Beach Energy’s Matt Kay building a business that’s hard to break
Matt Kay calls it the rock throwing exercise - gathering his team together to see what will break the business.
Matt Kay calls it the rock throwing exercise. The oil and gas boss gathers together his team at Beach Energy to work out what it takes to break the business.
Oil price ructions, regulatory restrictions and ‘‘black swan’’ events are tossed into the mixer to see what survives on the other side.
In almost every scenario “we’re very, very difficult to break”, Kay tells The Australian ahead of Beach's annual results on Monday.
Even so, the twin shocks of a meltdown in crude markets in the early months of 2020 and the COVID-19 pandemic was a scenario that shook its stress testing to the limit.
“There’s no possible way we could have predicted that event and what’s happened since. But it goes back to being prepared and having a business that could cope in a downturn and one that was highly resilient.”
Beach has been able to sidestep the worst of the sector’s carnage, partly through being prudent and paying down debt. But also because of what it doesn’t have: an LNG plant. More than $22bn has so been blown up in the Australian LNG sector this year alone in writedowns as LNG producers were forced to lower their oil price assumptions after energy demand cratered. Beach, with its domestic gas supply focus, has been able to lean on fixed price gas contracts to avoid bigger fallout from the tough market conditions.
Some 97 per cent of its east coast gas sales in the 2020 and 2021 financial years is expected to be sold under long-term deals with less than a quarter of volumes linked to oil prices.
“We’ve created a situation where the gas business which has very stable revenues basically covers all of our operating costs and all of our sustaining business capital expenditure.”
Beach’s more resilient model can partly be traced back to an unlikely bet made by Don ‘High Voltage’ Voelte. The former Woodside chief — earlier Kay’s boss and a big influence on his career — joined Kerry Stokes’ Seven Group Holdings in 2013 after departing Woodside with an eye on diversifying the conglomerate into energy.
Seven jumped on a big fall in the oil price and subsequent slump in Beach’s share price to buy into the South Australian gas producer in early 2015. By the time Kay started as Beach CEO in May 2016, Seven held per cent and talk was rife the Stokes camp was building to a full takeover.
“Certainly in my early days the investment community were wary of that major shareholding and there was some uncertainty as to their intentions.
But some of that water-cooler talk gets out of hand and that’s all it is — water-cooler talk — and the reality was far from that.”
Kay met with both Kerry Stokes and son Ryan Stokes shortly after joining Beach and realised Seven’s investment clout could soon prove valuable. Beach’s problem at the time was it only owned onshore assets in the Cooper Basin “and all our revenue went through one 1960s gas plant at some point”, Kay recalls. “So it was a very acute risk profile we had as a company and a pretty small patch in terms of opportunities to grow the company.”
Kay’s M&A experience was about to come to the fore. The oil man had already worked for three of Beach’s bigger rivals — Santos, Woodside Petroleum and Oil Search — before reaching the age of 50.
The Adelaide executive landed at Woodside shortly after Peter Costello had blocked Shell’s $10bn bid for Woodside, was the brains behind Woodside’s highly regarded — but ultimately abandoned — Leviathan gas project in Israel and in 2015 was Peter Botten’s right hand man at Oil Search defending a $11.6bn takeover bid lobbed by his former workmates at Woodside.
Beach’s board, backed by Stokes’s deep pockets, gave Kay the green light to strike a deal catapulting Beach into the big time.
Target No 1 was Origin Energy. Kay had watched as energy producers including Origin and Santos struggled under the weight of huge debt from building Queensland LNG projects, exacerbated by the plunge in oil prices over 2015 and 2016.
Kay met with Origin chief Grant King with a pitch to take over the producer’s non-LNG oil and gas assets.
“They weren’t even known as the Lattice assets at the time, but they were our No 1 target,’’ Kay recalls. King was on his way out, so Kay then pounced on Origin’s new chief Frank Calabria to continue the quest.
“Grant quite rightly had said ‘join the queue’ and we approached Frank probably in Frank’s first week or two. We were aggressive frankly and the reason we were aggressive is we knew it was a very good opportunity and a great fit for our company and it turned out to be that way.”
Beach struck the Lattice deal with Origin nearly a year later for $1.6bn, dwarfing Beach’s entire market capitalisation with the equity raising backed by Seven.
From its single Cooper Basin focus, Beach was catapulted into a major player with production in five basins including Western Australia and New Zealand from its South Australian roots.
“We said at the time we felt we’d just created a cash cow and that’s exactly what we’ve done.”
Within a year Beach’s market cap had more than doubled beyond $4bn, vindicating Kay’s M&A instincts.
Still, he knows he can’t afford to stand still. This year’s oil crash has meant some tough decisions with 10 per cent of the workforce cut after spending was slashed. With crude since staged a comeback, there is a sense Kay may have more deal-making in mind.
“We came out of the last downturn a much bigger and stronger company and I’m very confident you’ll see us do the same again this time.”