Switzerland-headed fuel major VARO Energy Marketing AG (VARO) has revealed details of its new "twin-engine" strategy that will change the role the company plays for customers, shifting it from being a supplier to becoming the energy transition partner of choice.
Created in 2012, VARO is a leading European energy company that manufactures, stores, and distributes conventional fuels and sustainable energies and services.
It is owned by US-headed global investment company The Carlyle Group via its Carlyle International Energy Partners (CIEP), the firm’s global energy investment arm for outside of North America, and the Netherlands-headed energy and petroleum products trader Vitol Group.
“Twin-engine” strategy to accelerate growth in Sustainable Energies
The new strategy is built around two engines. Engine 1 is focused on VARO’s Conventional Energies business comprising manufacturing, storage, trading marketing, and distribution.
The priority for Engine 1 is to continue to operate safely and reliably, to reduce carbon intensity, and to provide energy security for its that is customers.
The company’s track record of consistent performance is a driver of value and an enabler for our ambition for Engine 2.
VARO has introduced the “Fit For Growth” program in Engine 1 to support these aims. “Fit For Growth” will improve efficiency through the optimization of assets.
It will also further reduce emissions to ensure assets operate with best-in-class carbon footprint and continue to repurpose assets for alternative uses, ultimately transitioning decarbonized assets into Engine 2.
Cash flows from Engine 1 will be reinvested into Engine 2, which is focused on VARO’s Sustainable Energies business. Sustainable Energies consists of five growth pillars that VARO has identified as offering the most attractive low-carbon growth potential while playing to the company’s strengths.
When we established VARO 10 years ago, we wanted to create an agile business that could move quickly to capitalize on opportunities in the energy sector. The energy transition also offers huge opportunities. Our new strategy and VARO’s track record of growth and acquisitions means we are well placed to make the most of these opportunities and continue to scale the business, said Russell Hardy, CEO of Vitol.
The five strategic growth pillars in Sustainable Energies are:
- Biofuels: an integrated producer of 2G advanced biofuels, including sustainable aviation fuel (SAF). Leveraging existing biofuels optimization expertise, the company will build new renewable manufacturing facilities and, in time, repurpose older assets. The target is approximately 250 000 tonnes per annum of net biofuel capacity by 2026 with the long-term ambition to reach approximately 500 000 tonnes per annum.
- Biomethane (aka renewable natural gas – RNG), and bioLNG: to become a leading producer of biomethane and bioLNG, the company will develop a portfolio through both acquisition and greenfield development to strengthen offers to industrial and road transport sectors.
- Hydrogen: leverage position as an H2 consumer to develop hydrogen production hubs. In the initial phase, VARO will invest in an electrolyzer at Bayernoil Refinery, with the offtake meeting part of the demand from the refinery. Additional green and biogenic production could lead to offtake opportunities for industry, heavy transport, and synthetic fuels.
- E-mobility: turnkey charging solution for customers transitioning to E-mobility. Through its acquisition of stakes in E-Flux, VARO is already at the heart of the EV ecosystem. Our focus will be on further partnerships and acquisitions to create new businesses and enter new, less mature, markets.
- Carbon removal: a fully integrated carbon removal offer. Leveraging its existing expertise in carbon removal from its majority stake in SilviCarbon, VARO will invest in forestry projects to generate high-quality nature-based carbon removal over the next 5-10 years, optimized through advisory and trading.
Leveraging company strengths
According to the company, this twin-engine strategy reflects the firm’s “momentum in renewables and decarbonization” and plays to the company’s five core strengths:
- Ability to provide customers with a fully integrated portfolio of energy solutions that can be tailored to customer needs;
- Optimization and exposure management which supports value chain integration and benefits from VARO’s position as a leading biofuels trader in Europe;
- Entrepreneurial culture is well suited to developing the next generation of energy solutions. VARO was the first company to introduce UERs in Germany and has stakes in a number of businesses like E-flux that support customer integration;
- Culture of operational excellence with safe operations and assets operating at 98 percent reliability;
- Strategic infrastructure can be deployed for current needs for energy security but which have the flexibility for repurposing to meet the needs of the energy transition.
These strengths combined with the twin-engine strategy will change the role VARO plays for customers, shifting it from being a supplier to becoming the energy transition partner of choice.
As well as continuing to serve existing customers the strategy will also enable VARO to better serve wholesalers and retailers, food retailers, as well as those in hard-to-abate sectors such as industrial heat and aviation by providing a wider range of energy solutions.
Strategy built on strong financial foundations
The twin-engine strategy is underpinned by a robust financial framework, driven by high levels of cash generation, a strong balance sheet, and a disciplined approach to capital allocation.
Our customers’ needs are changing fast as they adapt to the Energy Transition while expecting reliability of supply. They want a partner that moves with them, one that can advise and provide a wide range of energy and decarbonization solutions from a single company, said Dev Sanyal, CEO of VARO.
That is why VARO plans to invest US$3.5 billion in the next five years in our twin-engine strategy, with around two-thirds of that investment focused on Sustainable Energies. This will enable VARO to provide integrated energy solutions to a wide variety of sectors including food, wholesalers, and retailers as well as hard-to-abate sectors like industrial heat and aviation. It will also reorient VARO into the higher-growth low-carbon sector and generate significant EBITDA growth, Dev Sanyal said.
High cash generation and resilient margins in existing businesses targeting:
- Free Cash Flow generation of approximately US$300 million a year to 2026;
- Investing US$3.5 billion to 2026: approximately two-thirds focused on the Sustainable Energies business, with about US$140 million p.a. sustaining CAPEX in Conventional Fuels;
- Grow EBITDA 3x by 2026: versus US$320 million in 2021; Sustainable Energies to contribute over 50 percent of EBITDA by 2026;
- A strong balance sheet with ample financing capabilities: growth to be accelerated by utilizing existing balance sheet capacity targeting a long-term level of 2.0x net debt/EBITDA ratio with a maximum of 2.5-3.0x at peak investment.
Leading Net Zero targets
VARO also released “ambitious and sector-leading new targets” for the reduction and elimination of carbon dioxide (CO2) emissions with Scope 1 and 2 interim targets of 40 percent absolute reduction by 2030 and Net Zero by 2040. Scope 3 targets a 15 percent reduction in carbon intensity by 2030 and Net Zero by 2040.
The need to take action to limit global warming is driving regulatory change and shifting consumer behavior and it is clear that VARO has a key role to play in Europe’s energy transition and energy security. Dev has an unrivaled track record in building low carbon businesses and I know he and the leadership team are well placed to deliver on VARO’s ambitious new strategy, ended Marcel van Poecke, VARO Chairman and Vice Chair of Carlyle International Energy Partners.
