BP Acquires RNG Producer Archaea Energy for $4.1 Billion

BP has boosted its biogas presence in the U.S. with a $4.1 billion acquisition of renewable natural gas (RNG) producer Archaea Energy, the company said Oct. 17, marking one of the largest energy deals this year and the largest for RNG.

Houston-based Archaea operates about 50 RNG and landfill gas-to-energy facilities across the U.S. The energy major says Archaea’s development pipeline supports about a fivefold increase in RNG volumes by 2030.

The business, which would move BP closer to its decarbonization goals, is expected to deliver rateable earnings growth, with BP targeting EBITDA from the business of more than $500 million in 2025. That could rise to $1 billion by 2027 after the development pipeline is complete, the company said.

“With our proposed acquisition of Archaea Energy, we are doing exactly what we said we would: investing with discipline in our transition growth engines and with a continuing focus on delivering long-term shareholder value,” BP CEO Bernard Looney said during a webcast about the transaction.

“This is a great deal combining Archaea’s proven biogas development and offtake expertise, with BP’s trading capabilities and scale, strong balance sheet and access to customers and customers who are increasingly seeking help to decarbonize their own energy demand,” he added.

With less carbon intensity than diesel, RNG’s appealing carbon profile—paired with access to carbon credits—are attracting investment as the energy transition picks up pace. Naturally occurring methane in places like landfills, dairy farms and other sources is being tapped for gas capture, and demand for bountiful supplies is growing.

The deal, coupled with BP’s existing supply, could boost the company’s biogas volumes to about 70,000 boe/d globally by 2030.

BP agreed on Oct. 17 to acquire Archaea for $3.3 billion in cash, or $26 per share. The amount represents a 38% premium to Archaea’s 30-day volume weighted average share price, the company said. With about $800 million net debt, the total enterprise value of the acquisition is $4.1 billion.

If all required regulatory approvals are secured and Archaea shareholders greenlight the acquisition, the transaction could be complete by the end of 2022. Biogas is now expected to double its contribution to EBITDA for BP, moving to about $2 billion, the company said.

The acquisition will enable the RNG business to realize its full potential, Archaea Energy CEO Nick Stork said.

“In a very short period of time, we have rapidly become a leading RNG platform in the U.S., and today’s announcement will further enable this business to realize its full potential,” Stork said. “BP is a world-class partner and a strong fit for Archaea, with a strategic focus on bioenergy and an operational history in the RNG value chain that is fully aligned with ours and our partners’.”

The two companies already work together via the Mavrix LLC joint venture, which is 50% owned by Archaea. Plans are to scale up by, for example, directing more RNG to transportation use and optimizing value from higher renewable identification number (RIN) credits, Looney said.

Earlier this year, Archaea reported the JV achieved commercial operations and produced first pipeline-quality RNG at the Costa View dairy digester facility, completing the second of four diary projects.

News of the acquisition comes about four months after Archaea announced in May a joint venture with Republic Services. As part of the $1.1 billion investment, about 40 RNG projects will be developed in 19 states across the U.S starting in late 2022. The projects when fully operational are expected to generate more than 12.5 MMBtu of RNG annually.

“Feedstock for more than 75% of the projects in the pipeline has been secured. Advance orders for equipment have been placed for 22 projects,” Looney said. “Low execution risk supports delivery of this growth. Projects are modular, they are capex light, and they have short development lead times.”

The projects are among the more than 80 projects that BP is counting on to grow its RNG volumes. Archaea’s existing RNG portfolio produces about 6,000 boe/d. 

“At closing, Archaea Energy is expected to provide an immediate 50% increase to BP’s biogas supply volumes,” Looney said. “While an established business today, this acquisition is underpinned by the significant and derisked growth potential we see in the future.”

Looney said BP is confident its base case, including capex of about $1.7 billion to support the buildout of the project pipeline by 2027, can support double digit returns.

“Alongside growth in our existing portfolio, the addition of Archaea Energy’s production and pipeline has the potential to take biogas supply volumes to around 70,000 barrels oil equivalent per day by 2030,” Looney said. “On the demand side, we have biogas customers today and demand from these customers is growing and diversifying rapidly as they seek to decarbonize.”

BofA Securities is acting as financial adviser to Archaea, while Kirkland & Ellis LLP is acting as Archaea’s legal adviser. Morgan Stanley & Co. LLC is acting as financial adviser to BP, while Freshfields Bruckhaus Deringer serves as lead legal adviser to BP.

Editor’s note: This story was last updated at 1:33 p.m. CT on Oct. 17.