Australia Oil, Gas Deals Heat Up With Billion Dollar Merger

The pace of deals in the sector has picked up as a slump in oil prices has battered share prices to such weak levels that companies and assets are proving irresistible to buyers with sufficient funds.

MELBOURNE, Oct 23 (Reuters) - Australian oil and gas producers Beach Energy and Drillsearch Energy Ltd agreed to a billion dollar merger on Friday, the day after Santos rejected a $5 billion offer, signalling the industry's fortunes may be bottoming.

The pace of deals in the sector has picked up as a slump in oil prices since June last year has battered share prices to such weak levels that companies and assets are proving irresistible to buyers with sufficient funds.

"Here it's been a particularly painful year for (energy) equities, which has generated once-in-a-cycle type opportunites for people with a more bullish long-term view on oil prices," said Adrian Prendergast an analyst with Morgans in Melbourne.

Analysts said the string of bids over the past month, including Suncor's C$4.3 billion bid for Canadian Oil Sands, suggested acquirors see oil prices bottoming as supply comes out of the market, especially in the United States.

"It does provide some indication the industry thinks it may miss the opportunity to transact in this recent oil price rout as people in the market have become more positive about oil prices next year," said Scott Simpson, an analyst at GMP Securities in Perth.

The Drillsearch-Beach merger followed a A$7.1 billion ($5.2 billion) bid for Santos from a firm backed by the royal families of Brunei and the United Arab Emirates and an A$11.7 billion bid by Woodside Petroleum for Oil Search Ltd.

"We are starting to see M&A as a real theme as cashed-up groups seek assets with exposure to oil price upside," UBS analyst Nik Burns said in a note on the Scepter bid for Santos.

Drillsearch agreed to a takeover offer valuing it at A$384 million, a 27 percent premium to its close on Thursday, to create a combined company worth about A$1.2 billion. The enlarged group would be Australia's biggest onshore oil and gas producer.

The two companies, both with good cashflows and little debt, said they would be well-positioned to snap up distressed assets, possibly from Santos or Origin Energy, which is also beefing up its balance sheet, to expand beyond their core in the Cooper Basin.

"This is not about squeezing the lemon, this is about finding growth opportunities," Drillsearch Chairman Jim McKerlie told analysts.

The merger of Beach and Drillsearch had long been expected as they are already partners in Cooper Basin oil and gas acreage, Beach owns a 4 percent stake in Drillsearch and they are both 19.9 percent owned by Seven Group Holdings.

Combined, they expect to produce 10.6 million to 11.8 million barrels of oil equivalent in the year to June 2016.

Drillsearch shares jumped 25 percent to A$0.82, trading just below the implied value of the offer, while Beach's shares rose 2.3 percent.

($1 = 1.3795 Australian dollars)

(Reporting by Sonali Paul; Editing by Richard Pullin)

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