SPACInsider contributors Anthony Sozzi and Sam Beattie this week compiled their three favorite potential SPAC targets among companies set to see increased demand among elevated energy prices. We look at why they are compelling and why each could be a fit for a blank-check merger.
Commodity prices are set to be one of the biggest storylines of 2022, because rates hikes, inflation and war apparently weren’t enough for one cycle.
Wars always bring higher oil prices even when the belligerents are not major oil producers. But, Russia, which is gradually being cut off from global trade and its financial systems, is the second largest exporter of oil in the world and the top natural gas exporter by a fair margin.
Crude oil has already hit its highest prices since 2014, which was coincidentally the last time Russia invaded Ukraine. If 2014 is any guide, the worst could be yet to come as prices hit their peak in June of that year, four months after Russian troops started mysteriously appearing in Ukraine’s east. This time around, an embargo of Russian energy exports is also at play.
The global auto industry is facing a triple whammy with the price surges. Russia is also the largest exporter of palladium and third biggest nickel producer, among other base metals. Palladium is a major component in electronics and the catalytic converters for internal combustion vehicles while nickel is important for the batteries in EVs, giving auto makers no respite in addition to rising fuel prices and a chip shortage.
So, while no private company out there can create more of these suddenly scarce commodities out of thin air, there is plenty of room for SPACs to piggyback on the companies with technology to circumvent the need for those resources or that have a new way of getting them to market. On the target side, a rocky IPO market means that SPACs may present their best chance to strike while the iron is hot with a locked-in timeline.
Venture Global LNG
A decade ago, liquefied-natural gas (LNG) appeared to be the answer for a Europe wary of relying on natural gas fed via pipelines from Russia. The problem is that it requires significant infrastructure investment in terminals to pressurize into a liquid form and then de-pressurize it again at both its port of departure and arrival – facilities with already little real estate to spare.
Although LNG terminals can in theory welcome resources from any gas-producing nation with export terminals of their own, pipelines are still just cheaper. Fast-forward 10 years, and Europe likely wishes it paid for more LNG terminals.
Luckily for it, the US has been plenty bullish on getting its natural gas onto ships and there are still ways for SPACs to get involved in that ongoing process. Arlington, Virginia-based Venture Global has been developing a series of terminal projects in Louisiana. Its first – Calcasieu Pass – loaded its first vessel with LNG earlier this month.
It has already signed purchase agreements with China National Offshore Oil Corporation to buy 1.5 million tons of LNG annually from Calcasieu Pass and an additional 2 million tons annually from its next project set to come online in Plaquemines Parish over a 20-year term.
Venture Global has funded much of its buildout with debt and raised $1.25 billion in senior notes in November to de-lever from past debt facilities. But private equity firms I Squared Capital and Stonepeak Infrastructure Partners invested more than $1.9 billion in equity financing into the company in 2019.
A SPAC deal could give all sides liquidity and an opportunity to further de-lever. Algoma Steel (NASDAQ:ASTL), which completed its combination with Legato in October, was in a similar debt position pre-merger and it is now itself riding the rising demand for metal commodities, finishing trading at $11 in after hours yesterday.
Many SPACs have shied away from the oil and gas space, perhaps due to ESG concerns, but Hunt I (NYSE:HTAQ) would be unlikely to be dissuaded by such exposure. It raised $230 million in its November IPO with a declared goal of searching among natural resources targets, and it is led by members of the Hunt family conglomerate, which originally made its money in Texas oil.
The pressures that the current pricing environment has generated haven’t winnowed the opportunities down to solely commercialized technologies, however. The energy sphere has already been undergoing a reset, and recent events have only accelerated the search for new long-term solutions.
Spring Valley (NASDAQ:SV) is already working to bring SPACs into the nuclear age with its combination with small-scale nuclear fission reactor-maker NuScale. The next stage of this energy transformation may well be fusion, and if the market appetite for participating is anything like we have seen with quantum computing, then that may prove to be a fruitful path.
The key factor for fusion is that while it has been demonstrated to function, it currently requires more energy to operate fusion plants than they produce. Vancouver-based General Fusion has raised about $400 million to date to prove its own design at a test plant in London and is backed by Jeff Bezos among others.
A US government-funded fusion project crossed the energy break-even line last year, and General Fusion is confident that it can be the first to do so outside of a laboratory setting. It has already signed an MoU with Bruce Power to begin laying the groundwork for a fusion plant in Ontario.
Of the 22 searching SPACs that have indicated renewable energy as their primary focus, East Resources (NASDAQ:ERES) and its $345 million trust have the tightest timetable. Its deadline to complete a transaction is July 27, 2022.
Hydrogen is likely to have a continuing role in the future of energy, even if some of the hydrogen energy-focused SPAC targets have not blazed upwards straight out of the gate. While those ventures, like Hyliion (NYSE:HYLN) and Hyzon (NASDAQ:HYZON) provide hydrogen solutions specific to the freight-trucking industry, Lincoln, Nebraska-based Monolith is working to be a clean hydrogen producer serving this and other industry verticals.
Pure hydrogen providers like Monolith are more insulated from industry-specific externalities, while its other ancillary involvement in the vehicle industry has also gotten a boost from commodity prices. It generates hydrogen from US natural gas, another byproduct of which is carbon black. Carbon black is used as a chemical ingredient in a wide variety of industries, but most commonly as a filler element in rubber tires.
Commodity rubber prices are also on a 33% upswing since September, and as prices change, it becomes easier for major manufacturers to make the switch to cleaner sources. Carbon black is a soot-like material that is generally produced by highly polluting means.
Monolith has already signed a letter of intent to provide Goodyear (NASDAQ:GT) with carbon black for cleaner tire production. It aims to provide resources for that arrangement out of a facility it aims to break ground on in 2022 that would provide 194,000 tons of clean carbon black annually once it is online in 2025.
US natural gas producer NextEra Energy (NYSE:NEE) also invested in Monolith in 2021 with an eye to advancing its own ESG efforts and it may serve as stable and incentivized natural gas supplier for Monolith moving forward.