AIMCo bets on renewables, keeps hydrocarbons in HEP investment

Alberta Investment Management Corporation (AIMCo) is making strategic bets on new forms of renewable energy, while maintaining a portfolio of hydrocarbons that are key for establishing profitability and energy supply through a majority ownership of Howard Energy Partners (HEP), a San Antonio, Texas-based energy company.

The Canada-based AIMCo previously owned a 28 percent stake in HEP. Through this recent deal its ownership has been upped to 87 percent. HEP management and other minority investors will have a 13 percent ownership in the company.

On the traditional energy side, HEP owns and operates natural gas and crude oil pipelines, natural gas processing plants, refined products storage terminals, deep-water dock and rail and fractionation facilities. The company’s renewables profile includes hydrogen production and renewable diesel logistics facilities. HEP operates in Texas, New Mexico, Oklahoma, Pennsylvania and Mexico.

Some technologies and innovations are still developing in the renewable energy side, bringing a cloud of uncertainty as to the scale at which they will become dominant, Ben Hawkins, the executive managing director and head of infrastructure, renewables and sustainable investing, told PE Hub.

“The renewable area is less certain and maybe the ability to scale up is less certain,” said Hawkins. “We try to make multiple strategic bets and be in a position for growth, depending on which of those strategic bets end up being the right ones.”

By being involved in some of these renewable projects, Hawkins said AIMCo is creating “options for that scale of factor if some of the uncertainties that are currently in the market get resolved.” The recently passed Inflation Reduction Act is also setting the stage for the development of more renewables.

This investment comes at a time the world is grappling with tight energy supplies, due in part because of Russia’s war in Ukraine that has sent prices of traditional energy skyrocketing, creating a major opportunity for investors in the space.

“The existing core business is paying the bills today, and it’s the bulk of our investment thesis right now, but we are also trying to think about the long run and things like renewable diesel would end up being part of that long run element of the thesis,” said Hawkins.

The AIMCo executive managing director said the decision to become the majority investor was based on the opportunity to create value for HEP in a manner that needed supportive capital and “parties like us” who believed in the management and are willing to lend support to that growth.

“If we were the minority owner, we would just be along for the ride, as opposed to being in a position to really help direct that growth constructively with the management team,” he said.

Hawkins also described HEP as well-suited to be a major player in energy transition based on its ability to leverage its existing core business, relationships, existing assets, technical know-how, among others.

Turning to the current macroeconomic environment that can potentially increase operating expenses for renewable fuels, Hawkins expressed confidence that HEP management will be able to navigate the situation based on previous experiences.

“We know the management team, the business and their story and have been very impressed by their ability to grow the business in good and bad times even during the worst of the pandemic when crude prices went negative,” he said. “It’s very resilient on the downside and then quite successful on the upside.”

AIMCo is also looking forward to capitalizing on natural gas, which is having strong macro tailwinds given the strong demand for LNG. Many investors and industry players see natural gas as a key transition fuel that can displace less clean fuels such as coal-fired generators and can be a backup plan when renewables fail to produce due to erratic weather conditions.

And for growth, AIMCo is targeting both organic and inorganic means to scale HEP. Hawkins, however, said when acquiring more, focus will be on “something that adds value to the business rather than just being growth for growth’s sake.”

To succeed, Hawkins said as financial investors, it’s essential to understand the risk profile and fundamentals of the business. “In these energy transition projects which are much more bespoke, you do need to roll up your sleeves and not be a cookie cutter.”

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