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. 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. 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. 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
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