Wall Street cheered news that Chevron Corp. is inking a deal to buy Renewable Energy Group Inc., saying that the energy giant would get a commanding lead in biofuels, a crucial piece for the transition away from crude-oil products.
The news sent Renewable Energy’s shares soaring more than 30%, and the stock had added to gains by midday trading, up more than 40% at last check.
“Chevron is making a splash in the field of alternative fuels,” said Peter McNally, an analyst with Third Bridge.
The company announced last week an equity stake in a carbon-capture technology company and a deal to build a few hydrogen fuel stations in California.
Renewable Energy was under pressure from heated competition from new companies as well as from major refiners looking to make inroads into biofuels, all at a time feedstock costs have been on the rise alongside commodity prices, McNally said.
“The renewable diesel industry is still expected to grow materially in the years ahead, but there are capacity challenges and the threat of higher costs,” he said.
“Chevron may be able to achieve greater scale for (Renewable Energy) than an independent company could, and Chevron is indicating that (Renewable Energy) will be its platform for growth in one of its pillars for the energy transition,” McNally said.
Small-cap renewable-energy companies, Renewable Energy Group included, had faced market headwinds in recent months, Tudor Pickering Holt’s Matthew Blair said in a note.
It is “unlikely that other bidders will emerge,” Blair said.
Ryan Todd with Piper Sandler said that the companies are likely “better together,” with their business combination “holding significant industrial logic.”
Renewable Energy is “one of the largest and most tenured players in biofuels, and one of the lowest cost producers,” he said.
The company “would bring significant operational/feedstock knowledge and customer relationships on both the feedstock and marketing side, as well as a large, diverse asset base across Europe and the US, including a strategic position in the U.S. Gulf of Mexico to complement (Chevron’s) ongoing (biofuels) conversion” at its refinery in El Segundo, Calif., Todd said.
For Renewable Energy, the combination has the potential to significantly improve its marketing and logistical capabilities, and in particular “a much improved downstream distribution capacity,” he said.
Shares of Renewable Energy have lost 21% in the past 12 months, while shares of Chevron have advanced about 42%. That compares with gains of around 14% for the S&P 500 index
in the same period.