Beach Energy buys Origin’s Lattice unit for $1.6bn

Beach Energy is poised to reclaim its position as Australia’s mid-tier producer after buying Origin oil and gas assets for $1.6bn.

Beach Energy CEO Matt Kay in Sydney yesterday. Picture: John Feder.

The balance sheet pain across the bulk of the oil and gas sector has opened the door for Beach Energy to reclaim its position as Australia’s mid-tier producer, with the Adelaide-based group striking a deal to buy Origin Energy’s conventional oil and gas assets for $1.585 billion.

Despite paying more than its market capitalisation and taking on board $1.3bn in debt to acquire Origin’s Lattice Energy business, Beach managing director Matt Kay said the company should have net cash by as early as 2021 due in part to the long-term gas sales agreements secured with Origin as part of the deal.

The sale of Lattice means Origin will have collected more than $2.5bn from the asset sale program started in September 2015 as part of its efforts to strengthen its debt-laden balance sheet.

The acquisition also delivers on the ambitions of Kerry Stokes’s Seven Group Holdings, which is the biggest shareholder in Beach and which has long seen the company as the vehicle for building a big presence in the gas industry.

Beach will triple its reserve base while its production will increase by about 150 per cent to the equivalent of 25-27 million barrels of oil a year.

The acquisition will be underpinned by a series of gas sales agreements with a variety of companies, including Origin itself.

Origin chief executive Frank Calabria said the agreements would keep its domestic gas business well supplied over the coming years.

The exact price of the gas to be sold to Origin was undisclosed, but Beach said the sales agreements represented a combined price above the $6.10 a gigajoule averaged by Beach last financial year.

Mr Kay said he expected the company to emerge from the acquisition with a gearing of less than 35 per cent and generating enough profit to have net cash on its balance sheet by the end of the 2021 financial year.

“The business we’re running is basically generating a lot of free cash flow to pay down that debt and that’s a big part of the attraction of this portfolio for us,” Mr Kay told The Australian.

The deal will be funded through a $1.3bn debt facility, Beach’s existing cash holdings of $66m and the $301m it expects to raise through a renounceable entitlement offer at 75c a share.

Seven Group has agreed to sub-underwrite the offer and will subscribe for up to $100m worth of new shares.

Mr Kay said market conditions across the oil and gas industry had created a unique window of opportunity for the company.

“We’ve been reasonably fortunate at the moment because a lot of our peers are under balance sheet stress and a number of traditional competitors for assets in Australia, such as the top-tier Chinese companies and others, are not active, so there’s a much smaller pool of competition,” he said.

Origin had been running an IPO process for Lattice at the same time as it pursued the sale, and Mr Calabria said a potential float had been a live option right up until the signing of the deal late on Wednesday.

Mr Calabria said the prospect of providing additional disclosure around gas prices in an IPO had not been a deterrent to going down that path.

“We were very comfortable with the gas price arrangements there and that wouldn’t have been an issue at all,” Mr Calabria said.

“It was really about our assessment of what would have been the best value for our shareholders, and when we assessed the Beach offer against that we thought the Beach offer was in the best interest of our shareholders.”

The sale means Origin should comfortably beat its target of having net debt of less than $7bn at the end of this financial year.

The Lattice transaction is the biggest single deal in Australia’s upstream oil and gas sector since Woodside Petroleum’s $US3.6bn acquisition of assets from Apache Energy in December 2014.

Seven Group managing director Ryan Stokes said the Lattice assets would prove naturally complementary to Beach’s portfolio. “Beach has a really strong balance sheet and if you look at the suite of assets, it changes Beach quite a lot towards gas at a time when gas assets are really quite attractive,” Mr Stokes said.

Beach had long been seen as the most likely Australian buyer for the assets given its growth ambitions and the dearth of obvious rivals.

Wood Mackenzie senior analyst Chris Meredith said he expected the deal to be positive for the east coast gas market, given the potential for Beach to invest in growing the business.

“Beach is a domestic-focused player, and without LNG to distract it we expect to see increased investment in exploration, development and production in these assets,” Mr Meredith said. “This will enable Beach to capitalise on the high east coast gas prices.”

RBC Capital Markets analyst Ben Wilson said the purchase price was in line with his expectations and said the acquisition would be a positive for Beach, although it was not enough to shake his “underperform” rating on the stock.

He said the deal was good for Origin given the combination of its impact on its debt position and the certainty provided by the gas supply contracts for its energy markets business.