robert merrick - herbert smith freehills
TRANSCRIPT
Rob Merrick, Head of Global Energy Group, Partner, +61 8 9211 7683, [email protected]
14 SEPTEMBER 2016
SEAAOC 2016
OUTLOOK FOR AUSTRALIAN OIL & GAS M&A
2
OIL PRICE FALL = M&A RISE?
Conditions ripe
for M&A?
3
UPTICK IN M&A?
After the Meltdown, an
era of opportunity for
mergers and acquisitions
The Australian, September 2008
Rich pickings on
horizon for oil and gas
Sydney Morning Herald,
November 2008
Low oil prices may
spark a frenzy of Australian
oil and gas acquisitions
Business Insider Australia,
December 2014
Oil price slide sets the
stage for M&A
Financial Times, September 2014
Oil slump spurs wave
of merger deals around the
world
The Australian, December 2014
4
BUT THE REALITY HAS BEEN QUITE DIFFERENT…
Australia – Number of deals
8
7
5
6
12
13
11
6
9
6
8
66
15
10
9
12
11
6
10
8
11 11
6
10
7
6
9
12
13
4
9
13 13
6
3
12
6 6
21
16
17
12
7
8
12
4
0
5
10
15
20
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Source: Capital IQ
5
Asia Pacific – Number of deals
24
20
26
23
20
33
27
30 30
26
22
1010
34
28
33
24
33
18
27 27
22
26
17
26
16 16
35
33
41
24
2122
31
18
6
37
2423
40
42
36
34
27
38
21
10
0
5
10
15
20
25
30
35
40
45
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Source: Capital IQ
6
WHY HAVE WE NOT SEEN AS MANY DEALS AS EXPECTED?
Oil price volatility and unpredictability
??
7
WHY HAVE WE NOT SEEN AS MANY DEALS AS EXPECTED?
We are not an as attractive destination as elsewhere …
Source: Beyond Borders: The Future of Deal-Making
Herbert Smith Freehills 2016
http://www.hsfbeyondborders.com/
8
What sellers are offering…(stressed, cost-saving, portfolio rationalisation)
• mid-to-late life production assets with
near-term capex or decommissioning
exposures, or
• gas development opportunities without
a settled development plan /
commercialisation pathway, or
• exploration
What buyers want…(cash-rich independents, private equity / capital, hedge
funds)
• spend of US$250m – US$1b, and
• production, and
• preferably oil, and
• no near-term capex or
decommissioning, and
• exploration upside
WHY HAVE WE NOT SEEN AS MANY DEALS AS EXPECTED?
9
SO WHAT IS THE OUTLOOK?
At the risk of sounding like a broken record, conditions are still ripe for
upstream M&A:
• forward curve is stabilising
• asset write-downs are being booked
10
STRUCTURING, VALUATION AND RISK ALLOCATION INFLUENCERS – PACKAGE DEALS
• Exit of entire portfolios – take the good with the bad
• Some restructuring may be required to prepare the package for sale
• Need to manage pre-emption risks on individual assets within the
package (price allocation)
11
STRUCTURING, VALUATION AND RISK ALLOCATION INFLUENCERS – PRE-EMPTION
• Buyers have little appetite for pre-emption
• Sellers must:
- avoid e.g. Texas two-step, economic interests, holdco sales; or
- minimise risk e.g. waivers, avoid disputes
12
STRUCTURING, VALUATION AND RISK ALLOCATION INFLUENCERS – VALUE BRIDGING
• Sellers want premium to forward curve whereas Buyers want to pay
towards the lower end of the curve
• Valuation gaps bridged by:
- contingent payments
- ORRs
- warranty protection and purchase price retention
- risk sharing (some creative!)
13
STRUCTURING, VALUATION AND RISK ALLOCATION INFLUENCERS – DECOMMISSIONING
Greater focus on exposure and impact on valuation
Starting point is that all structures, equipment and property must be removed
+
significant expense arising at an uncertain point in time
+
refundable PRRT credit capped at PRRT paid by actual tax payer
+
smaller, less financially robust players attracted to these types of assets
need to find solutions share risk
massive problem
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DECOMMISSIONING - RATCHET MECHANISM EXAMPLE
• Ratchet:
- Buyer responsible for first slice of decommissioning costs relating to the transferred
interest
- The next slice borne by Seller (70%) and Buyer (30%)
- Any other decommissioning costs and any other losses relating to decommissioning
borne by the Buyer
• Cash call mechanism: Once threshold decommissioning expenditure has been reached
(requiring Seller contribution), Buyer can cash call Seller for contribution to
decommissioning invoices. Back to back cash calls with JOA with supporting evidence to
be provided to the Seller and paid either directly to the Operator or to the Buyer
• Seller Contribution to decommissioning security: Seller support to decommissioning
security agreements by posting security on behalf of Buyer covering Seller’s expected
contribution to decommissioning costs.
• Transfer rights: Rights are transferable to acquirer of the licence interests
• Buyer default: Exclusion of liability in case of Buyer default under the agreement
15
STRUCTURING, VALUATION AND RISK ALLOCATION INFLUENCERS – CONSENTS
• Regulators and co-venturers focussing on:
- technical capability orderly transition of operatorship
- financial capability security
16
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