ambition, specifically its aim to reduce to net zero the carbon intensity of energy products it sells by 2050 or sooner.
Archaea is a fantastic fast-growing business, and bp will add distinctive value through our trading business and customer reach. It will accelerate our key bioenergy growth engine, creating a real leader in the biogas sector, and support our net zero ambition. And, importantly, we’re doing this while remaining focused on the disciplined execution of our financial frame, said Bernard Looney, CEO of bp.
A leading RNG producer
Based in Houston, Texas (TX), Archaea Energy is a leading RNG producer, operating 50 RNG and landfill gas-to-energy facilities across the US, producing around 6 000 barrels of oil equivalent a day (boe/d) of RNG.
Assuming a successful closing of the transaction, Archaea’s current production would be expected to provide an immediate 50 percent increase to bp’s biogas supply volumes.
Furthermore, the company has a development pipeline of more than 80 projects that underpin the potential for around five-fold growth in RNG production by 2030.
Archaea has become one of the largest and fastest-growing RNG platforms in the US and today’s announcement will further enable this business to realize its full potential. bp is a world-class partner with an operational history in the RNG value chain that is fully aligned with ours and our partners, and I look forward to our hard-working team joining the bp organization to help achieve their bioenergy goals, said Nick Stork, CEO of Archaea Energy.
Republic Services joint venture
Earlier this year, Archaea announced a joint venture with Republic Services, Inc. to develop 40 RNG projects across the US, which is part of this pipeline portfolio.
The joint venture will convert landfill gas (LFG) into pipeline-quality RNG that can be used for a variety of applications to displace conventional natural gas.
Archaea has extensive operational expertise and experience with an industry-leading modular and integrated approach to biogas projects that provides short development lead times.
The business’s innovative and highly experienced management and operations team has a proven track record and will remain with bp on completion.
The acquisition of Archaea by bp allows us to accelerate decarbonization through our innovative joint venture with Archaea. With our shared focus on sustainability, this joint venture provides additional opportunities to work together on other decarbonization and environmental services initiatives, said Jon Vander Ark, President, and CEO of Republic Services.
Strategic fit for bp
The acquisition of Archaea has a strong strategic fit with bp’s existing biogas business, enabling expansion of its position in the US and potentially also in key geographies globally, including the UK and Germany.
Alongside the growth in bp’s existing portfolio, the addition of Archaea’s existing production and project pipeline has the potential to take bp’s biogas supply volumes to around 70 000 boe/d globally by 2030.
bp sees the opportunity to deliver additional distinctive value through the integration of the business with bp’s trading capabilities and broad customer base.
bp is a leading marketer of natural gas in North America, with many customers looking to decarbonize.
Demand for biogas is also diversifying with opportunities for growth into areas such as LNG, renewable hydrogen, and power for EV charging.
Our biogas team is already one of the leading suppliers of renewable natural gas in North America. This deal accelerates our ability to deliver cleaner energy, generate significant earnings in a fast-growing sector, and help reduce emissions. This could help bp take a significant stride toward our net zero ambition, said Dave Lawler, Chairman, and President of bp America.
Accelerates earnings growth, while maintaining discipline
bp has agreed to acquire Archaea for US$3.3 billion in cash, or US$26 per share, representing a 38 percent premium to Archaea’s 30-day volume weighted average share price.
Together with around US$800 million net debt, the total enterprise value is US$4.1 billion. Subject to regulatory approvals and Archaea shareholder approval, bp is targeting acquisition completion by the end of 2022.
Post integration, bp expects the transaction to be accretive to both its earnings per share and free cash flow per share.
The business is expected to deliver rateable earnings growth. From around US$140 million today, bp is targeting EBITDA5 from the business, when integrated with bp, of more than US$500 million in 2025 and is aiming for around US$1 billion by 2027, following the completion of the development pipeline.
This underpins an acquisition multiple of around four times. bp’s investment is expected to deliver double-digit returns.
As a result of the agreed acquisition, bp has doubled to around US$2 billion its aim is the contribution to EBITDA from biogas in 2030. bp now aims for more than US$10 billion EBITDA to be generated by its transition growth businesses by 2030 (@ US$60 bbl) – up from previous guidance of US$9-10 billion.
bp remains committed to its disciplined financial frame, with its five priorities unchanged. A resilient dividend remains bp’s first priority with guidance unchanged. bp remains focused on maintaining a strong investment-grade credit rating.
bp’s medium-term capital expenditure guidance is unchanged at US$14-16 billion a year. And bp’s commitment to return 60 percent of full-year surplus cash flow through share buybacks in 2022, subject to maintaining a strong investment grade credit rating, is unchanged.
In setting the buyback, bp’s board will continue to take into account the cumulative level of and outlook for surplus cash flow, including the effect of this transaction.
Investing with discipline into the energy transition, creating further value through integration – this is exactly what bp’s transformation into an integrated energy company is all about, said Bernard Looney.
Morgan Stanley & Co. LLC is acting as the financial adviser and Freshfields Bruckhaus Deringer is the lead legal adviser to bp.