Why didn’t all of those Queensland gas takeovers happen last year?
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Last year analysts were widely predicting a wave of takeover activity among east coast gas companies, after a flurry of deals in the first half of 2018.
On the shortlist as takeover targets were Senex Energy (ASX:SXY), Central Petroleum (ASX:CTP), Cooper Energy (ASX:CEO), Comet Ridge (ASX:COI) and Strike Energy (ASX:STX).
Deloitte said M&A in the gas sector was “likely to be a big trend in 2018”.
Argonuat head of corporate finance Eddie Rigg said “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”.
EY picked a 30 per cent growth in upstream deal flow.
And Credit Suisse said in February 2018 that was the hour to take out Senex.
Those fortunes were based on shortages of gas in the east coast gas domestic market, actual shortages at the Gladstone, Queensland LNG trains, and visions of Asian behemoths and US private equity allegedly wanting to secure cheap Australian assets.
But these predictions have come to naught and those organisations either declined to comment for this article or did not respond before deadline.
All of those companies remain independent today.
>>Scroll down to find out who could be on a shopping list.
Experts say the obvious buyers — the three LNG outfits in Gladstone — which have most of the viable exploration and producing land already locked away, have just been too busy to think about buying small companies which would only add very incrementally to their overall gas haul.
Wood Mackenzie analyst Dan Toleman says Santos (ASX:STO), by far the main player in Queensland gas by licence numbers, has been busy buying west coaster Quadrant.
“As the key player in the east coast gas market with a gas shortage, they’ve had their hands tied,” he told Stockhead.
APLNG this month bought the undeveloped coal seam gas project Ironbark from Origin Energy (ASX:ORG) for $213m.
And QGC has been middle-man in a spat: Arrow and its Surat Basin reserves is co-owned by Petrochina and Shell, which also owns QGC. The former wants the reserves developed soon, the latter wants it to supply cheap gas to the LNG plant.
Graeme Bethune, CEO of consultancy Energy Quest, reckons there just aren’t enough decent targets, while policy risks could put off buyers who aren’t already playing that field.
Armour Energy general manager Richard Fenton suspects mergers between companies are still to come.
“It would not be unrealistic to assume that there will consolidation of companies that have significant uncontracted 2P reserves and exploration upside, be those through lower risk farm-in arrangements, or pure M&A,” he told Stockhead.
“Companies that have 2P or 3P reserves and exploration tenure, companies will be highly attractive to larger companies that have the funds to accelerate production to full plant capacity in order to support their Australian domestic gas supply obligations, especially those that are already connected and producing to the east coast domestic market.”
And supply is predicted to start getting tight both for the already-stretched LNG terminals and the domestic market.
A new report by consultancy Energy Quest suggests there are only sufficient Proved and Probable (2P) gas reserves and production to meet east coast domestic demand until around 2026.
Further, there is growing uncertainty around the commerciality of coal seam gas reserves, with about 3,000 petajoules (PJ) of 2P reserves in Queensland written off in the last year.
“From around 2025, production from Queensland’s coal seam gas fields is expected to fall by more than 100 PJ per annum in deliverability – the equivalent of an LNG import terminal every year,” the report said.
“This will force a cut in output from six to four LNG production trains [terminals] at Gladstone.”
Wood Mackenzie’s Mr Toleman believes QCG and APLNG may need extra reserves for later in the 2020s, but it’s more urgent for Santos which famously commissioned its LNG terminal without locking in place all of the necessary gas to feed it.
For the large acquirer, Queensland doesn’t actually have as many attractive targets as you’d think.
According to data crunched by Stockhead, the only producers listed and unlisted that are not already owned by a billion-dollar behemoth are Armour and Senex.
Two other producers fit this description but sit just outside Queensland: Cooper Energy is in the corner of the Cooper Basin that’s in north-east South Australia, and Central Petroleum works in the Northern Territory, but after hooking into the Northern Gas Pipeline can now sell into the east coast.
Queenslanders Bounty Oil and Gas (ASX:BUY), Energy World Corporation (ASX:EWC), Galilee Energy (ASX:GLL) and Comet Ridge are expecting to have producing fields running this year.
Viable explorers — those which are actively developing fields — could also be on the block down the track if they can firm up resources into reserves.
‘Reserves’ refer to oil or gas discoveries that are commercially recoverable using existing technology while a resource is an initial, untested estimate. A 2P means it’s proven and probable, while a 3P includes ‘possible’.
Companies that are in analysts’ crosshairs include Strike Energy, State Gas (ASX:GAS) and Blue Energy (ASX:BUL).
Icon Energy (ASX:ICN) and Real Energy (ASX:RLE) also have tenements in the Queensland side of the Cooper Basin.
That doesn’t include an array of about 30 miniature unlisted companies with exploration licences in Queensland.
In order to make the grade, companies must have access to the east coast market and they’ve got to have the reserves.
Senex, for example, has about 539PJ of 2P reserves across its projects at three projects in Queensland and in the South Australia Cooper Basin holds about 15,000 square kilometres of oil and gas tenements.
In the half year to December, Senex produced oil volumes of 374,000 boe (barrels of oil equivalent) and gas volumes of 183,00 boe — compared with 18 kboe in the previous corresponding period.
Armour is a couple of years behind Senex but has just upgraded its reserve count to 123.6 PJ, and holds about 14600 square kilometres on tenements in northern Queensland and a swathe of land next door in the Northern Territory — connected to the east via the new Northern Gas Pipeline.
A selection of the main listed players in the small and mid levels of the east coast gas sector.