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“Most of the sub-billion market cap companies with reasonable 2P resources and cash flow or near term cashflow would be attractive to private equity funds,” said Eddie Rigg, head of corporate finance at Argonaut, who advised a private Chinese firm that lost out in a three-way bidding war for gas producer AWE Ltd in February.
Rigg predicted Sino Gas will attract a rival bid from a U.S., European or Asian group as most of the geological and well engineering risks on its project have been dealt with.
“It’s a reasonably safe entry into a growing gas market,” he said.
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MELBOURNE (Reuters) - Private equity firms are expected to drive a wave of merger activity in Australia’s gas sector, hunting for bargains amid soaring demand in China, rising domestic prices and a broader oil market recovery.
The logo of Australian oil and gas producer Santos Ltd is pictured at their Sydney office February 15, 2016. REUTERS/Jason Reed/File Photo
The energy sector has dominated Australian M&A activity over the past 12 months, led by a spurned $10.8 billion bid for oil and gas producer Santos (STO.AX) and a $9.8 billion bid for pipeline operator APA Group (APA.AX) by Hong Kong’s CK Infrastructure.
Still, the share prices of smaller companies in the sector have yet to fully reflect the sharp recovery in oil markets over the past year and gains from lower drilling costs, say bankers and consultants.
“Private equity firms clearly see strong turnaround opportunities in the oil and gas sector. Stocks are trading below their earnings potential with serious upside,” said Perth-based Deloitte Consulting partner Bernadette Cullinane.
U.S. firm Harbour Energy pursued Santos for a year before its bid ended in acrimony, while private equity fund Lone Star bid A$530 million ($392 million) in March for Australia’s Sino Gas & Energy Holdings (SEH.AX), which has stakes in two shale gas projects in China.
More deals are seen as small oil and gas companies look to fund new gas developments to feed the east coast market and bigger companies, like Santos, look to replenish their reserves, following years of cuts in exploration.
“Most of the sub-billion market cap companies with reasonable 2P resources and cash flow or near term cashflow would be attractive to private equity funds,” said Eddie Rigg, head of corporate finance at Argonaut, who advised a private Chinese firm that lost out in a three-way bidding war for gas producer AWE Ltd in February.
Such companies include Senex Energy (SXY.AX), Central Petroleum (CTP.AX), Cooper Energy (COE.AX) and Strike Energy (STX.AX).
Rigg predicted Sino Gas will attract a rival bid from a U.S., European or Asian group as most of thpe geological and well engineering risks on its project have been dealt with.
“It’s a reasonably safe entry into a growing gas market,” he said.
LOW RISK, ON ASIA’S DOORSTEP
Australian domestic gas prices have more than doubled in the past three years as east coast supply has been sucked into exports of liquefied natural gas (LNG) to feed Asia-Pacific demand.
China’s LNG imports, driven by a clean air push, are expected to jump 50 percent over three years to 57 million tonnes by 2020, according to Australian government forecasts. For investors, Australia is handy way to play into that growth.
“Australia’s attractiveness as an oil and gas M&A and investment proposition is driven primarily by its low geopolitical and sovereign risk ... and of course its proximity to Asia’s energy demand centres,” said Deloitte’s Cullinane.
The next likely target is in Australia’s west. Gas supplier Quadrant Energy, potentially worth A$3 billion, is attracting interest as one of its two owners, Canada’s Brookfield Asset Management (BAMa.TO), is looking to sell its stake, bankers say.
Quadrant, co-owned by Macquarie Group (MQG.AX), produces more than a fifth of the gas going into the domestic market in the state of Western Australia, has oil production and untapped gas reserves.
Potential suitors include Santos.
The appeal for Santos is that it knows the Quadrant business well as the companies share stakes in a number of gas fields, bankers and analysts say, although Santos may not want to risk alienating shareholders by splashing out on a deal so soon after having rejected a takeover.
“Quadrant’s domestic business in Western Australia is a prized cash cow in Santos’ portfolio. Doubling down there makes sense,” said Wood Mackenzie analyst Saul Kavonic.
Santos, Brookfield and Macquarie declined to comment.
SEH Price at posting:
23.0¢ Sentiment: Buy Disclosure: Held
