APA Group has broadened its search for a $2bn to $4bn North American acquisition
The Sydney-based company has been scanning US targets as it looks to add a higher margin business to its regulated Australian earnings .
APA Group has broadened its search for a $2bn to $4bn North American acquisition after a writedown hit dragged it to a first-half loss, with the gas pipeline giant considering a shift into electricity infrastructure as part of its long-term growth plans.
The Sydney-based company has been scanning US targets as it looks to add a higher margin business to its regulated Australian earnings and will now target electricity integrated energy infrastructure in addition to its existing search for gas pipelines and utilities.
“Our focus on that broader lens has come about from our due diligence on what was a difficult market in 2020 and those learnings have highlighted how many companies have both gas and electricity as part of their portfolio,” APA chief executive Rob Wheals told The Australian.
“The other aspect is the energy transition and positioning ourselves to provide those energy solutions for tomorrow is important as well.”
The oil market crash in 2020 increased pressure on the energy midstream sector including pipeline operators, processing facilities, gas gathering systems and LNG terminals, which could see companies place assets on the market to raise capital.
Still, analysts remain cautious on its strategy shift given the company’s experience and earnings are largely based on gas exposure.
“We think this is a real change for APA shifting the outlook from its historical expertise in gas transmission to other infrastructure assets,” RBC analyst James Nevin said. “APA has previously talked to the potential for lower returns outside of its core expertise in gas infrastructure so we will watch this with interest to see how APA messages the risk/return of other investment opportunities.”
APA has previously targeted local distribution companies where it has identified 145 targets with return on equity in the 9-10 per cent range, while identifying 169 state pipeline opportunities which allow returns in a 13-15 per cent range. Combined, the two asset classes are valued at $US450bn ($570bn).
A rough deadline of early 2022 to identify a deal had previously been disclosed, as part of APA’s efforts to diversify the business which include its new Pathfinder program focusing on emerging technologies including hydrogen, energy storage and off-grid renewables.
Still, RBC said it will require deft execution by the company.
“The investment in capability is required as APA shifts its growth focus to areas such as hydrogen and electrification. We think this will be looked at cautiously as APA looks to grow in areas it does not have as much experience in and this may come with increased risk,” Mr Nevin said.
APA fell to an $11m loss for the first half of 2021 after taking a writedown hit but retained its annual guidance and lifted its dividend flagging growth in energy infrastructure projects.
The $249m writedown was due to delays and extra costs at its Orbost gas processing plant on Victoria’s Bass Strait coast.
The plant has been plagued by start-up issues which are still being investigated and have meant the facility is producing at rates a third below its target of 68 terajoules a day. Orbost is processing gas from Cooper Energy’s $600m offshore Sole field.
Earnings before interest, tax, depreciation and amortisation fell 2.3 per cent to $823m for the first half of the 2021 financial year while profit after tax excluding significant items drifted 7 per cent lower to $163m.
Revenue was largely flat, easing 0.6 per cent to $1.072bn, while it declared a 24c interim dividend which was up by 4.3 per cent.
APA has exposure to build a number of new pipelines connecting to major gas projects including Santos $3.6bn Narrabri development and AGL Energy’s Crib Point LNG import terminal and emerging gas basins including the Northern Territory’s Beetaloo.
Its annual earnings guidance was reaffirmed within a range of $1.625bn to $1.665bn for the 2021 financial year, meaning either flat or falling profits during the earnings period, while upgrading its full year payout to shareholders to 51c per security.
It owns 15,000kms of gas pipelines worth $21bn across Australia and delivers half the nation’s gas along with stakes in storage facilities, power stations and wind and solar farms.
APA shares fell 1.42 per cent on Tuesday to $9.04.
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