(Credit: Pixabay)bp recently announced that it has agreed to acquire Archaea Energy, 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 $3.3 billion in cash, as well as around $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' decarbonization 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.
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 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.
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 its trading capabilities and broad customer base. Demand for biogas is also diversifying with opportunities for growth into areas such as LNG, renewable hydrogen, and power for EV charging.
bp has agreed to acquire Archaea for $3.3 billion in cash, or $26 per share, representing a 38% premium to Archaea's 30-day volume weighted average share price. Together with around $800 million net debt, the total enterprise value is $4.1 billion. Subject to regulatory approvals and Archaea shareholder approval, bp is targeting acquisition completion by the end of 2022.
Post integration, the company 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 $140 million today, bp is targeting EBITDA from the business, when integrated, of more than $500 million in 2025, and is aiming for around $1 billion by 2027, following completion of the development pipeline. This underpins an acquisition multiple of around four times. The company's investment is expected to deliver double-digit returns.
As a result of the agreed acquisition, bp has doubled to around $2 billion its aim for the contribution to EBITDA from biogas by 2030. The company now aims for more than $10 billion EBITDA to be generated by its transition growth businesses by 2030 - up from previous guidance of $9-10 billion.
bp remains committed to its disciplined financial frame, with its five priorities unchanged. A resilient dividend remains its first priority with guidance unchanged. The company remains focused on maintaining a strong investment grade credit rating. Its medium-term capital expenditure guidance is unchanged at $14-16 billion a year. And its 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, the company's board will continue to take into account the cumulative level of and outlook for surplus cash flow, including the effect of this transaction.
Global biogas demand is growing rapidly. In the company'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.
