Under-fire APA Group targets US deal to lift earnings
The Sydney-based company has been scanning US targets as it looks to add a higher margin business to its regulated Australian earnings.
Energy giant APA Group pointed to Covid-19 ructions for delaying progress on a big-ticket acquisition in North America and pushed back at investors questioning whether its network of gas pipelines could become stranded assets as a move to renewables gathers pace.
The Sydney-based company has been scanning US targets as it looks to add a higher-margin business to its regulated Australian earnings and is targeting electricity integrated energy infrastructure in addition to its existing search for gas pipelines and utilities.
Some $US2.7 trillion ($3.5 trillion) of investment will be required by 2040 in the US energy transition, according to APA, even as it conceded an M&A search was blunted last year with conditions likened to the economic slump in the 2008 global financial crisis.
“Unfortunately over the last 12 months or so Covid did create volatility globally and we have found boards and management here in the US have been loathe to transact in these environments,” APA’s president for North American development, Ross Gersbach, told the company’s annual investor day.
“I suppose it is not too dissimilar to GFC times.”
A rough deadline of early 2022 to identify a deal had previously been disclosed, part of APA’s efforts to diversify the business that include its new Pathfinder program focusing on emerging technologies including hydrogen, energy storage and off-grid renewables.
“But we do see markets coming back,” Mr Gersbach said. “There has been recent announcements for a couple of gas utility sales which confirm there is considerable interest to invest in gas infrastructure and I think those announcements are likely to trigger further asset sales to capitalise on demand. We remain confident the market is attractive enough to spend more time in it.”
APA reaffirmed its annual earnings guidance within a $1.625 billion-$1.665 billion range for the 2021 fiscal year, meaning either flat or falling profits during the earnings period, with a full-year payout to shareholders of 51c per security. Underlying net interest of $490 million-$500 million is expected.
Capital spending will jump more than four-fold to $600 million in the 2022 financial year from 2020 levels.
APA owns 15,000km of gas pipelines worth $21 billion across Australia and delivers half the nation’s gas along with stakes in storage facilities, power stations and wind and solar farms.
However, investors and analysts quizzed the company about the risk of long-term infrastructure becoming stranded as users moved away from higher-polluting fossil fuels.
Gas would remain a vital transition fuel for decades, according to APA chief executive Rob Wheals.
Gas played a “critical role” as part of APA’s “primary energy usage but also for gas generation. All the forecasts we look at give us confidence that will continue over the next number of decades all the way through to 2050,” Mr Wheals said.
The International Energy Agency expects gas to play a major role transitioning the globe to cutting emissions, although superannuation funds and institutional investors are ratcheting up pressure for peak bodies to rethink the gradual switch over concerns it will fail to meet the most ambitious Paris Accord goals.
Analysts also pointed to shorter-term contracts such as the four-year deal APA signed with Origin Energy on May 5, but the pipeline operator also pointed to longer-run pacts with resources customers in Western Australia.
“The east coast grid we are seeing some of that such as the Origin contract,” said Julian Peck, APA’s group executive for strategy and commercial. “But I would contrast customers with an existing book and an existing position who are rolling that forward. I think if we have customers with specific project needs who are looking for longer-term security – and if you look at the west coast you have resources customers doing projects who are not looking for three-year security.”
APA shares rose 0.4 per cent to $9.47 on Wednesday.
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