Beach moves on Lattice

BEACH Energy will buy “cash cow” Lattice Energy from Origin Energy for $1.585 billion, giving it access to the prized Waitsia field and deepening its exposure to the hungry east coast gas market.

Beach moves on Lattice What the new Beach Energy will look like with Lattice Energy in its fold.

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Beach, currently worth $1.545 billion itself, will partly fund the deal by raising about $301 million through a three-for-14 pro-rata accelerated non-renounceable entitlement offer, about $233 of which will be fully underwritten.
 
Importantly, Seven Group Holdings has thrown its weight behind the acquisition, not only taking up its full entitlement of $68 million but sub-underwriting the offer of up to 68.26 million shares.
 
The rest of the purchase price and acquisition costs is to be financed from $1.3 billlion of debt facilities and $66 million from cash on hand, with Beach expected to have $300m of remaining liquidity after the acquisition.
 
The deal will cut Origin's $8.1 billion debt to less than $7 billion and expand Beach's reach to the onshore Perth Basin and offshore Otway, Bass and Taranaki basins, doubling its 2P reserves to 232 million barrels of oil equivalent and lifting its FY18 production guidance by about 150% to 25-27MMboe.
 
Origin CEO Frank Calabria said the deal represented that the vertically integrated company was simplifying its business and cutting debt while retaining access to future Lattice east coast gas production and LPG.
 
For Origin, net proceeds of the deal also reflect the acquisition of Benaris' interests in the Otway Basin, transaction costs and the closing out of two oil forward sale agreements Origin signed in FY13 estimated at $270 million.
 
Origin also said this morning it had entered into supply agreements for LPG production from BassGas and Otway, which will feed its LPG business, and it has rights to contract gas from several exploration permits in the Otway should they progress to development.
 
Once the deal wraps up, Origin's simplified Integrated Gas unit will comprise its 37.5% stake in Australia Pacific LNG, Ironbark (10)%) and Beetaloo Basin (70%) exploration assets, that latter of which is frozen until the Northern Territory's frac ban lifts.
 
However industry speculation is that this ban will be lifted, if not just for Origin, which will, as part of today's deal, retain a number of dormant onshore permits near Port Campbell in Victoria which may give it a future opportunity to develop a gas storage facility.
 

Transformational

 
Beach CEO Matt Kay, who called Lattice a "cash cow" this morning, said the acquisition would be "transformational" across several fronts, though speculation is rife that another deal is already underway to sell Waitsia, providing more cash to the company for further growth.
 
Swallowing Lattice will boost Beach's operated production from about 50% to roughly 75%, with offshore operations set to account for about half of production.
 
In New Zealand, plans are underway for an additional development well which, if successful, will support production levels for the next decade.
 
Kay told analysts this morning he saw Waitisia as an "exciting" project currently producing 10 terajoules a day, with a full field development plan targeting 100TJ/d.
 
The Otway gas project has a number of potential development wells under consideration with high-impact potential over the medium-term.
 
The east coast thematic has been part of Beach's strategy for some time, but the new transaction will step this up significantly, with 600PJ of strategic reserves for domestic purposes and development projects to capitalise on those positions.
 
Based on FY17 production levels, the combined entity would have supplied roughly 15% of the east coast and southern market gas demand, excluding LNG demand, with Lattice to boost Beach's attributable east coast gas sales and ethane production by about 310% to 95PJe from three core gas processing hubs.
 
Kay said that while much of the value extraction will be via the drill bit, development and further investment, Beach had already identified $20 million of a year of steady synergies, which he believes will likely prove a conservative estimate.
 
The deal for Beach will be materially value per share accretive and provide return on equity on incremental equity of more than 30%.
 

Domgas leverage

 
"The ability to underpin long-term agreements for larger volumes of gas for domestic supply is uncommon, as it provides security and predictability of cash flows, protect risk and deleverage the business quickly," Kay said.
 
Beach has entered new gas agreements with Origin and will also benefit from existing contracts with counterparties which provide material and stable cash flows to fund growth programs and keep the balance sheet in tact.
 
The blended portfolio gas price of the Lattice contract is above the average gas price realised by Beach in FY17, which was $6/gigajoule.
 
The new contracts also provide CPI linkage for repricing mechanisms which have annual step ups across the first three years before market pricing resets in years 3-4 onwards.
 
The deal also allows Beach to high-grade and sequence growth projects.
 
Beach was trading at 82.5c this morning, while Origin was up 1.4% to $7.55.

 

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