Landfills are major greenhouse gas emitters. They’re the third-largest source of U.S. greenhouse gas emissions, accounting for 14.4% of the total. Landfills produce carbon dioxide and methane gas. Methane is the more dangerous contributor to global warming. It’s 28 times more effective at trapping heat in the atmosphere than carbon dioxide.
While methane gas is harmful to the environment when emitted, it’s much less damaging when burned as a fuel to generate electricity or power commercial vehicles. That’s leading several energy companies to invest heavily in facilities to capture landfill gas and convert it to valuable renewable natural gas (RNG).
Building RNG platforms
Energy giants BP (NYSE: BP), Enbridge (NYSE: ENB), and Kinder Morgan (NYSE: KMI) have invested heavily in recent years to buy and build RNG platforms. British energy giant BP made the biggest splash, acquiring Archea Energy for $4.1 billion in 2022. At the time, Archea operated 50 RNG and landfill gas-to-energy facilities in the U.S. BP aimed to grow Archea’s output fivefold to 30,000 barrels of oil equivalent per day (BOE/d) by 2030.
The deal enhanced BP’s already large biogas business, which was producing around 11,000 BOE/d at the time of the deal. That transaction is part of BP’s bold plans to grow its energy transition businesses into meaningful contributors by the end of the decade.
Natural gas pipeline giant Kinder Morgan made a few RNG acquisitions in 2022. It paid $310 million for Kinetrex Energy, which had a 50% interest in a landfill RNG facility and three more under development. Kinder Morgan also bought North American Natural Resources for $135 million. That company owned seven landfill gas-to-power facilities, some of which it planned to convert to RNG production facilities.
The company also bought three landfill assets from Mas CanAm for $335 million, which included an RNG facility. Kinder Morgan sees tremendous growth potential for its RNG platform, fueled by the view that the U.S. will grow its RNG production from 0.3 billion cubic feet per day (Bcfd) last year to 3.7 Bcfd by 2050. That provides the company with a very long growth runway.
Canadian energy infrastructure giant Enbridge has also entered the growing RNG market. Last year, it bought seven U.S. landfill gas-to-RNG facilities from RNG developer Morrow Renewables for $1.2 billion. The deal established a U.S. RNG business for Enbridge. The company expects the facilities to contribute to its earnings this year. Enbridge also invested in Divert, a company aiming to turn wasted food into RNG.
A potentially needle-moving investment opportunity awaits
Energy companies looking to get into the RNG business (or expand their existing platforms) have an opportunity to purchase a sizable platform. Leading U.S. waste manager WM (NYSE: WM) recently put its RNG business up for sale. It’s reportedly seeking up to $3 billion for the business, comparable to the valuation multiple Enbridge paid for the Morrow facilities.
WM would sell the rights to develop RNG operations at 115 of the landfills it owns. The company had planned to invest $1.2 billion through 2025 to grow its RNG business. However, it now wants to sell the platform so that it can invest that cash into other areas.
The business currently generates about $150 million in annual earnings before interest, taxes, depreciation, and amortization (EBITDA). This platform could grow its earnings to more than $500 million by 2026 as more of the RNG projects under development come online.
WM’s RNG platform would be an ideal fit for an energy company looking to grow its RNG business. Of those already mentioned, Kinder Morgan seems like the best fit. It has the financial flexibility to acquire the platform and fund the capital needed to build out the associated projects. Acquiring WM’s RNG business would enhance the long-term visibility into Kinder Morgan’s earnings growth.
Other potential bidders could include big oil giant Chevron (NYSE: CVX). The oil giant aims to grow its RNG production to more than 40,000 MMBtu per day by 2030. It formed a joint venture with Brightmark to help it reach that goal. Acquiring WM’s RNG platform would accelerate Chevron’s ability to reach that goal, much like its $3.2 billion acquisition of Renewable Energy Group boosted its biofuels business in 2022.
Going green (and making a lot of it in the process)
Energy companies are investing heavily in acquiring and building out RNG platforms. These landfill gas-to-RNG facilities help reduce greenhouse gas emissions while generating cash flow for their owners.
There’s a lot of growth ahead for the sector as energy companies build more RNG facilities at landfills across the country. RNG makes these energy stocks look like potentially more compelling investment opportunities compared to their fossil fuel-focused rivals since it will grow their earnings from lower-carbon energy sources, making them more sustainable in the long term.
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Matt DiLallo has positions in Chevron, Enbridge, Kinder Morgan, and Waste Management. The Motley Fool has positions in and recommends BP, Chevron, Enbridge, and Kinder Morgan. The Motley Fool recommends Waste Management. The Motley Fool has a disclosure policy.
Turning Trash Into Treasure: These Energy Stocks Are Betting Big on Converting Garbage Into Gas (and Cash) was originally published by The Motley Fool
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