Big news hit the oil and gas markets last week when two multi-billion-dollar deals were made in Australia.
On Wednesday, Royal Dutch Shell (NYSE:RDS.A) announced plans to take over global liquefied natural gas (LNG) producer BG Group (LSE:BG) for US$70 billion. Then came Apache’s (NYSE:APA) decision to divest its Australian assets in a sale valued at $2.1 billion.
The fact that such big deals were made within a day of each other definitely raises some questions about the future of oil and gas in Australia and the world as a whole. Here Resource Investing News breaks down details of the two deals and looks at the impact they may have.
Shell/BG Group gas deal
Shell taking over BG Group is a huge deal for Australia, and considering the oil and gas space is already filled with corporate giants, the deal will also likely affect the global market as well.
Looking at what it means for Australia, Reuters reported that some of the country’s biggest manufacturers fear the takeover could worsen the lack of competition in the country’s eastern gas market. Indeed, Ben Eade, Manufacturing Australia’s executive director, told the news outlet that the deal will “increase competition in a market where we think what we need is more suppliers than less.”
Eade’s organization is a CEO-led coalition of Australia’s largest manufacturers, and it released an action plan for gas market reform on Monday. The 13-point plan focuses on four key goals: establishing transparent and functional gas markets; securing domestic and export supply; developing appropriate infrastructure and providing incentives for new production. Chairman Mark Chellew has warned that if market reforms aren’t fast tracked, 83,000 manufacturing jobs will be at risk.
There are also concerns surrounding rising gas prices in Eastern Australia. The Australian Competition and Consumer Commission plans to begin an inquiry into the competitiveness of wholesale gas prices and the overall structure of the industry.
In regards to what the deal could mean for the world as a whole, The Globe and Mail considers it a game changer for British Columbia. That’s because Shell will have more power over which of its projects to keep and throw away in the province. BMO Nesbitt Burns energy analyst Randy Ollenberger told the publication, “[w]e’re going to see some consolidation amongst the LNG projects. There really isn’t room for all of them.”
The Shell-BG Group deal will likely also change Premier Christy Clark’s prediction of three operations LNG terminals in BC by 2020.
Apache oil deal
In terms of the Apache deal, the company is looking to further deepen it pockets and cut its oil ties Down Under completely with the sale of its Australian subsidiary, Apache Energy, for $2.1 billion. It will go to “a consortium of private equity funds managed by Macquarie Capital Group and Brookfield Asset Management.”
The company is making the sale in a bid to focus on oil production primarily in North America; however, it still has international operations in both Egypt and off the United Kingdom coast in the North Sea.
“Over the last five years, we have transitioned Apache’s primary growth engine to North America onshore through the announcement or completion of approximately $17 billion of asset purchases and $17 billion of asset sales,” said Apache President and CEO John Christmann in a press release. “Following the sale of our Australian assets, approximately 70 percent of Apache’s production will come from North America onshore. Our robust North American position is complemented by our North Sea and Egyptian regions, which have an extensive inventory of prospects and assets that generate free cash flow.”
In terms of what Apache’s move means for Australia, the consensus seems to be that it’s another step in the reorganization of the nation’s oil space. The Sydney Morning Herald notes that the reordering involves not only the Apache and Shell deals, but also Chevron’s (NYSE:CVX) recent exit from the Australian downstream oil sector.
Explaining the significance of those moves, Morningstar analyst Mark Taylor told the news outlet, “[w]hen you’ve got the sort of stress that we have following the collapse in the oil price, it brings to the fore the ‘haves and have-nots.’ The have’s have managed themselves a little more conservatively when compared to the have-nots who have stumbled. You are seeing, especially with American companies, exploration being cut and non-core assets being sold – as they focus on their core, usually back in the US.”
He said he wouldn’t be surprised to see more asset sales in Australia moving forward.
Apache’s share price has seen a little bit of a bump since the news came out Thursday, going up roughly $3, to $68, by end of trading Friday. On Monday, shares of Apache were trading for $67.51 down 0.49 percent.
Securities Disclosure: I, Kristen Moran, hold no direct investment in any of the companies mentioned in this article.