More M&As expected in Australia’s gas sector

Private equity firms see strong turnaround opportunities in industry: expert

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 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 and a $9.8 billion bid for pipeline operator APA Group 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.

US 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, 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.

“Most of the sub-billion market cap companies with reasonable 2P resources and cash flow or near-term cash flow would be attractive to private equity funds,” said Eddie Rigg, head of corporate finance at Argonaut.

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 are expected to jump 50 percent to 57 million tons by 2020, according to Australian government forecasts. For investors, Australia is handy 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 centers,” said Deloitte’s Cullinane.