Is it time for old energy to buy new energy? According to analysts at Canaccord, yes.
Conditions are ripe for more M&A activity in the sustainable energy sector, as equities in the sector suffered big drawdowns in 2022 – especially in comparison to the performance of traditional energy firms.
The most recent example is oil and gas giant BP’s bid to buy Archaea Energy, the largest renewable natural gas company in the US, for around $4.1 billion.
READ: BP to supply green hydrogen to UK low-carbon lithium processor
The deal represents a near 54% premium to Archaea’s closing price on October 14, when its shares were down nearly 11% year-to-date.
BP’s shares, on the other hand, were up almost 11% year-to-date.
As Canaccord noted, there is a “dramatic” performance differential between traditional energy companies and those zeroing in on sustainable energy.
Bolstering long-term growth
Analysts compared the Invesco Dynamic Energy Exploration & Production ETF (PXE), which is concentrated on oil & gas, to the ALPS Clean Energy ETF (ACES) in an effort to show the robust gap in relative performance both year-to- date and over the last year.
Unsurprisingly, PXE has far outperformed ACES with over 80% relative outperformance over both periods, which Canaccord analysts believe creates opportunities for both oil and gas companies and longer-term investors.
“We think the conditions are ripe for accelerating M&A in the sector,” analysts wrote.
“In particular, we think traditional oil and gas companies would be prudent and shrewd to take advantage of their strong current fundamentals and dramatic stock outperformance by acquiring their way into more sustainable energy exposure and bolstering long-term growth.”
The sentiment is echoed by BP’s CEO Bernard Looney, who called Archaea “a fantastic fast-growing business.”
“It will accelerate our key bioenergy growth engine, creating a real leader in the biogas sector, and support our net-zero ambition,” Looney added.
The deal is expected to close by the end of the year.
Contact Angela at angela@proactiveinvestors.com
Follow her on Twitter @AHarmantas