In a move that will expand and accelerate the growth of its strategic bioenergy business, bp has announced that it has agreed to acquire Archaea Energy Inc., a producer of renewable natural gas (RNG) in the US. The agreed acquisition, which is subject to regulatory and Archaea shareholder approval, will be for USD 3.3 billion in cash, as well as around USD 800 million of net debt.
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% of its total annual capital expenditure by 2025, aiming to grow this to around 50% by 2030.
Acquiring Archaea will expand bp’s presence in the US biogas industry, enhancing its ability to support customers’ decarbonisation goals and also progressing 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.
Bernard Looney, bp chief executive, says, “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. 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.”
Based in Houston, Texas, 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. At closing its production would be expected to provide an immediate 50% increase to bp’s biogas supply volumes.
Archaea has a development pipeline of more than 80 projects that underpin the potential for around five-fold growth in RNG production by 2030. Earlier this year, it announced a joint venture with Republic Services, Inc. to develop 40 RNG projects across the US, part of this pipeline. The joint venture will convert landfill gas 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.
Nick Stork, CEO of Archaea Energy, says, “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 realise 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 organisation to help achieve their bioenergy goals.”
Jon Vander Ark, Republic Services president and chief executive officer, says, “The acquisition of Archaea by bp allows us to accelerate decarbonisation through our innovative joint venture with Archaea. With our shared focus on sustainability, this joint venture provides additional opportunities to work together on other decarbonisation and environmental services initiatives.”
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 growth in bp’s existing portfolio, the addition of Archaea’s production and 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 decarbonise. Demand for biogas is also diversifying with opportunities for growth into areas such as LNG, renewable hydrogen, and power for EV charging.
Dave Lawler, chairman and president of bp America, says, “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.”
Accelerates earnings growth, while maintaining discipline
bp has agreed to acquire Archaea for USD 3.3 billion in cash, or USD 26 per share, representing a 38% premium to Archaea’s 30-day volume weighted average share price. Together with around USD 800 million net debt, the total enterprise value is USD 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 USD 140 million today, bp is targeting EBITDA from the business, when integrated with bp, of more than USD 500 million in 2025 and is aiming for around USD 1 billion by 2027, following 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 USD 2 billion its aim for the contribution to EBITDA from biogas in 2030. bp now aims for more than USD 10 billion EBITDA to be generated by its transition growth businesses by 2030 – up from previous guidance of USD 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 (2023-30) capital expenditure guidance is unchanged at USD 14-16 billion a year. And bp’s commitment to return 60% 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.
Renewable natural gas
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.
Biogas is generated by the decomposition of organic material at landfill sites, anaerobic digesters and other waste facilities. 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.
RNG can be used interchangeably with fossil fuel-based natural gas – including as transport fuel, in power generation and in heating – but, as it is derived from organic waste, its use results in lower lifecycle greenhouse gas emissions. Projects such as Archaea’s also have the potential to be integrated with technology such as carbon capture and storage to further reduce lifecycle greenhouse gas emissions.
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. It has set an interim target to reduce this carbon intensity by 5% by 2025 and aims to reduce it by 15-20% by 2030, both against a 2019 baseline.