Calabria moots Origin oil and gas spin-off to slash debts
Origin’s Frank Calabria has revealed he plans to pay off up to $2 billion in debt by spinning off gas and oil assets.
Less than two months after taking the top job at Origin Energy, managing director Frank Calabria has revealed he plans to pay off up to $2 billion of a $9bn net debt load by spinning off developed gas and oil assets not associated with its Queensland LNG project and forming a new mid-tier gas company to challenge Beach Energy.
The surprise move, which helped Origin shares climb 2.5 per cent yesterday to a 14-month high, has backed up Mr Calabria’s earlier claims his main immediate focus would be on debt reduction. It has also bolstered comments from chairman Gordon Cairns that a long-talked-about demerger to separate the company’s energy generation and marketing businesses from its stake in the Australia Pacific LNG project would not happen any time soon.
Mr Calabria told The Australian APLNG and energy marketing (which includes Origin’s fossil fuel and renewable power generation) would stay together, even after more debt was paid down.
“A demerger is off the table, we are now very much focused on these two strong businesses,” he told The Australian when asked whether a demerger would be considered in future.
“The simplified integrated gas business (APLNG and other coal-seam gas assets) is the largest onshore unconventional gas operator in Australia, and has the capability to supply both LNG and domestic markets, so I believe it is a strength for us and the energy markets business.”
The assets being slated for an initial public offering are a collection of largely gas-producing sites in Bass Strait, the Cooper Basin in central Australia, Western Australia and New Zealand. About 85 per cent of the new company’s reserves will be gas, with the rest being oil.
Next to no detail has been provided on how the spin-off’s balance sheet will be structured, its name, or who will be running the company, with the move still a long way down the track and slated for some time next year. Origin — itself spun out from Boral early last decade — will keep its stake in the Poseidon gasfield off Western Australia that it bought from Karoon Gas for $US600 million in 2014 (when oil prices were still above $US100 a barrel) and will keep the Ironbark coal-seam gas project in Queensland’s Surat Basin.
With debt reduction its prime focus, Origin will not give existing shareholders a stake in the new company, selling all shares to new investors.
The move will create a new oil and gas producer in the mid-tier range where Beach Energy, which has Kerry Stokes’ Seven Group Holdings as a 22.9 per cent shareholder, dominates.
RBC Capital Markets analyst Ben Wilson said he valued the spin-off, which has proven and probable reserves of 948 petajoules (163 million barrels of oil equivalent) and annual production of 75PJ, at between $1.6bn and $1.8bn. He said this compared to a $1bn valuation of Beach, but noted the market was currently valuing Beach at $1.6bn. This may have something to do with why Origin has decided to sell the assets through a public float, rather than a trade sale.
Fund manager Allan Gray, which has Origin as one of its top five holdings, said that while details were light, the theory was solid.
“Subject to price, it looks like a sensible thing to do,” Allan Gray’s senior analyst Suhas Nayak said. “This part of the business is capital-intensive, which at a time when you’ve got a lot of debt and bigger businesses that attract more of your attention, could very well do better in other people’s hands.”
Mr Nayak said he was not worried that a demerger of APLNG was being talked down.
“Separating the business wasn’t really feasible because neither of the independent businesses would have been able to shoulder the debt burden on their own,” he said.
“Whether they separate or not, it’s not really important. These transactions don’t necessarily result in shareholders seeing value, but they certainly result in a lot of transaction costs.”
Yesterday, Origin shares rose 16c to $6.58, their highest since September last year, just before the company launched a $2.5bn rights issue.
Origin took on its big debt load to finance its stake in APLNG. It was then hit hard by the prospect of lower revenue to pay its high interest costs when oil prices plummeted in late 2014 after Saudi Arabia refused to cut production in the face of a US shale oil glut. As a result, its share price plunged and Origin was forced into the $2.5bn rights issue to pay down debt.
The spin-off will leave Origin more focused on boosting productivity at APLNG and running an energy markets business that is tackling the disruptive impact of technology and the global move to cleaner power.
Mr Calabria, who ran the energy markets business before taking over in the top job from Grant King on October 19, said there would be no shift in energy markets strategy. “We see ourselves as moving forward on our previously articulated strategy,” he said.
A float of the asset had been determined as the way to best realise value from the assets, Mr Calabria said. But if a trade buyer was prepared to offer better value, the company would take it. Origin has appointed Macquarie and UBS as joint lead managers on the float.
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