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

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.

 

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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