Chevron to Buy Biofuel-Maker Renewable Energy Group for $3.1 Billion

(Bloomberg) -- Chevron Corp. agreed to buy green diesel producer Renewable Energy Group Inc. for $3.1 billion in the biggest low-carbon deal of Chief Executive Officer Mike Wirth's four-year tenure.

The San Ramon, California-based oil giant will pay $61.50 a share for Renewable, it said Monday in a statement. Bloomberg News reported the companies were close to a deal late Friday.

The purchase would give a significant boost to Chevron's push into renewable fuels, with demand expected to grow in the coming years as businesses and governments move away from oil and gas to cut carbon emissions. Chevron, like the rest of the fossil fuel industry, is under pressure from investors to help scale up technologies to advance a low-carbon economy as well as reduce its own carbon footprint.

Renewable, based in Ames, Iowa, is one of North America's largest producers of biodiesel, and they also make renewable diesel. The fuels are seen as critical in decarbonizing heavy-duty transportation that cannot be electrified as easily as passenger vehicles, such as airplanes.

“A rush to deploy new renewable-diesel capacity is being accelerated by integrated oil companies to capture lucrative low-carbon fuel standard credits in California and federal renewable-identification number credits, as well as the blenders tax credit,” Blomberg Intelligence analyst James Evans said in a note.

Renewable Energy's Geismar production “also has the potential to be converted into sustainable jet fuel, offering another growth avenue for Chevron,” he said.

READ: Chevron Sees Clean Energy Making Just as Much Money as Oil Does

Chevron has pledged to spend $10 billion on low carbon investments through 2028 and expects to generate double-digit returns that are competitive with its main oil and gas business, CEO Wirth said in September.

Unlike biodiesel, which until recently had been REG's main focus, renewable diesel is almost chemically identical to the traditional petroleum product and therefore easy for fossil-fuel companies to adopt. As more big oil refiners -- motivated by federal and state subsidies -- gear up to make the climate-friendly fuel, the cost of vegetable oil, discarded animal fats and other feedstocks used to make it has soared.

“There's been general concerns around how fast REG can scale up in renewable diesel as they contend with lower margins in its base business of biodiesel, driven by the increased competition for feedstocks,” Truist Securities analyst Jordan Levy, who has a “buy” rating and $70 price target on the shares, said in an interview.

Renewable Energy shares closed 40% higher at $17.69 in New York. Chevron shares closed 2.6% higher at $144.

Goldman Sachs Group Inc. and Paul, Weiss, Rifkind, Wharton & Garrison advised Chevron while Guggenheim Securities and Latham & Watkins advised Renewable Energy.