The U.S. is moving in earnest toward carbon-neutrality, but investments in fossil fuels will remain fundamental to the country’s energy portfolio for years to come.
By Onofrio Castiglia and Xinyi Jiang in Charlottesville, Virginia and Nate Trela in Denver.
Joe Biden’s electoral success has returned the American focus to carbon neutrality, but M&A opportunities in fossil fuels, particularly natural gas, will by driven by necessity in the near term, sources tell Mergermarket.
Natural gas holdings are poised to benefit from political and economic reality in the near term, one sector advisor said. Biden insisted throughout the campaign that he was not an enemy of natural gas interests, which was politically expedient in fracking states like Pennsylvania and Ohio, but it also served to set the stage for an era in which gas is used as a “bridge” to cleaner sources of energy, he said.
“There’s no natural marriage in the electric space other than gas to renewables,” the sector advisor said. To add voltage support to the grid and reliability to the customer, a percentage split between renewables and gas is going to be required for, likely, the next 15-to-20 years.
“There’s space to be invested in both sides of that equation,” he said, pointing to renewable natural gas (RNG) as a place for transitioning investors.
There is a lot of potential for big companies in natural gas to do large deals and snap up smaller players in the Appalachian basin, the Haynesville play in Louisiana, and, to a lesser extent, the Piceance and Uinta, a second sector advisor said. EQT tops the list of potential buyers, followed closely by Range Resources, they both said. Antero and Cabot could snap up smaller E&P deals, the first advisor said. All of them are efficient and there is potential for big mergers between them.
Additionally, the Appalachian and Haynesville interests have the added benefit of being close to major eastern markets – a benefit you do not get with far-flung western oil fields, the second advisor said.
The first advisor said he thinks the Piceance, which straddles the Utah-Colorado border, will ultimately be less attractive under Biden, as it is less likely his administration would approve a long-desired Pacific export terminal.
Some in natural gas balk at the idea of their industry as a bridge to renewables, insisting it is a cornerstone of America’s energy future.
Nick DeIuliis, CEO of Pennsylvania’s CNX Resources Corporation, said at a recent energy conference that companies are making a mistake by going along with the idea that natural gas is a bridge fuel to 100% renewable energy. The industry needs to highlight things like the way it invests in the communities where it operates, he said, and pointed to the carbon footprint of renewables from mining and manufacturing needs for transportation and clearing of land to install turbines and transmission lines.
“We are not a bridge fuel. We are a foundation of the future,” DeIuliis said.
Environmental, Social and Governance (ESG) investing in renewable energy and related technologies, once shrugged off by some energy investors, has been a bright spot throughout 2020, the first sector advisor said, noting that ESG index funds continued to grow throughout the year.
Joe Madden, CEO of Xpansiv CBL Holding Group (XCHG), a global trading market for ESG-inclusive commodities, said the momentum around ESG that began in the Trump presidency will continue through the Biden administration as the new president pushes for net-zero carbon emissions by 2035.
During the transition, which will stretch out over a period of decades, there will be opportunity for companies to reduce emissions with cleaner products like renewable natural gas (RNG), several sources agreed. This is likely to be necessary, as reliability issues in California have shown that renewable sources cannot yet support the energy grid on their own.
But not everyone in the sector sees gas as a good bet in the coming decade.
One oil and gas executive said gas could have a moment in the near term, but the industry needs to learn the lessons of coal. He said he expects gas demand to steadily shift to overseas, until those governments and foreign ESG investors find it unpalatable.
“Carbon-free power means carbon free, not ‘better’ carbon,” he said “As soon as storage looks viable, they’ll turn against gas like they did coal.”
Onofrio Castiglia is a reporter covering energy and industrials from Charlottesville, Virginia. He can be reached at email@example.com. Nate Trela covers the energy, mining and cannabis sectors from Denver. Contact him at firstname.lastname@example.org. Xinyi Jiang covers financial services and fintech out of Charlottesville, and can be reached at email@example.com.