Origin sells upstream oil & gas assets to Beach for US$1.25 billion

Australian energy company Origin Energy has entered into an agreement to sell its conventional upstream oil and gas business, Lattice Energy, to its compatriot Beach Energy for A$1.59 billion (US$1.25 billion).


As part of the sale, Origin has secured access to a significant portion of Lattice Energy’s future east coast gas production under long-term gas supply agreements to support its domestic gas business, Origin said on the 28th September.


Under the terms of the sale, the transaction will have an effective date of the 1st July.


Completion is subject to satisfaction of customary conditions, including approvals from the New Zealand Minister of Energy and Resources and the New Zealand Overseas Investment Office.


Origin CEO, Frank Calabria, said: “In signing these agreements today, we have delivered on our commitment to divest Lattice Energy consistent with our plan to simplify the Origin business, reduce debt and improve returns to shareholders.


“Importantly, Origin retains access to future Lattice Energy east coast gas production and LPG, to help us continue to meet the energy needs of our domestic customers.


“The sale to Beach represents the best overall value to Origin shareholders, through the combination of the upfront sale proceeds and ongoing supply of gas and LPG, which allows Origin to retain the benefits of our integrated business model.


“Origin and Beach have a long history of working together through joint ventures and existing gas supply arrangements, and we look forward to continuing that relationship as Beach will remain a major supplier of gas to Origin into the future,” Mr Calabria said.


The assets

Lattice Energy’s assets comprise: a 67 per cent interest in the Otway Gas Project, as well as interests in various adjacent exploration permits; a 100 per cent interest in the Halladale, Speculant and Black Watch gas fields; a 42.5 per cent interest in the Bass Gas Project, as well as interests in discoveries located in nearby exploration permits; various interests in the Cooper Basin, including in the Cooper Basin Joint Venture operated by Santos and in the Cooper Basin Origin Senex exploration joint venture operated by Senex; various interests in the Perth Basin, including a 50 per cent interest in the Waitsia Gas Project and a 67 per cent interest in the Beharra Springs Project; various interests in exploration permits in the Bonaparte Basin, including a 5 per cent interest in the Petrel field; and interests in New Zealand, including a 50 per cent interest in the Kupe Gas Project and an exploration permit located in the Canterbury Basin.


Origin paying debts

Origin said that proceeds from the sale will be used to pay down debt, putting Origin on track to reduce adjusted net debt to below US$7 billion by the 30th June, 2018. Net proceeds will also reflect the acquisition of Benaris’ interests in the Otway basin, transaction costs and the closing out of two oil forward sale agreements that Origin signed in 2013, estimated to be US$270 million depending on oil price at the time of completion.


In September Origin had entered into an agreement with Benaris to enable Lattice Energy to acquire Benaris’ 27.77 percent interest in the Otway Gas Project in Australia. The Otway project consists of offshore gas fields, Thylacine in Tasmania and Geographe in Victoria, with gas and liquids extracted using an offshore platform and transported via pipelines to an onshore gas processing plant in Port Campbell, Victoria.


Gas supply deals

As part of the sale, Origin has entered into agreements with Lattice Energy to secure access to long-term gas supply.


Origin will also have certain rights to contract for gas from several exploration permits in the Otway basin in the event they progress to development. In addition, Origin has entered into supply agreements for LPG production from BassGas and Otway, which will continue to supply Origin’s LPG business.


Origin noted that the transaction will include the transfer of all Lattice Energy employees as part of the sale.


Mr Calabria also said: “While Lattice Energy was ready to be a successful independent listed entity, the sale to Beach represented the most attractive option to deliver value to Origin shareholders.”


Following the sale, Origin’s simplified Integrated Gas business unit will comprise its 37.5 per cent interest in Australia Pacific LNG for which it is upstream operator, as well as Ironbark (100 per cent) and Beetaloo Basin (70 per cent) exploration assets. Origin will also retain a number of dormant onshore permits near Port Campbell in Victoria (Heytesbury) which may provide a future opportunity to develop a gas storage facility.


‘Transformational acquisition’

In a separate statement on the 28th September, Beach said it intends to raise approximately US$301 million through a three for 14 pro-rata accelerated non-renounceable entitlement offer to partially fund the acquisition.


The balance of the acquisition will be funded through new committed senior secured syndicated debt facilities of up to US$1.575 billion. These new facilities represent a refinancing of existing facilities and cover general operations, bonding and the acquisition financing.


Beach CEO, Matt Kay, said the acquisition of Lattice is transformational for the company as it executes its strategy to become a premier upstream oil and gas company.


Mr Kay further said: “The transaction greatly enhances our platform for continued growth, delivers a diverse asset portfolio with significant upside and provides material value accretion for Beach shareholders.”


“It establishes Beach as a major supplier of gas to domestic markets, and provides a step-change in production, operating capabilities and geographic exposure. It also provides attractive long-term gas contracts with Origin Energy and other high quality counterparties which underpin returns, cash flow generation and a rapid deleveraging profile.”


According to Beach, Lattice is a complementary portfolio of assets with diversified exposure to the Australian East Coast, West Coast and New Zealand gas markets with a mix of production and exploration assets.


The combination will expand Beach’s footprint, increasing Beach’s 2P reserves by about 200% to 232 MMboe and FY18 production guidance by about 150% to 25-27 MMboe.


Lattice delivers a step-change in operatorship capabilities and expertise, including gas processing and offshore production. Operated production increases from about 50% to about 70% and offshore operations are expected to account for about 50% of productions.


Woodmac: ‘Positive deal for eastern Australian gas market’

Following the announcement of the deal, Wood Mackenzie’s Australasia senior analyst commented: “This deal will transform Beach Energy, in terms of production increase and diversification. Beach is an onshore operator that has historically been focused on oil exploration and development. Beach currently produces 28,000 boe/d, and will acquire assets producing around 46,000 boe/d, bringing up production by 160%.


“The company will become much more gas focused, with gas production increasing from 45% of total production to 66%. It will also give Beach overseas and Western Australian production for the first time.


“The sale will reduce upstream costs and enable Origin to pay down debt and focus on its flagship APLNG CSG-to-LNG project and its gas and power business. It is part of a wider restructuring by Origin, which has raised capital as well as selling Contact Energy in New Zealand for A$1.6 billion.”


Mr Meredith further added: “The sale will 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.


“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 A$6.10


“Although Lattice has a declining production profile, we see this investment leading 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 Energy will provide a base cash-flow which is not linked to oil price. Once these contracts begin to expire from 2021, Beach will have the freedom 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.”