I will be getting back into a few posts over the coming days. Today, I posted my latest article to Forbes:

There Will be MORE Blood: Exxon should acquire BP

Link can be found here, and the text is below:

The 2007 movie thriller There Will be Blood portrayed the ruthless quest for wealth throughout the 1920s oil boom. Wannabe oil barons menacingly clamored for land and used any method to extract and convert crude oil to wealth.

Fast forward to 2020 and we have a new script being written as the oil industry moves from thriller to horror story: Oil demand is getting crushed by a COVID-related slowdown. The accelerating electric mobility movement is limiting demand for transportation fuels. En masse corporations are revisiting environmental impact and carbon footprint metrics. Meanwhile the everyday consumer is now face-first with a continuous barrage of oceanic and land-based climate disasters. This confluence of events is leading to an unavoidable event: messy and major consolidation amongst the traditional energy superpowers.

And here is the first move on the oilfield: Exxon should acquire BP.

These two stalwarts are down 50% year to-date. And while both stocks are being decimated by lower demand for oil and expected heavier regulations, BP offers an important lifeline to Exxon. Why?

1. Renewables are the future, and BP is focused on renewables. Aiming to be net zero by 2050, BP has built up the organizational structure, wind & solar assets, retail sites, and power trading capabilities to capitalize on renewables growth. Exxon doesn’t have any of these assets at scale.
2. Investor sentiment has declined across the O&G sector and institutions and endowments are divesting from O&G for ESG purposes. Exxon is the largest carbon emitter with no plans on changing. A “bolt on” acquisition of BP would improve ExxonMobil’s carbon footprint and improve investor ESG sentiment.
3. A focused subsidiary can drive internal change at the larger Exxon: in their most recent annual report, bp references “renewable”, wind, “solar” 124 times. Exxon? only 16 times.

Exxon trades at nearly 3x the scale of BP, meaning the combined company would be bolster an approximate $225 billion market capitalization.

The Energize Ventures team evaluated the prospective joint businesses by analyzing 3 key business units: Low Carbon & Renewables, Retail & Trading, and Oil & Gas framework. Mark Tomasovic brought many keen insights into how a traditional energy firm can use M&A to capitalize on the energy transition.

Renewables & Low Carbon

Wind & Solar: Exxon could operate BP Renewables as a standalone business to get exposure into the growing renewables category, improving investor sentiment, acquiring power expertise, and capitalizing on cost declines in wind & solar

• BP currently owns 2.5 GW and wants to develop 20 GW of renewables by 2025
• Exxon has no renewables or power generating assets in their portfolio

LNG Portfolio: BP’s strategy to becoming greener includes increasing their LNG portfolio

• BP wants to increase their LNG production from 15 MTA to 30 MTA by 2030
• Exxon is a leader in the LNG business with over 23 MTA of LNG globally and 4 mega projects currently being constructed

Biofuels: BP wants to increase its bioenergy portfolio to 50 kbd by 2025 to reduce emissions

• Biofuel research is a strength of Exxon after announcing a gene editing breakthrough in 2017. Exxon is the only major publicly continuing to talk about biofuels and is targeting the capability to produce 10kbd of biofuels by 2025
• However, many people still question if biofuels are commercially viable

Retail & Trading

Retail: BP has a strategic advantage with electric vehicle customers

• BP has 10M touch-points with customers every day at 2,870 retail gas stations and 7,500 EV charge points
• Exxon exited all of their retail sites in 2008. The Exxon and Mobil gas stations remain because they still license their name to retailers
• Margins on BP convenience / electrification are 25% and are expected to increase to 35%
• BP’s partnership with Uber and Microsoft position the company to capitalize on its EV charging and digital strategy

Trading: BP has a strong trading division for oil, gas, and power

• BP’s trading division has significantly improved company top line – specifically in oil trading – and they want to 2x the size of the power trading division
• Exxon has only a small trading organization and could benefit from trading expertise

Oil & Gas

1- Upstream Oil & Gas

BP and Exxon both want to high-grade their investments to the best basins and divest from old dry gas assets; the strategies are aligned here

• BP wants to divest $10B of non-core oil/gas assets
• Exxon wants to divest $15B of non-core oil/gas assets

Permian-Specific Assets: Exxon’s huge position in the Permian would be accretive to BP’s small position

• Exxon is the third largest landowner in the Permian (1.6M acres), whereas BP only owns 83K acres

BHP Gas Assets: BP has top-tier gas assets in the Haynesville and Eagle Ford that they acquired in 2018 from BHP; these gas assets will significantly improve XTO’s net acreage position in these basins

BPX (BP’s U.S. division) and XTO (Exxon’s U.S. division) both operate as semi-autonomous organizations within BP and Exxon and would be easy to merge

2- Downstream & Chemical

Refining: BP’s refining business is performing better than Exxon’s. Combined downstream organizations will increase purchasing power, add procurement synergies, and improve the efficiencies in BP retail networks

• Exxon refining margins are at historic lows and Exxon refining has not been profitable during COVID
• BP refining is still profitable

Chemicals

• Exxon Chemicals is still growing and profitable due to the company’s strength in plastics and olefins manufacturing
• BP divested their chemical company this year, which mainly focused on aromatics and acetyls
• The cheap gas from BP would certainly benefit Exxon’s $40B Grow the Gulf chemicals initiative

The energy landscape is changing, and Exxon’s acquisition of BP would provide a pathway towards owning the future of energy. Through the acquisition, Exxon would improve their base business by acquiring strategic U.S. assets while also adding exposure to renewables, retail EV charging sites, and a strong oil/gas/power trading division. During this time of consolidation in the O&G industry, Exxon can use the opportunity to bolster its core business, reduce its carbon footprint, and prepare for renewables growth. With volatile oil prices and historically low margins in O&G, the future remains unknown. But there is one thing for certain: it will be a messy transition and there will be (more) blood.

The link can be found here. The original post was written by Tyler Lancaster, a Principal at Energize Ventures.

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Electrifying Everything: The Key to Decarbonization & A More Sustainable Future

Electrification is a key theme to Energize’s investment thesis. We invest in software and business model innovations, many of which directly contribute solutions towards decarbonization by means of electrification. This is the inaugural post in a blog series where we’ll explore this critical transition and the technologies driving and enabling it.

Addressing climate change is the existential challenge for our generation — and decarbonizing human activity is an essential first step. How do we get there? Put simply: Electrify everything.

Rewiring America argues that to effectively decarbonize (limiting global temperature rise below 1.5°C, consistent with the Paris Agreement), we must electrify…everything, and power those electrons with renewable energy. What does electrifying everything look like? It’s transitioning to fully electric cars, converting home appliances like heating and air conditioning to electric heat pumps, installing efficient LED lights instead of wasteful incandescent bulbs, and even using electricity to create heat for industrial processes. Powering an electrified world with zero-carbon energy means primarily generating electricity with the sun and wind. Electrifying everything is the most important climate imperative of the next 20 years.

As an investor in clean energy technologies, I agree with Rewiring America’s thesis that electrifying everything is the most viable path towards decarbonization. Here’s why:

1. Renewable power is the only carbon-free, cost-effective solution readily available at scale today.

Solar and wind are highly efficient electricity production technologies that represent the largest potential energy sources available on earth. The entire human population consumes approximately 19 terawatts (TW) of energy today. The global solar resource available is 85,000 TW, or 4,500 times the current energy demand. Wind is a 3,600-TW resource, or 190 times demand. As a population, we can afford to both consume much more energy and be incredibly selective about where we put solar panels (rooftops, parking lots, deserts) and wind farms (pastures, fields), while still comfortably covering our energy needs.

Not only are these renewable resources readily available, they’re also cost-effective. Solar and wind are now cheaper than coal, natural gas and nuclear almost everywhere. Lazard’s 2020 Levelized Cost of Energy (LCOE) update estimates in many cases, even unsubsidized solar and wind are less expensive than the marginal cost of operating existing conventional generation. Yes, that means it is cheaper to build new solar and wind systems than to continue operating fossil fuel power plants. Renewable energy’s economic lead will only grow with further innovation and scale.

Attaining a 90+ percent clean energy power grid powered primarily with wind and solar is achievable in the next 15 years if we move quickly. Energy Innovation and Policy, an excellent nonpartisan energy and environmental policy firm, recently published the 2035 Report outlining a cost-effective pathway to 90 percent decarbonized grid by 2035. I will caveat that energy storage and flexible zero-carbon generation (hydro, geothermal and nuclear) become even more valuable — and essential — for a 90+ percent clean energy grid with increasingly large amounts of variable wind and solar. If you are interested in the tradeoff of going “all in” on solar and wind, I would encourage you to read the work of Jesse Jenkins, who has conducted extensive research on an optimized and decarbonized energy system.

What about alternatives like carbon capture, advanced nuclear, and green hydrogen? In our experience, these energy resources are not technically feasible or economic at scale today. The clean energy sector is experiencing rapid innovation, and new tools to aid the fight against climate change are emerging every day. We’re excited to add these technologies to the mix when the time is right — but wind and solar are ready to go now.

2. Electrifying everything will create a massive renewable energy economic boom.

Rewiring America estimates that electrifying everything would increase U.S. electricity demand by 3 to 4 times, from 450 GW to 1.5 to 1.8 TW. A mostly electric energy system would necessitate a massive investment in renewable generation, storage, high capacity power lines, and demand-side flexibility. As we electrify the U.S., we need to rapidly scale up investment in renewables to the tune of 1,200+ GW in new wind and solar capacity, injecting $1.7T of investment into the power grid.

The benefits of solar and wind extend beyond the direct investment. Solar and wind reduce local pollution, create jobs, generate revenue for municipalities and landowners, improve public health, increase home values, and preserve the natural landscape. Energy Innovation and Policy estimates a 90% clean power grid would support a total of 29 million job-years cumulatively from 2020 to 2035. Electrifying everything and thereby increasing electricity demand by three to four times would further multiply employment related to decarbonization efforts. The U.S. can employ a generation of workers by powering our economy with renewable electrons.

Clean energy entrepreneur Jigar Shah has argued for years that addressing climate change is the single greatest wealth creation opportunity of our lifetime, to the tune of a $10 trillion economic impact. We agree, and a growing body of interdisciplinary research is forming a clear pathway to unlocking climate wealth in the U.S. by electrifying everything — and powering everything with renewable energy.

3. There is incredible inertia in carbon-based energy consumption systems, and we must start NOW.

Shayle Kann, Managing Director at Energy Impact Partners, recently tweeted a simple framework to focus decarbonization efforts. Eighty-six percent of global greenhouse gas emissions come from five sectors: electricity and heat (25%), agriculture and land use (23%), industry (18%), transportation (14%), and buildings (6%). Decarbonize each quickly, and we are well-positioned to limit global temperature rise below 1.5°C. The problem? Today’s equipment base is heavily committed to future emissions. We need to act now by electrifying quickly.

A furnace lasts 18 years. A car or truck? 20 years. How about a power plant? 50 years. Every time we build or continue to operate a fossil fuel-consuming machine, we are creating “committed emissions” for the entire lifetime of that machine. Energy consumption systems face remarkable inertia from replacement cycles, even with exponential adoption of new technology. If we do not rapidly achieve 100% adoption of electric, renewable, zero-emission machines sooner than later, we cannot prevent global temperatures from charging past 1.5 degrees Celsius.

Let’s use electric vehicles (EVs) as a thought experiment. To keep things simple, we’ll assume that EV adoption as a percent of all annual vehicle sales will reach 100 percent by 2030 — much faster than even aggressive forecasts by Bloomberg New Energy Finance. To provide another baseline, we’ll use the data point that in 2018, there were approximately one million EVs in the U.S. market, making up 0.4 percent of all vehicles on the road. In our scenario, when we reach the incredible milestone in 2030 of making every new vehicle sold an EV, cumulative EV adoption would still be just 35 percent. Why? On average, vehicles are replaced once every 20 years (the average vehicle in the U.S. is now 12 years old). We currently have about 280 million gas-burning vehicles on the road. Even after achieving 100% annual EV adoption in 2030, 193 million fossil fuel combustion vehicles would remain on the road.

We have a long journey ahead to fully electrify and decarbonize the machines and equipment that make the modern economy hum. However, I am optimistic sustained market and technology tailwinds behind electric machines and renewable energy will catalyze exponential adoption. Acting now is pivotal to combat the inertia in our energy-consumption systems, from power to transportation, buildings and beyond.

What does “electrifying everything” entail for the energy and industrial start-up ecosystem?

I expect in the next 20 years, most new machines, equipment and appliances will be electric. Increasingly, electricity will be zero-carbon and renewable. Massive growth tailwinds in the U.S. and abroad will create a new class of climate unicorns, generating venture-scale returns for entrepreneurs and investors. Solutions that are technically viable, economic, and simply a better product and customer experience will capture disproportionate market share.

At Energize, we believe the following solutions are best poised to capitalize in the 2020’s:

Energize will continue its focus on asset-lite, software-enabled firms. We believe a multibillion enterprise value software company will be built in each of these categories in the next 20 years.

We are bullish on all nine of the above solutions to decarbonize by electrifying (everything). The ensuing blog series will dive deeper into how we believe software and business model innovation will accelerate each. In my next post, I’ll dig further into solar software…stay tuned!

I recently wrote a post about Honeywell’s digital aspirations. The anchor to the digital transformation is Honeywell Connected Enterprise’s ‘Forge’ Product. The Forge Product is an enterprise performance management system meant to be an operating model for industry. I wrote my post about Honeywell here: Hungry Honeywell.

I also recently wrote about Microsoft’s “Energy Wildcatter” presence. Microsoft is partnering up with the leading firms of the energy landscape. Through a mix of power purchase agreements and algorithmic treaties, Microsoft is locking in its’ IT operating system within the new energy OT environment. The moves are very smart. The article can be found here: Microsoft the Surprise Wildcatter.

Well, the two firms are now colliding. Honeywell has selected Microsoft’s Azure cloud platform and Dynamics 365 Field Service platform architecture to be the backbone of Honeywell Forge. This move makes sense for two key reasons:

1- Microsoft suite tools are already the standard IT platform for most energy, industrial and manufacturing customers that Honeywell serves. Defaulting to Microsoft is really just meeting the customer where the customer already is…

2- Honeywell is a leader in OT. Pairing subject matter expertise in OT with the traditional leader in IT brings topical and architectural expertise together.

The initial use cases where Honeywell and Microsoft will collaborate are on: digitized maintenance, energy optimization, and OT cybersecurity. Energy & industrial customers are quite savvy on these topics and the market is ready for them now – meaning these should be good launching points for the Forge-Azure partnership.

Finally, this move is very smart for Microsoft. They are clearly not intent just being a player in the energy transformation. Microsoft has set its’ sight on being the IT backbone for the industrial transformation as well. This Honeywell contract and the downstream effect for how Honeywell and their customers are committing to the Azure framework will pay dividends to Microsoft for decades to come…

Over the past few months I have seen a few software companies serving the energy and industrial verticals with this head-turning profile:

+ $5-10M of revenue

+ >200% YoY revenue growth

+ Profitable

+ Sizable cash balance

My first thought when seeing these companies? Wow, this scale of efficient growth wasn’t happening before.

My second thought: This firm won’t be raising money, right? Wrong.

COVID changed the energy and industrial verticals. All software purchases are accelerating and new budgets are being formed and consumed. The smartest start-ups realize that these energy & industrial software relationships could extend decades.

These digital-focused start-ups have two early advantages that compound:

• access to historically buried and undiscovered data assets that are revealed as firms move from analog to digital-first operations
• license for product-driven growth as industry’s new knowledge workers realize the potential to digitize industry’s soft costs

Given the potential to entrench within the customer and iterate with non-transferable assets, software firms serving the energy and industrial vertical are attracting new investors. These investors, it seems, believe that there is potential for the Law of Accelerating Returns in heavy industry’s digital layer. In this structure, winning companies far escape their peers and should continue to invest early and often to capture market share to solidify the #1 market position. I have seen this accelerating return profile in other verticals, but it is a relatively new phenomenon for software companies serving the historically analog verticals.

As a result, the race is on to build the new software operating platforms for the Operating Technology network. I suspect we are at the beginning of a 10-year+ trend in this purchasing cycle and there will be many head-turning financing rounds in the coming quarters for software companies addressing this theme.