Australia: Insights and trends for the leading edge of the energy industry - Part 1

Australian Energy Sector Update: September 2014

Recently completed deals

Further to our reporting in August 2014, ASX-listed Infratil announced on 12 September 2014 that it has agreed to sell Lumo Energy and Direct Connect Australia to Snowy Hydro Limited for cash consideration of A$605 million plus an adjustment amount for final working capital. The transaction is unconditional and is expected to complete on 30 September 2014. The portfolio includes a 163.4MW portfolio of diesel peaking generators in South Australia and New South Wales and a power station development site in Bamarang. Snowy Hydro own and operate the 3,950MW Snowy Mountains Scheme, an integrated water and hydro-electric power project located in Australia's Southern Alps, the 300MW Valley Power gas-fired power station and the 320MW Laverton North gas-fired power station both located in Victoria and are the parent company of Red Energy, a retailer selling electricity and gas to around 400,000 customers in the Victorian, South Australian and New South Wales markets. The combined businesses will create the fourth largest integrated generator and retailer in Australia's National Electricity Market servicing nearly 1 million customers with a complete portfolio of products and services.

SGX-listed Linc Energy announced on 28 August 2014 that it has entered into a binding Option Deed (and consequent Deed of Assignment and Assumption) with India-based Adani Group for the transfer of Linc Energy's benefits in and obligations under the coal related asset, the Carmichael Royalty Deed to Adani. The Option exercise consideration under the Option Deed is A$155 million and it is expected that the Option will be exercised (at discretion of either Adani or Linc Energy) between 50 and 65 days from the date of the announcement.

On 27 August 2014, ASX-listed High Peak Royalties (HPR) (previously known as Torrens Energy) announced that it had signed a Share Sale and Purchase Deed with Mosman Oil & Gas, the Australia and New Zealandfocused oil exploration and development company, for the sale of OilCo, a 100% owned subsidiary of HPR. Mosman is reported to have two assets, the Petroleum Creek Project, an onshore project in New Zealand and the Officer Basin Project in Western Australia. OilCo is the holder of one exploration permit EP156, on which it is reported that a number of prospective leads have been outlined and one exploration permit application EP(A)155 in the Amadeus Basin in the Northern Territory of Australia. The agreement includes the grant of a 2% gross overriding royalty on all Recovered Petroleum from EP156 and EP(A)155 (if granted) to HPR. Mosman is also reportedly in the process of acquiring Trident Energy and Trident's permit, EP145. Following a successful acquisition of Trident, Mosman's holdings in the Amadeus would cover a total of 5,458 km2 .

Solco Ltd, an Australia-based, ASX-listed, solar panel wholesaler announced on 29 August 2014 that it will acquire GO Group from Urban Group Energy Holdings Pty Ltd, by issuing 615.3 million new ordinary shares valued at about A$9 million based on the share price of A$0.015. The acquisition of the GO Group comprises the brands, businesses, assets and intellectual property of GO Energy, GO Energy Services, GO Energy Installations, GO Quote, CO2 Global Exports, CO2 Markets and SolarTrade.

Recent announcements

On 1 September 2014, ASX-listed ERM Power announced that it had entered into an agreed term sheet with ASXlisted Empire Oil & Gas to sell its directly held interests in its West Australian gas assets for A$16.34 million to Empire, which may be adjusted subject to Empire's share price performance. The assets include interests in eight exploration permits in the Perth Basin, including EP389 containing the wells Red Gully-1 and Gingin West-1, developed in 2013 and producing gas and condensate that is contracted to Alcoa and BP respectively, and associated assets. ERM Power has also agreed to participate in a recapitalisation of Empire by a subscription and proposed rights issue up to a value of A$7.5 million to increase its interest in Empire to 19.99%. The transfers are subject to the approval of Empire's Shareholders at a general meeting to be held no later than 17 November 2014 and other regulatory and contractual approvals.

Further to our August reporting, BCP Energy International Pte Ltd announced on 2 September 2014 that it intends to declare its off market takeover offer for ASX-listed Nido Petroleum free from defeating conditions if it secures acceptances of not less than 50.1% under its offer (subject to no prescribed occurrences and no Target Material Adverse Change as set out in the Bidder's Statement) and has also indicated that it intends to accelerate payment of consideration under the offer. The offer has been extended to 3 October 2014. On 16 September 2014 it was announced that BCP Energy International Pte Ltd had secured 51.03% of voting shares in Nido Petroleum.

ASX-listed Neon Energy announced on 10 September 2014 that it had recently received a letter from Evoworld Corporation announcing its intention to make an unsolicited proportional takeover bid for 30% of the ordinary shares in Neon Energy and that shareholders should take no action given a number of concerns about the structure and timing of the offer. A bidder's statement has not yet been received by the company or distributed to shareholders. On 15 September, Neon Energy announced that it had received a further notice from Evoworld Corporation and its associates requesting that the directors of Neon Energy convene a general meeting under section 249D of the Corporations Act to consider replacing the Board with nominees of Evoworld and it will convene a general meeting in due course.

Further to our August reporting, on 11 September 2014,the board of ASX-listed Roc Oil released a target's statement unanimously recommending that shareholders accept the cash takeover offer of A$0.69 per share from Transcendent Resources, a wholly owned subsidiary of Fosun International in the absence of a superior proposal. As reported in our August edition, Roc Oil withdrew from a merger deal with Horizon Oil in favour of the cash offer from Fosun last month which has an implied market capitalisation of about A$474 million.

Further to our reporting in June 2014, ASX-listed Ambassador Oil and Gas announced on 9 September 2014 that ASX-listed Drillsearch Energy, through its unconditional takeover offer, had increased its relevant interest in Ambassador to greater than 88% and it is now the only takeover offer open for acceptance by Ambassador Shareholders, following the expiration of the takeover bid by Outback Shale Hunter.

Further to our reporting in June 2014, ASX-listed Dart Energy announced on 26 August 2014 that Deloitte Corporate Finance concluded that the proposed acquisition of the company by IGas Energy plc, the UK-based oil and gas explorer, under a scheme of arrangement in which IGas will offer Dart shareholders 0.08117 IGas shares for each Dart share, is not fair to Dart shareholders, but remains reasonable. On 10 September 2014 Dart shareholder's approved the scheme of arrangement and the company is currently awaiting approval of the UK Competition and Markets Authority and NSW Ministerial approval for a change in control in Dart's NSW licences before the Supreme Court can hear Dart's application for approval of the scheme which is currently set down for hearing on 24 September 2014.

Market rumours and opportunities

Chinese state-owned companies Zhenua Oil and Huadian Corp are interested in purchasing a portion of ASXlisted Transerv Energy's 57% working interest in the Warro tight gas field in the Perth Basin according to a Mergermarket report on 11 September 2014. The article reports that a company document estimates Warro's total gas initially in place (GIIP) to be in excess of 10 trillion cubic feet and that the value of the field would depend on future drilling results, but could be worth between A$700 million and A$1 billion. Other potential bidders are reported to be Origin Energy, Santos, Apache, AWE, Norwest Energy and Empire Oil & Gas.

A Mergermarket article dated 11 September 2014, reports that Pathfinder Energy, a Perth based, private-owned oil and gas company, is seeking interest from mid-large international oil and gas companies for participation in its permits WA-479-P in the offshore Canning Basin Western Australia and the neighbouring permit WA- 487-P. The main primary term commitment for both permits is 530km2 3D seismic which will be acquired in a single survey in 2014. Pathfinder Energy is about to appoint financial advisors for the deal and reportedly aims to conclude a transaction by October 2014.

ASX-listed New Standard Energy, an onshore hydrocarbon producer, has retained advisors who are setting up a data room for the sale or farm down of its Western Australian assets and will officially seek bids in the next couple of weeks according to a Mergermarket report dated 10 September 2014. New Standard Energy is reported to be primarily seeking partners to farm into its assets in the onshore Canning Basin, situated more than 2,000km north of Perth, however would consider an outright sale. The company is also actively seeking to farm down half of its current interest of 52.5% equity interest (or even more) in PEL 570 in the Cooper Basin.

According to a Mergermarket report dated 9 September 2014, ASX-listed Real Energy, an oil and gas junior, has received takeover approaches but prefers to deliver drilling results from the Toolachee and Patchawarra formations at the maiden Tamarama-1 well and determine reservoir productivity before formally assessing its options.

Apache Corp, the US-based energy business, is expected to spin-off or sell up to US$30 billion in energy assets, many of which are located in Western Australia, by June 2015 which could see the formation of a new locally listed company valued around A$6 billion or a secondary listing on the ASX of a new company that would be valued at up to US$15 billion according to an article in The Australian on 5 September 2014. The Australian Financial Review reports on 1 September 2014 that Apache is exiting its 13% stake in the $29 billion Wheatstone liquefied natural gas project off the coast of Western Australia, as well as its controlling interest of a 65% stake in two gas fields, Julimar and Brunello, in the Canarvon basin which comprise 20% of Wheatsone's LNG commitments. The article reports that ten parties have entered confidentiality agreements granting access to Wheatstone's data room. According to an earlier report in the Australian Financial Review on 31 August 2014, Apache is said to be targeting a completed deal by the end of the year and the article predicts that a preferred candidate will emerge by midOctober under the first-past-the-post bidding structure.

Mergemarket reported on 1 September 2014 that according to an unnamed source, the South Korean company, Doosan Heavy Industries & Construction has submitted a bid for the power plant, Redbank Power Station near Singleton. The power station is being sold by Redbank Project, a wholly owned subsidiary of ASX-listed Redbank Energy. The power station went into receivership after talks on restructuring its A$192.7 million debt broke down when Redbank did not have enough cash to meet its creditors' 5 October 2013 repayment deadline.

Further to our reporting in the August edition, according to an article in the Australian Financial Review on 1 September 2014, ASX-listed Seven Group Holdings' purchase of ASX-listed Nexus Energy for $180 million through a deed of company arrangement and creditors' trust is being reviewed by ASIC to allow a share transfer in the proposed deal. Nexus creditors agreed to a deed of company arrangement for the takeover in August after a sale process failed to bring forward any rival offers to counter Seven. Sean Wilson, a spokesperson for Nexus Battle Group, a group of investors critical of Seven's handling of the process, is cited in the article as saying that investors have lodged several complaints with ASIC.

ASX-listed Antares Energy received a takeover proposal and a separate Letter of Intent from unrevealed bidders to acquire its assets in the Permian Basin for US$300 million according to a Mergermarket report dated 29 August 2014. The article reports that Antares Energy has three core assets in the Permian Basin; Northern Star, Southern Star and Big Star. In relation to the Letter of Intent for the Permian Basin assets, CEO James Cruickshank is reported to have said the company had 60 business days to negotiate a deal, which would suggest a deadline of late September.

The New South Wales Government is seeking binding bids for Delta Coastal, the state-owned electricity group, reported The Business Spectator on 26 August 2014. The paper stated that bankers were valuing the Delta Coastal assets at around A$600 million, down from a 2013 book value of A$850 million, excluding cash and debt. According to the report, a source familiar with the situation was cited as saying that the government had completed a review of indicative bids last week and would soon invite shortlisted suitors to submit binding bids. The process of receiving the binding bids is said to take another 10-12 weeks. Further to our June reporting, the paper cited banking sources as saying that a few bidders had withdrawn from the process, including AGL, ASX-listed ERM Power, Japan-based Marubeni as well as Thai-controlled Ratch. According to earlier media reports, expressions of interest had been lodged by ASXlisted Origin Energy, Energy Australia and Snowy Hydro earlier in the year, however, the report states that its banking sources said that Origin is unlikely to proceed due to competition issues.

According to an article in The Australian on 30 August 2014, the state government of Queensland has appointed advisers for asset sales outlined in its budget earlier this year, worth a possible $33.6 billion. The report states that the assets include Powerlink, Energex, Ergon Energy, industrial pipelines at SunWater and electricity generators CS Energy and Stanwell as well as Ergon's retail business.

The US private equity firm, TPG Capital, is seeking to sell or float its investment in the Australian power-generation-and-distribution business Alinta Energy for up to $4 billion according to an article in the Business Spectator on 16 September 2014. The Business Spectator opines that Alinta, with its 650,000 retail energy customers in Western Australia, could be attractive to a large energy company looking to combine power generators with an existing customer base, a strategy that has been successful for AGL and Origin Energy in Australia's eastern states. However, the paper notes that any sale of Alinta in the new year may coincide with a significant amount of government-owned energy assets being divested as Queensland has announced its intention to sell CS Energy and Stanwell in 2015, as well as retailer Ergon Energy. Western Australia may also look to sell parts of two energy businesses, Synergy and Horizon Power.

According to the Australian Associated Press article dated 3 September 2014, NSW Premier Mike Baird was planning to use his upcoming trip to China to invite Chinese investors to take part in his plan to lease 49% of NSW's electricity distribution network, commonly known as the poles and wires. Under the plan, which Premier Baird is taking to the March election, the government expects to raise $20 billion to be ploughed back into critical infrastructure projects. Premier Baird emphasised that under the government's proposal 51% of the assets would remain owned by the NSW government.

On 28 August 2014, the Western Australian government announced its intention to sell the Canning Vale Markets, the Kwinana Bulk Terminal and Utah Point bulk handling facility in Port Hedland as the beginning of an ordered asset sales program according to an article in The West Australian of the same day. The Australian Financial Review reported the day prior, that Western Australia is the last state to retain ownership of its TAB, the only state to own a gold refinery and depository and the only state to retain complete ownership of its electricity network. The article went on to cite an unnamed Western Australian business executive as saying that the state owns significantly more assets than other states and could easily raise over A$10 billion just by selling its "poles and wires" asset.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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