Archaea Energy: Turning Pollution into Profit - [Business Breakdowns, EP. 79]

5 snips

Oct 19, 2022

Chadd Garcia, lead portfolio manager of the Ave Maria Focused Fund, shares his insights on Archaea Energy, a leader in renewable natural gas. He discusses how the company transforms landfill methane into energy, highlighting its innovative approach and the environmental benefits. They dive into BP's recent $4.1 billion acquisition and its implications for landfill gas valuations. Key topics include financial growth prospects, market dynamics in renewable fuel, and the strategic importance of long-term contracts in this emerging sector.

Ask episode

AI Snips

Chapters

Transcript

Episode notes

INSIGHT

Landfill Gas Challenges

Landfill gas, or biogas, is roughly 50% methane, a potent greenhouse gas.
Historically, landfills flared methane, converting it to less potent CO2, or used it for on-site electricity.

INSIGHT

Archaea's Business Overview

Archaea Energy generates renewable natural gas (RNG) from landfill methane, with growing revenue and EBITDA.
They are a major player in the RNG market, which is experiencing rapidly increasing demand.

INSIGHT

Waste Hauling Value Chain

Municipalities contract with waste haulers, who either own landfills or pay tipping fees to dump waste.
Waste haulers may benefit from owning landfills (economic moat) or using municipal landfills (lower capital).

Get the Snipd Podcast app to discover more snips from this episode

Get the app

This is Zack Fuss, an investor at Irenic Capital, and today we’re breaking down Archaea Energy. Archaea is one of the largest and fastest growing providers of renewable natural gas in the US. The company uses methane produced by landfills as its feedstock to create renewable electricity and natural gas.

To break down Archaea, I’m joined by Chadd Garcia. Chadd is lead portfolio manager of the Ave Maria Focused Fund and co-portfolio manager of the Ave Maria Growth Fund.

You may have seen Archaea in the news this week. On Monday morning, BP announced a deal to buy Archaea for $4.1 billion US. We recorded on Friday before this news broke. The bulk of our discussion, therefore, does not touch on BP. It serves as an explanation for what BP has bought and why they found it to be an attractive asset. At the end of our conversation, we asked Chadd for his quick reaction to the news. Please enjoy this business breakdown of Archaea Energy.

For the full show notes, transcript, and links to the best content to learn more, check out the episode page here.

-----

Business Breakdowns is a property of Colossus, LLC. For more episodes of Business Breakdowns, visit joincolossus.com/episodes.

Stay up to date on all our podcasts by signing up to Colossus Weekly, our quick dive every Sunday highlighting the top business and investing concepts from our podcasts and the best of what we read that week. Sign up here.

Show Notes

[00:02:59] - [First question] - Defining landfill gas and its historic and current state

[00:05:50] - What Archaea is, their business scale, and economic profile

[00:07:44] - The waste hauling value chain and how money is made in the ecosystem

[00:11:33] - How Archaea takes something that’s perceived to be worthless and profits from it

[00:15:47] - The way the company is organized to capture and capitalize on this opportunity set

[00:17:56] - How much visibility they have into their future earnings

[00:19:04] - The renewable fuel standard and how revenue is derived from it

[00:20:10] - Explaining how you produce renewable natural gas from a landfill

[00:24:52] - The unit economics of a single Archaea landfill to gas site

[00:25:40] - How much capital can be deployed into one of their projects

[00:26:45] - What differentiates and makes Archaea defensible from private equity companies

[00:27:51] - The history of the company, how it was founded, and its major players

[00:29:57] - Thoughts about the size of the untapped opportunity in this sector

[00:31:57] - Where is Europe in doing something comparable to this

[00:32:59] - Free cash flow conversion and financing requirements

[00:34:18] - The current state of the competitive landscape

[00:37:37] - The key risks for a business like Archaea

[00:40:30] - Lessons learned from studying Archaea from an investor’s and operator’s perspective

[00:43:02] - His reaction to the news of Archaea being purchased