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Finance_Apache

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Finance_Apache

  1. 1. OGIAustralia.com | July 2015 HartEnergy.com64 Finance On opposite sides of the continent two major deals, alike in causes but fundamentally different in structure, demonstrated Australia’s changing market dynamics. Change Is In the Air BY BIANCA BARTUCCIOTTO An aerial view of the oil and gas processing plant on Varanus Island, off the northwestern coast of Australia. (Source: Apache Corp) I nefficient projects and cost pres- sures have long plagued the Australian oil and gas industry, but companies still watched the investment dollars roll in thanks to a generous world oil price. Then, a near 60 per cent drop in the oil price from June 2014 to January 2015 sent the industry into a frenzy. Followingthedownturn,aspateof mergerandacquisitionactivityruffled afewfeathersinwhatwaspreviously averycomplacentmarket.Former ChesapeakeEnergyexecutiveAubrey McClendonlookstopossiblyinvest intheNorthernTerritory,andChev- ronbackedoutofitsunconventional resourcecommitmentsintheCooper Basin,soanythingcouldbeinthecards. And so it began, larger companies started looking to take over their junior competitors that held “sweet” assets but had no bank roll. Midcaps began going after anyone they could while the price was right. And two big movements shook the market. ApacheCorp’sWesternAustralia exitmarkedanendforthecompanyin thenation’sexplorationandproduction market.Meanwhile,RoyalDutchShell’s pendingtakeoverofBGGroupdemon- stratedthemajor’sfocusedcommit- menttotheAustralianLNGmarket. Thetwomajordealsnotonly demonstratethedrasticmeasurestaken toinsulatecompaniesfrom
  2. 2. HartEnergy.com July 2015 | OGIAustralia.com 65 fallingcommodityprices,butalsoshow thattheendofinvestmentinAustralia maybefarfromover,especiallywith establishedassetsandprojects. As they say, one man’s trash is an- other man’s treasure. Apache’s divestment Apache’s decision to withdraw from its Australian operations to refocus on its core onshore U.S. business was the company’s approach to what it saw as a changing market. After Woodside came in and took the company’s share of the Wheat- stone LNG project, a consortium of Brookfield Asset Management and Macquarie Capital swooped in and paid a cool $2.1 billion for the remainder of the company’s Austra- lian assets. The sale included gas fields in the Exmouth and Canning basins and various facilities operated by Apache, such as Varanus Island. Apache said this move was a notable step in its “strategic portfo- lio repositioning”. Contacted by Oil and Gas Investor Australia, a spokesman from Apache declined to provide further comment, but said that the deal was based on a refocus to its North American assets. When the decision to divest from Australia was initially announced, Apache CEO John Christmann offered a statement. “Over the last five years, we have transitioned Apache's primary growth engine to North America on- shore through the announcement or completion of approximately US$17 billion of asset sales,” he said. “Follow- ing the sale of our Australian assets, approximately 70 per cent of Apache's production will come from North America onshore.” As for the buyers, both Brookfield Asset Management and Macquarie Capital saw a chance to scoop up lucrative assets in the context of a downturn in the oil price cycle. The value they saw in the assets, despite Apache’s total withdrawal, was the potential to tap into the Western Aus- tralian natural gas market. Macquarie and Brookfield will jointly manage those assets, and each initially holds 50 per cent interest. The two companies plan to tap into the strong local demand for gas in Western Australia, particularly with a long-term commitment to Alcoa to supply 120 terajoules of natural gas per day. The contract underpins the value of the assets and the “commit- ment of future capital to the business’ gas assets”. Brookfield Head of Private Equity Australia Len Chersky said the Robert Perrons Associate Professor Queensland University of Technology “Low-price environments in commodity markets are often the catalyst that leads to a flurry of mergers and acquisition activity.” —Professor Robert Perrons
  3. 3. Finance portfolio had strong underlying value “via its contracted domestic gas port- folio, production flexibility and a great platform for growth, organically and through market consolidation, led by the strong local management team.” Shell’s big deal Another significant deal for the Aus- tralian LNG industry is the biggest deal of the year to date—Shell’s purchase of BG Group. The nearly $70 billion takeover of the LNG darling allows Shell to increase its presence in the Australian LNG space. WithPreludeonthewayinWestern Australia,aninterestinotherprojectsin theBrowseBasinandNorthWestShelf andsomecoalseamgas(CSG)assets intheBowenBasin,Shelliscementing itselfasanLNGpowerhouse. Queensland University of Tech- nology Associate Professor Robert Perrons, who previously worked with Shell’s strategy and economics team, said the acquisition of BG Group’s stake in Queensland’s CSG market will significantly change Shell’s overall strategic footprint in Australia. “BG Group clearly has a sizeable stake in Queensland’s CSG production, so this translates to Shell potentially having a significantly larger footprint in Queensland’s CSG domain than it had last year,” Perrons said. “The thing to remember here is that Shell already had a presence in the CSG space via Arrow Energy. Arrow is a 50-50 joint venture between Royal Dutch Shell and PetroChina. “One major benefit to mergers like these is that companies can potentially achieve gains in operational efficiency by reducing duplicated functions, and Shell will definitely be keeping its eyes open around the world for those kinds of opportunities,” he contin- ued. “Arrow Energy and BG Group’s Queensland assets will definitely at- tract that kind of careful attention.” Perrons said he thinks the two companies have been a great strate- gic fit for at least a decade and prob- ably longer. He also said the current market conditions made this type of transac- tion favourable because every oil and gas company’s portfolio is worth less. “Low-price environments in com- modity markets are often the catalyst that leads to a flurry of mergers and acquisition activity,” he said. Perrons said this deal was a good way for Shell to increase its reserves without taking too much exploration risk. “Whatismore,it’sbeengetting moreandmoreexpensiveandtech- nicallychallengingovertheyearsfor BigOilsupermajorstoreplenishtheir reserveswiththeirownexplorationef- forts,sobuyingsomebodyelse’sportfo- lioisalow-riskstrategyforimprovinga company’sreservesprettyquickly,”he said.“Shellhasbeenveryaggressive— atleastbyBigOilstandards—inthe LNGspaceforsometime,andtheBG dealisexpectedtocatapultShellfrom Apache Corp’s sale to Brookfield Asset Management and Macquarie Capital included gas fields in the Exmouth and Canning basins and various facilities operated by Apache, such as Varanus Island. (Source: Apache Corp) OGIAustralia.com | July 2015 HartEnergy.com66
  4. 4. beingoneofthebiggestLNGplayersin theworldtotheundisputedleader.So thismoveisconsistentwiththisheavy LNGemphasisinShell.” Looking forward The current market is a hot spring for merger and acquisition activity, ex- emplified by the level of activity in the first half of 2015. Independent analyst Peter Strachan said the market was going to see a lot more activity, particularly with junior and mid-cap companies, given the oil price was set to rise over the medium to long term. “Thecurrentoilpriceisforcingmany smallercompaniestoseekfarm-infund- ingorpartnershipsonmoregenerous termsthanmighthavebeenavailable12 monthsago,”Strachansaid. “I think that stronger companies, such as Woodside, with low debt and solid operating cash flow, are now in an excellent position to acquire growth assets. I think that oil production glob- ally will begin to fall rapidly from July this year, under the influence of a lack of spending on field development.” Strachan predicted the oil price would recover to about US$85 per bar- rel by the end of the year. “More M&A activity is assured this year, but is more likely to be through funding at the project level than corpo- rate moves,” he said. He said the two deals were typical of the current market, and said the ac- costing of Apache’s assets will be seen as a good deal in five years. “Privateequityplayersrecognisethe long-termvalueofoilandgasassetsand believethatcurrentpricesareanom- alousandunsustainablylow,somore M&Aactionislikely,”Strachansaid. He tipped the Cooper Basin as the next big area to watch for activity, given the gas shortage for the east coast. “A looming gas shortage on Aus- tralia’s east coast will shine a light on Senex, Beach Energy, Drillsearch, Blue Energy and Real Energy as they and Santos seek to squeeze more gas out of the basin’s tight reservoirs,” he said. “Seven Group could be the catalyst with its holdings in Drillsearch and Beach, as well as interests in Gippsland acquired from Nexus,” he continued. “AWE Ltd is also well placed with little debt, strong east coast gas assets and good development options in the Perth Basin and in Indonesia.” Strachan said the place to invest is in the Perth Basin, through AWE, and the Otway and Bass Basins, again through AWE and also more specu- latively through 3D Oil and Beach, as they work to explore T-49-P, south of the Otway Basin. “Gaspricesshouldrisethrough2016 creatingmoreinterestintheOtwayand remnantGippslandBasinandCooper Basinopportunities,”hesaid.n Peter Strachan Analyst and Co-owner StockAnalysis “Private equity players recognise the long-term value of oil and gas assets and believe that current prices are anomalous and unsustainably low, so more M&A action is likely.” —Peter Strachan HartEnergy.com July 2015 | OGIAustralia.com 67

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