Dynamic Oil, Gas Environment in Australia Delivers M&A Opportunities

Dynamic Oil, Gas Environment in Australia Delivers M&A Opportunities
Increased merger and acquisition deals involving leading Australian oil and gas companies recently is a result of more than just a decline in oil price, analysts told Rigzone.

Australia’s rapidly evolving oil and gas industry has been influenced by a number of factors, in addition to the low oil prices, which have led to the latest wave of merger and acquisition (M&A) deals, according to analysts.

Despite falling commodity prices being a common element contributing to M&A activity, Australia’s ongoing transition into one of the world’s leading liquefied natural gas (LNG) exporters, and a tightening east coast market, has helped shape a healthy environment for buyers.

Woodside Petroleum Ltd., Australia’s largest oil and gas company, continued to pursue growth in the LNG sector with an $8.2 billion (AUD 11.6 billion) bid for Oil Search Ltd. Despite the offer being rejected, and Woodside since keeping its distance, the Perth-based company has not ruled out re-approaching Oil Search.

Santos Ltd. also knocked back an offer it received from Scepter Partners, which is backed by sovereign wealth funds and the royal families of Brunei and the United Arab Emirates.

Since the offer Santos has stood its ground, this month hiring a new CEO, while announcing it would raise $2.5 billion (AUD 3.5 billion) by selling a stake in a gas field, issuing new shares and forming a partnership with a Chinese investor.

Beach Energy Ltd. and Drillsearch Energy Ltd., both focused on the Cooper Basin region, delivered a successful deal after launching a merger in October to create a company worth about $843 million (AUD 1.17 billion).

Changing Climate

Jason Chesters
Jason Chesters, Analyst, Patersons Securities
Analyst, Patersons Securities

Patersons Securities analyst Jason Chesters said the “dynamic climate” that has evolved in Australia had left the likes of Oil Search, Santos and others as prime targets for companies with stronger balance sheets.

While the oil price was key to these developments, Chesters explained to Rigzone, the industry in Australia was also being affected by other factors.

“The decline in the commodity price environment in oil and gas has opened up the landscape for companies with stronger balance sheets to take opportunity where they see it,” Chesters said.

“In the Australian landscape there are a couple of other dynamics at play as well. Obviously the larger players have dominated [the activity], and the LNG industry is also changing the landscape of the domestic gas industry with the amount of gas that is going to be required to feed the new plants in Queensland.”

According to Chesters, this is creating a tightening of the demand supply situation on the east coast of Australia, leading to initiatives to source longer term gas supply, such as the possible construction of the North East Gas Interconnect. 

More M&A Deals

David Lennox
David Lennox, Analyst, Fat Prophets
Analyst, Fat Prophets

Fat Prophets analyst David Lennox suspects the recent deals could be the start of an extended period of M&A activity.

“You can’t rule out further M&A because most of the majors now have what you would term as relatively good balance sheets,” Lennox told Rigzone.

“It has taken a while for companies to adjust to the oil price, and some are still adjusting, but we’ve now seen most of the strain come out of their balance sheets.”

Lennox said the recent wave of deals indicated that companies were now better positioned to pursue growth following a period of adjustment.

“It has taken companies a while to heal, to get their balance sheet into an order where they won’t be writing off significant value year-on-year,” Lennox explained.

“They now won’t be spending a lot of money on acquisitions and then realizing a couple of years later they have to write off billions of dollars in a revaluation. That’s why Oil Search and Santos were targeted because they were so undervalued compared to the value of their assets.”

Stretched Balance Sheets

Chesters said Santos’ balance sheet had been stretched by investments such as the GLNG project in Queensland, which it committed to at a time of lower commodity prices.

He added that significant investments like this were limiting the potential for many companies to look at M&A opportunities, as they do not have the capacity.

“Their main issue is actually asset sales,” Chesters said. “Companies need to repair balance sheets. That again offers the opportunity, like Woodside with its attempt at Oil Search. Woodside had a better-placed balance sheet because the timing of their CAPEX was prior to the collapse – timing has been good for them,” he said.

Chesters points to the Cooper Basin as a region open for consolidation, with the merger between Beach Energy and Drillsearch as an example of the deals predicted for the area.

By September 2015, Australian Securities Exchange (ASX)-listed companies active in the Cooper Basin, which sit across South Australia and Queensland, had lost 70 percent of their market value since the rapid decline of oil prices, according to energy analysts EnergyQuest.

Excessive Falls

Dr. Graeme Bethune
Dr. Graeme Bethune, CEO, EnergyQuest
CEO, EnergyQuest

Dr. Graeme Bethune, CEO at EnergyQuest, told Rigzone that consolidation in the Cooper Basin would mainly be due to company share prices falling so much.

They’ve fallen “significantly more than the fall in the oil price,” Bethune noted, adding the declines had been excessive. “Also a lot of those companies’ balance sheets were stretched so we thought this was an obvious situation for M&A activity.”

Bethune said the additional dynamics impacting M&A activity – the tightening gas market on Australia’s east coast – were heavily at play for companies in the Cooper Basin.

“On the east coast there are a lot of proposals by companies to increase gas supply but in many of those cases they have got stretched balance sheets,” he said.

“So I wouldn’t be surprised if we see bigger fish come in and swallow them, particularly given the market environment on the east coast, which is one of the few tight gas markets in the world.”



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