Lattice takeover bonus

INSTITUTIONALS have heavily backed Beach Energy’s move on Lattice Energy which is good news for the east coast market as it will be unencumbered by LNG to ramp up investment in exploration, development and production, Wood Mackenzie says.
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Having declared it would buy what CEO Matt Kay called "cash cow" Lattice for $1.585 billion last Friday, this morning Beach successfully completed the institutional component of its 3-for-14 accelerated non-renounceable pro-rata entitlement offer of new shares.
 
Major shareholder Seven Group Holdings pre-committed to its full equity entitlement and sub-underwrote the offer, enabling Beach to raise about $201 million of the total $301 million to be raised under the entitlement offer, which 97% of existing institutionals backed, excluding SGH.
 
The retail component of the entitlement offer, which opens this Thursday and closes on October 16, will raise about $100 million.
 
Kay said the near-record institutional take-up level of more than 98% demonstrated the overwhelming support they had for the Adelaide-based oiler and its move on Lattice which will deliver a step-change in its production, operating capabilities and geographic exposure.
 
Beach, an onshore operator which until now had been focused on oil exploration and development, currently produces 28,000 barrels of oil equivalent a day, which will improve by 160% by acquiring assets producing about 46,000bopd.
 
The deal will make Beach much more gas-focused, with gas production rising from 45% of total production to 66%; and will give the company overseas and WA production for the first time.
 
The transaction will enable seller Origin Energy to pay down debt on its flagship Australia Pacific LNG project and its gas and power business as part of its restructuring plan which has already raised capital and sold Contact Energy in New Zealand for $1.6 billion.
 
RBC Capital Markets expects the proceeds on sale after transaction costs, close out of the forward sale agreement - depending on oil prices when the deal closes - and payments for the additional 28% interest in the Otway joint venture to be about $1 billion. 
 
Once that's wrapped up RBC forecasts Origin's adjusted net debt to be about $6.7 billion by June 30 2018, is in line with guidance for net debt below $7 billion. 
 
Yet the bigger upside is for the east coast, where things heated up substantially over the weekend with former Prime Minister Tony Abbott saying his successor could invoke "defence powers" to take management of resources from states like Victoria and New South Wales to develop gas resources to support energy security.
 
Treasurer Scott Morrison dismissed the claim, saying that the government had no interest in a "khaki solution". 
 
In a client note, Wood Mackenzie said the Lattice sale would be positive for the eastern Australian gas market. 
 
"Beach is a domestic focused player, and without LNG to distract it, we expect to see increased investment in exploration, development and production in these assets," the firm said. 
 
"This will enable Beach to capitalise on the high east coast gas prices. The company is selling under long-term contracts and average portfolio price for 2018 will be above $6.10/GJ.
 
While Kay would not disclose the exact terms, gas from Otway plus Halladale, Speculant and Black Watch, Cooper and BassGas will be sold above $6.10/GJ, with Beach to benefit from annual step ups on top of CPI linkage for the first 3-4 years and market prices at Otway/HSBW and Cooper for the remaining contract term. 
 
The pricing for these contracts over this 3-4 year period is below RBC's current assumed real long-term east coast gas price of $7/GJ, which is "clearly favourable" for Origin's Energy Markets business. 
 
"The fixed price with annual step-ups rather than oil price linked contracts does provide the benefit to Beach of downside protection over this period while retaining the upside pricing risk when the contracts revert to market prices with some recent contracts being signed [more than] $7/GJ and strong pricing in east coast gas markets likely to persist," RBC said.
 
Wood Mackenzie said that while Lattice has a declining production profile, the firm believes that the investment will lead to additional gas becoming available from the Otway and Cooper basins in what remains a tight domestic market.
 
The long term gas contracts that Lattice has entered into with Origin will also provide a base cash flow for Beach that is not linked to oil price. 
 
Once these contracts start to expire from 2021, Beach will be free to sell gas into either the domestic market or to one of the LNG export projects. 
 
Producing from the Cooper Basin also allows Beach to participate in gas swaps between the Queensland and southern markets.
 

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