WoodMac: M&A shake-up due for Australian E&P industry

A mergers and acquisitions shake-up could be on the horizon for the Australian upstream industry, said Wood Mackenzie, which identified a potential $32 billion in assets that could change hands in the next few years.

A mergers and acquisitions shake-up could be on the horizon for the Australian upstream industry, said Wood Mackenzie, which identified a potential $32 billion in assets that could change hands in the next few years.

ConocoPhillips looking to divest its Darwin LNG stake is the latest possible deal, WoodMac said, and there more potential activity to keep the industry speculating over the next 12 months.

In 2018, sizeable deals made including Woodside Petroleum Ltd.’s $444-million acquisition of Scarborough and Santos Ltd.’s $2.2-billion acquisition of Quadrant Energy.

This year in comparison has been relatively quiet, but that may change, WoodMac said.

Many of the deals that may get done “are long in the planning and reflect wider trends in the Australian and global upstream sectors,” said WoodMac.

Portfolio rationalization

The majors and big international oil companies continue to actively manage their global portfolios, trimming mature, noncore assets to focus and allocate resources to core growth projects. In Australia WoodMac says its spotlight falls on two IOCs: Eni SPA and ConocoPhillips.

“Eni’s Australian portfolio is reliant on the depleting Bayu-Undan field that feeds the Darwin LNG plant. The undeveloped gas assets, Evans Shoal and Blacktip, offer limited potential when Bayu-Undan ceases in 2022, and the Italian player may prefer to focus on more attractive opportunities in the Middle East and Mozambique,” WoodMac said.

ConocoPhillips’s portfolio high-grading has already started, WoodMac said. It sold its 30% stake in Sunrise to the East Timor government for $350 million in October 2018. “It’s unlikely this will be the last asset in the region to be sold. More radically, we’ve believed for some time that ConocoPhillips could sell out of Australia entirely, and recent market rumors suggest we’re not the only ones.”

Selling Darwin LNG and the “capital and emissions intensive Barossa-Caldita supply project,” said WoodMac, would free up capital for buybacks and re-investment in US tight oil.

If sold, APLNG would be ConocoPhillips’s only producing asset left in Australia, said WoodMac, a “cash cow” unlikely to be sold anytime soon. “That said, it is a high sustaining capex, relatively low return-yielding coal-seam gas asset. The funds could be diverted to higher payback US onshore projects instead.”

Corporate takeover targets

Consolidation is likely for smaller companies like Cooper Energy, Senex Energy, Comet Ridge, and Galilee Energy—and others with exposure to rising east coast gas prices, WoodMac said.

“However, not all companies are valued equally, with the market favoring those with discovered gas in the ground and ready to go, over unconventional resource holders,” it said. Senex Energy, Comet Ridge, and Galilee Energy are being valued around four times less than Cooper Energy on an enterprise value to resource base metric, according to WoodMac. “Acquiring or bolstering a position on the Australian east coast market could be cheaper via the unconventional route, but it is not without risk.”

The biggest potential corporate takeover in Australia may be Oil Search Ltd., WoodMac noted. Its PNG expansion plans have run into political problems, but the firm’s PNG portfolio “still offers an attractive LNG growth position, and coupled with the oil-weighted Alaska assets, Oil Search might yet be an attractive proposition for a larger player with serious LNG ambitions.”

Australian LNG infrastructure

“We see the need for a new LNG asset ownership model if Australia is to optimize its undeveloped gas resources and remain globally competitive,” WoodMac said.

“The North West Shelf (NWS) is the primary project in question. It is running short of gas supply to maintain LNG output and will require third-party gas in the near-future. The list of potential backfill resources in the Carnarvon basin is long, but the current development pipeline is short, as a lack of alignment between upstream partners and plant owners stymies new investment.”

But, WoodMac noted, “as the 17.6 million-tonne/year NWS LNG plant starts receiving third-party gas, and generating tolling and tariff revenue, a change in ownership of the downstream facilities could breathe new life into several stalled upstream projects. Infrastructure-investors or pension funds would be happy with regular tolling and tariff revenues, and less concerned with where supply comes from, provided maximum throughput is maintained.”

There are many barriers yet to overcome, WoodMac said, the main one being convincing all NWS joint venture partners to relinquish control of the asset. Alignment on third-party access agreements and security of future gas supply into the facility are some key hurdles.

“These hurdles are not insurmountable. And we see this ownership structure as a longer-term play. In the interim, we think equity alignment between third-party upstream supply and the liquefaction facility through M&A, a more likely outcome.”

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