SPACs Offer New Investment Opportunities For Energy Industry – Energy and Natural Resources

Much has been written and discussed in the last several months
about SPACs, or special purpose acquisition companies.  What
is a SPAC, and what are the possible applications of this capital
raising and acquisition strategy in the energy industry? 
Those questions are the topic of this piece.

SPACs have been around for years, but gained significant
traction and attention in 2020.  So much so, that new SPACs
were viewed as coming to the public market at a
“frenzied” pace, with more proceeds raised in SPAC
IPO’s from July 1, 2020 through April 1, 2021 than in
the preceding 10 years.  A SPAC is an entity without an
operating business that undertakes an IPO seeking to raise funds
(typically between $200 to $400 million, but sometimes higher
or lower), to make acquisitions in an identified industry or
utilizing a loosely identified business strategy.  Investors
typically invest in the IPO based on their:
 (i) perception of the quality and experience of the
management team in charge of identifying acquisition candidates,
(ii) expectations for, and interest in, the identified
industry or with the identified strategy, and (iii) knowledge
that if they do not like the acquisition candidate ultimately
identified by the management team, they can vote against the
proposed acquisition and potentially get their investment returned.
 After the IPO is complete, and assuming a suitable
acquisition target is identified, the SPAC seeks to combine with
the target in what is referred to as a “de-SPAC”
transaction.  Frequently, these combinations occur at the same
time as a private investment by institutional investors in the
SPAC.  These transactions come in various flavors and
structures, but the end result is a public company that is believed
to be appropriately funded to pursue a discrete business strategy
capable of generating acceptable returns to investors and founders
of the SPAC.

So what does all of that have to do with the energy
industry?  First, the SPAC market is particularly well-suited
to raise cash in industries that offer the potential for
significant growth and are currently of interest to investors
(think a combination of technology and ESG-friendly).  As the
recent experience at ExxonMobile has shown, investors are eager to
invest in, and accelerate the migration toward, energy production
that does not rely on fossil fuels.  SPACs that have invested
in the electric vehicle sector are certainly an example of the
concept.  And the energy industry, broadly defined, is host to
a number of opportunities for the SPAC strategy.  A few
examples:

• The rapidly developing renewable natural gas market is putting
  in place a meaningful number of cash-generating RNG production
  facilities that could be the subject of a roll-up of sufficient
  size to attract the attention of a SPAC team.




• The development and implementation of methane capture and
  carbon sequestration technologies meet a large, current need for
  reduction of greenhouse gas emissions. A consolidator of the best
  of those technologies could attract significant interest.  The
  energy department recently announced a new program to reduce the
  costs of carbon free hydrogen by 80% by the end of this
  decade.




• The program, a part of the DOE’s Energy Earth Shots
  initiative, is hoping to reduce the price of green hydrogen to
  $1 per kilogram by 2030.




• Large scale production of green hydrogen will require large
  scale transportation of that hydrogen from its source of origin to
  its source of use.




• The acquisition and re-purposing of that infrastructure will
  require significant capital expenditure that might lend itself to
  SPAC funding.

The confluence of the renewed interest in the SPAC structure,
the growing commitment of investors to support green technologies,
and the wide range of new technologies coming online to move the
energy industry away from fossil fuels is likely to create
opportunities in the near future.  Husch Blackwell has the
experience in the energy industry and with SPAC transactions to
assist those considering the opportunity.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.