Australian Shale Assets Next Big Thing for Investors

Surging prices for shale gas and oil properties in the US are turning owners of deposits as far away as Australia into potential takeover targets.

While shale assets in Texas sold at $US25,000 an acre this year and a holding in Ohio and Pennsylvania changed hands at about $US15,000 last month, shale properties owned by Australia's Beach Energy can be bought for $US406 per acre, according to data compiled by Bloomberg and DNB Markets. Energy companies are pursuing unconventional assets such as shale after the average price for Brent oil futures reached a record in 2011 and the cost to find and develop oil jumped, the data show.

With explorers from Senex Energy to Drillsearch Energy also owning pieces of an estimated 400 trillion cubic feet of recoverable shale-gas resources, Australia is poised to commercialise its holdings on a “large scale,” according to the US Energy Information Administration.

While the country's explorers are trailing their US counterparts in development by several years and face higher drilling costs, Asian demand for natural gas may lure energy and power producers to Australia's shale properties, the Commonwealth Bank said.

“This could be the next big thing,” Mark Carnegie, former head of Lazard's Australian private equity business, said from Sydney. Carnegie manages a $170 million venture capital fund at M.H. Carnegie & Co., which owns about 11 per cent of Perth-based shale explorer Strike Energy.

“There's no reason the economics shouldn't be the same in Australia as they are in the Eagle Ford,” shale region in Texas, he said. “If we get anything like that we're going to end up with a phenomenal return.”

Fracking technology

Advances over the past decade in the technology for hydraulic fracturing, or fracking, used to free gas and oil trapped in dense shale-rock formations, has helped spur the increase in prices for shale acreage. The process involves fracturing the formation by injecting water mixed with sand and chemicals to keep the cracks open and petroleum flowing.

Companies are also expanding into unconventional drilling areas after Brent oil futures, the London-traded benchmark for two-thirds of the world's crude, jumped 26 per cent to an average of $US110.91 a barrel in 2011, the highest level on record.

Japan's Marubeni Corp. this month agreed to pay as much as $US25,000 an acre for a stake in an Eagle Ford shale oil and gas property, a 19 per cent increase from the per-acre price paid for a nearby holding by Marathon Oil Corp. last year.

Cooper Basin

Beach Energy, Senex and Drillsearch each own resources in the Cooper Basin, Australia's main source of onshore gas. The area is already connected by pipeline to Sydney and other eastern markets, according to an April EIA report, which found that Australia has “geologic and industry conditions resembling those” of the US and Canada.

“The country appears poised to commercialise its gas shale resources on a large scale,” it said.

Natural gas demand on the east coast of Australia may triple by 2020, driven by exports to Asia and Australia's move to tax carbon emissions, Commonwealth Bank said in a note last month.

BG Group, ConocoPhillips and Santos are building more than $US50 billion of projects on the coast of Queensland that will convert gas extracted from coal deposits into liquid so it can be shipped to Japan, China and South Korea. Arrow Energy, owned by Royal Dutch Shell and PetroChina, has said it plans a fourth venture.

Oil India

Those projects may need Cooper Basin shale-gas to underpin expansion plans, said Lucas Huang, a Singapore-based analyst at DNB Markets. Utilities and international oil companies may also seek Cooper Basin shale gas properties, according to Commonwealth Bank analyst Luke Smith.

Oil India Ltd., which said this week that it plans to spend as much as $US200 million on its first shale-gas investment in the US, has also asked banks to propose investments in Australia.

“We'll see consolidation because the LNG plants, we think, will be under-supplied with gas,” said Tim Hannon, who manages a $100 million hedge fund at Melbourne-based Evergreen Capital Partners. “If you're a large LNG player in Australia you might want to get in first and make an acquisition.”

Beach Energy, Senex and Drillsearch make up about 15 per cent of the Evergreen fund's holdings, and Hannon said he plans to invest in more shares of Australian shale gas companies. New Standard Energy, AWE and Buru Energy are among other potential investments, he said.

'First mover'

Beach Energy, whose 61 per cent gain in the past 12 months through yesterday was the biggest in the S&P/ASX 200 Energy Index, has held talks with companies that may help develop its shale assets, Managing Director Reginald Nelson said last year. The company has a market value of about $1.52 billion.

“We're a first mover in shale gas,” Adelaide-based Beach Energy said in an e-mailed response to questions. “We're happy to see continuing corporate momentum surrounding shale gas assets in Australia, bringing further attention to a significant new resource.”

Senex has also held discussions with international energy producers for potential partnerships, Ian Davies, managing director at the Brisbane-based explorer, said last year.

“You've seen waves of consolidation with coal-seam gas in Queensland, and given the scale of the resource potential in the Cooper Basin, it's a reasonable extension you will see farm-outs and further consolidation there,” Davies said this week.

'Strong landholding'

Beach Energy in August reported an initial 2 trillion cubic feet of potential resources in its Cooper Basin shale gas acreage after the drilling results from two wells exceeded projections. The company, active in eight countries including the US, Egypt and Tanzania, also plans to spend $355 million on development and exploration in the year through June, more than double spending in fiscal 2011.

The Australian oil company this month completed its acquisition of Adelaide Energy Ltd., gaining shale gas exploration stakes in the Cooper Basin that Beach Energy said in November would consolidate its “strong landholding.”

Senex, whose market value has more than doubled in the 12 months through yesterday to $733 million, may be an acquisition target for power supplier AGL Energy Ltd., the Australian Financial Review reported in its Street Talk column on January 16, without citing any sources. Davies and AGL declined to comment.

Drillsearch, cited as a potential acquisition target by Commonwealth Bank, signed a partnership accord with BG Group in July. The U.K. gas producer agreed to invest $130 million to search for unconventional gas in the Cooper Basin, Drillsearch said. The Sydney-based company's shares have risen 44 per cent in the last year, valuing it at $298 million yesterday.

'Big balance sheets'

Brad Lingo, managing director of Drillsearch, didn't return a telephone message left yesterday.

Conoco, Mitsubishi Corp. and Hess Corp. have also agreed to fund shale gas exploration through ventures with Australian partners. Further deals will probably follow, said Andrew Williams, an analyst at RBC Capital Markets in Melbourne.

“If you have a look at what's happening globally, these assets are cheap, and the big international companies are cashed up,” said Williams, who has an “outperform” rating on Senex. “It's going to take big balance sheets to exploit it.”

Beach Energy, which has about 875,000 acres of Cooper Basin shale according to DNB data, excluding the assets of Adelaide Energy, would be among the explorers most in demand when global companies seek out Australian shale, Huang said. DNB values the company's Cooper Basin shale holdings at $342 million, or $391 an acre.

$US15,000 an acre

Beach Energy's bid for Adelaide Energy valued the target's shale holdings at $761 an acre, Huang estimates. Total SA on December 30 acquired a 25 per cent stake in 619,000 acres in the Utica shale for about $US15,000 an acre, including drilling costs, data compiled by Bloomberg show. That's more than four times the average price from seven transactions in the Ohio and Pennsylvania shale region from March to September 2011, according to IHS Inc. data.

The US projects still deserve higher multiples than those in Australia because they are already producing or in a more advanced stage of development, according to Huang. To draw interest from global oil companies, Australian shale gas explorers need to cut drilling expenses and boost reserves, which may take at least three years, he said.

Drilling in Australia may cost $US10 million to $US15 million a well, compared with $US4 million to $US6 million in parts of the US, Morgan Stanley estimated in June.

'On the radar'

“We are seeing signs that drilling service providers are looking to work with shale gas operators to slowly move the costs down,” Huang said. “They might not be takeout targets for the large majors now, but in another three, four, five years, they will look attractive.”

PetroChina and China Petroleum & Chemical Corp., known as Sinopec, may also seek to purchase assets, he said. Beijing- based spokesmen for both said the companies are interested in shale and other natural gas sources.

“PetroChina is very interested in unconventional natural gas resources,” said spokesman Mao Zefeng. Sinopec “will pick the right time to acquire the right assets,” Sinopec's Huang Wensheng said. Both declined to comment on speculation or specific projects.

While Australian shale project developers must overcome technical hurdles and demonstrate that the projects can be commercially successful, they are “on the radar screens” of international oil producers, John Young, a Melbourne-based analyst at Wilson HTM Investment Group, said.

“As they do more work, and there's more confidence these assets will be commercial, people will be prepared to pay more for them,” he said.

Source: Bloomberg