US gas venture in pipeline for APA as it expands its horizons
APA may splash up to $4bn buying a US gas infrastructure business as the pipeline operator rekindles an expansion plan.
APA Group may splash up to $4 billion buying a US gas infrastructure business as the pipeline operator rekindles an international expansion after CK Group’s $13bn takeover bid for APA was blocked by the Australian government last year.
The Sydney-based company said it’s conducting ongoing due diligence of the North American gas infrastructure sector with a focus on acquiring a business with a similar or lower business risk profile to itself.
After opening an office in Houston about 18 months ago, progress striking a deal was stalled as the CK takeover process dragged on in the first half of 2019.
APA cited favourable gas fundamentals, attractive rates of return and the significant number of entry points available into the US market as reasons for considering the deal with the company prepared to pay between $2bn to $4bn for a deal.
“The process was on hold for six months but once the CKI bid died the obvious question was where’s your growth going to come from,” APA chief executive Mick McCormack said. “We are picking up the pieces now and reinvigorating the effort in North America.”
However, Macquarie said the mooted move into North America divides opinion among shareholders. The North America focus “remains polarising for investors and ultimately creates some uncertainty until the initial investment and track record is obtained. The focus is the risk profile of the US assets is slightly different,” Macquarie said in a note to clients.
“We expect caution will remain around the US strategy with more colour required before investor confidence will emerge.”
Mr McCormack said the returns on a successful US deal would easily outweigh those it can achieve in Australia.
“When you look at regulated assets, the returns over there is almost double what’s allowed here. It reflects the fact the US market is very dynamic and they need more investment in pipelines and distribution systems because they’re sourcing gas from places where the infrastructure hasn’t previously been.”
APA said it expects full-year earnings at the upper end of guidance of $1.55bn to $1.575bn after posting a 27 per cent rise in net profit for the first half.
Net profit rose to $157.4 million from $120.4m in the same period of 2018, while earnings before interest, tax, depreciation and amortisation rose 4.3 per cent to $787.7m from $755.3m.
“There is an implied EBITDA upgrade as it includes the CKI expenses and now is at the top end of the range. However this was expected, thus is unlikely to have a material impact on the share price,” Macquarie said.
APA fell 0.21 per cent to $9.38. The company’s shares have increased nearly 12 per cent so far this year partly due to the fall in bond rates, according to Macquarie.
Mr McCormack in December flagged his intention to retire just three weeks after Treasurer Josh Frydenberg rejected the takeover of APA by Hong Kong’s CK, citing national interest concerns.
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