This week we welcome Scott Chabina, a Director at Marathon Capital, an investment bank focused on the global power and infrastructure markets, to talk with us about interesting energy trends that we haven’t paid enough attention to in our a$$-kicking briefings. This dialogue is edited slightly for length and clarity.
PETITION: As you know, Scott, PETITION is primarily about disruption. What are some things that you're seeing in the alternative energy space that ought to have incumbents quaking in their boots? Have you seen any recent M&A that had you nodding your head thinking "yes, that is the future"?
Absolutely! One of the more “disruptive” and rapidly-developing segments that I cover is renewable natural gas (“RNG”), also known as biomethane. As opposed to natural gas produced by the petroleum industry, RNG is derived from abundant, organic waste resources (ag-waste, food waste, wastewater treatment facilities, etc.). RNG is interchangeable with traditional natural gas and can be directly injected into the existing interstate utility natural gas lines. Critically, when used specifically in transportation fuels, RNG is eligible for key environmental attributes through federal and state programs (RINs and LCFS credits, respectively) and, as a result, generates tremendous value above the prevailing commodity price of natural gas (in some instances 20-30x on a MMBTU basis). The continued de-carbonization of the transportation sector, as well as the need to materially reduce harmful methane emissions, will continue to support the need for these types of environmentally-impactful projects. While the transportation sector is clearly the most valuable end market for RNG today, further out on the horizon we anticipate broader applications of RNG to a wider range of industries. For example, RNG for use in the renewable electricity markets is a particularly compelling proposition (electric vehicle charging stations powered by truly renewable energy resources doesn’t sound so crazy these days).
PETITION: Narrowing in on solar, specifically, there was a period a few years ago when a number of solar-based companies were filing for bankruptcy. Lately, not so much. Have solar companies figured out their business model or is there trouble on the horizon?
Broadly speaking, a major historical challenge with public YieldCo or IPP business models is they exposed the solar sponsor to capital markets financing risk. Sponsors, such as SunEdison, were unable to continuously raise the required corporate equity from the public markets to fund all of their new projects. Large solar sponsors have since pivoted from the public to the private markets to reduce capital markets financing risk.
PETITION: The International Maritime Organization will, come 2020, start enforcing limits on the sulfur content in marine fuels for ocean vessels. By volume, sulfur content will need to decrease from 3.5% to 0.5%. In addition to tariffs potentially curtailing demand, is this a headwind for the shipping industry? What other effects might arise out of this? Increased prices for diesel and constrained US gasoline supply?
Great question. In a nutshell, we are facing the most significant fuel specifications shift since the phaseout of lead additives in the 1970’s. Notably, this regulation is global in nature and binds the shipping industry to these lower-carbon fuel commitments. This has left ship owners with a number of options ranging from installing scrubbers to switching to compliant fuels. While there is no “one size fits all” solution, refiners have publicly indicated that they are prepared for IMO 2020 and are ramping up production of low-sulphur fuels in the second half of 2019 ahead of implementation. However, we anticipate second-order effects to impact the refining, chemicals, mining and industrials sectors. In fact, Goldman Sachs recently estimated that if the entire shipping industry were to follow the rules (100% compliance) consumer wallets could be hit by around $240 billion by 2020 – clearly, this transition needs to be closely monitored and the effects of such a transformative shift are yet to be fully understood.
PETITION: Unlike more recent participants in this segment, you're a younger guy. As you look out on top of you, what growth opportunity do you see for folks of your vintage in distressed/restructuring/banking? What is the best piece of advice that's helped guide your career?
Well, thank you very much for that…I think. I am very fortunate to have had a diverse background in the restructuring and investment banking sectors, having advised clients across the capital structure in more than 20+ industries over 13 years, prior to joining Marathon Capital two years ago and deepening my focus within the renewable fuels and renewable chemicals sectors. In terms of advice, let me offer two lessons I’ve learned that I hope will be valuable to others, particularly professionals in the earlier stages of their careers: (i) be open to new opportunities and try to recognize that each engagement is a chance to learn more about what you are passionate about (equally as important to know where you are NOT passionate). This can take time and isn’t always obvious in the moment, but reflection is a powerful thing when you have a diverse range of experiences upon which to form a perspective; and (ii) consider every engagement an opportunity to audition both your firm and yourself for the future. Some of the best relationships I have made in my career are with other professionals (yes, even competitors) that were on the “opposite side of the table” in one engagement or another. These are the folks that ultimately will rise to decision-making capabilities for future business on similar timelines as yourselves.
PETITION: Lastly, if you had to recommend one book to folks interested in banking, what would it be?
For a lighter, quicker read, I strongly suggest “The Madhouse Effect: How Climate Change Denial is Threatening Our Planet, Destroying Our Politics, and Driving Us Crazy” by award-winning climate scientist Michael E. Mann and Pulitzer Prize–winning political cartoonist Tom Toles. As Amazon will tell you, the book “aims to address the manipulation of the media by business and political interests and the unconscionable play to partisanship on issues that affect the well-being of billions,” which I found to be done in a very approachable and humorous manner.
PETITION: Thanks Scott.