Chevron Shale Bet Down Under Makes Senex Target: Real M&A

Senex Energy Ltd., Asia’s worst gas exploration stock in the past year, is rebounding after Chevron Corp.’s investment in an Australian shale competitor stoked optimism that it may be the next target.

Last week, Chevron made the biggest single investment in shale in Australia, agreeing to pay as much as $349 million for a stake in Adelaide-based Beach Energy Ltd.’s Cooper Basin prospects. Senex, which also explores in the Cooper Basin, has risen 13 percent since Chevron’s investment fueled investors’ expectations that the Brisbane-based company could lure a buyer, even after its shares had lost 40 percent in the prior 12 months, according to data compiled by Bloomberg.

Chevron and global explorers including ConocoPhillips and PetroChina Co. are entering Australia in search of new sources of the gas that’s extracted from rock formations. According to Commonwealth Bank of Australia, the Cooper Basin may help supply $60 billion of projects to export liquefied natural gas from Australia’s east coast, where the commodity is forecast to double in price this decade. That shale potential is poised to attract acquirers to Senex, which yesterday had a market value of A$770 million ($788 million), said Royal Bank of Canada.

“We’re in the most rapidly growing, industrializing part of the world and that speaks to power needs and industrial needs for gas” across Asia, Chris Flynn, a partner at law firm Gilbert & Tobin in Sydney who specializes in energy and resources, said in a phone interview. Chevron’s investment “probably is the beginning of more trades” and Senex “is among the obvious potential targets.”

Shares Rise

The stock today climbed as much as 3.7 percent to its highest in five weeks, before closing up 0.7 percent at 68 cents. Australia’s benchmark S&P/ASX 200 index fell 0.2 percent.

Senex produces oil and explores for gas from shale formations and coal deposits. The company on Feb. 25 posted record six-month profit of A$23.4 million and said it expects to exceed a full-year oil production target of 1 million barrels.

The same day, Chevron agreed to acquire stakes in two blocks covering about 810,000 acres in the Cooper Basin, joining Beach’s natural gas exploration campaign in central Australia. It marked Chevron’s first shale investment in the country.

“Senex represents the last mid-cap opportunity of scale that’s independent,” Andrew Williams, a Melbourne-based analyst at RBC, said in a phone interview. “It looks very attractive.”

Andrew Barber, a spokesman for Senex, didn’t respond to an e-mail seeking comment.

Cooper Basin

Explorers in Australia are trying to apply methods successfully used in the U.S. -- a combination of horizontal drilling and technology for hydraulic fracturing, or fracking -- to extract gas trapped in shale formations. Australia may hold about 400 trillion cubic feet of shale gas, the world’s sixth-biggest potential reserves, the U.S. government estimates.

The Cooper Basin, a 130,000-square kilometer zone straddling the border of South Australia and Queensland where Senex and Beach are exploring, “stands out as the most prospective and commercially viable region for shale gas development in Australia,” the government’s Commonwealth Scientific & Industrial Research Organization said last year.

Cooper Basin gas tapped by conventional means is already supplied by pipeline to South Australia, Queensland, New South Wales and Victoria. While BG Group Plc, Santos Ltd. and ConocoPhillips are converting coal-seam gas in Queensland to liquid form to export the fuel to Asia, they may turn to Cooper Basin supplies to expand their ventures, according to a Jan. 11 report from Commonwealth Bank of Australia.

Skeptical Traders

Gas from the basin also may be needed to address a looming shortage with New South Wales moving to restrict access to some areas for drilling, analysts at the bank wrote.

“I’d expect the whole Cooper is on the radar of anyone who has participation in those projects, along with people looking to get exposure globally to LNG,” said Tim Schroeders, who helps manage about $1 billion at Pengana Capital Ltd. in Melbourne, including Beach shares. “The LNG developments on the east coast will require more gas, and if the unconventional play in the Cooper proves up, it’s ideally placed.”

Still, Australian investors remain skeptical because of high drilling costs relative to the U.S., a lack of rigs and the remote location of the fields. The country may be a decade away from producing oil and gas from shale on a large scale, Wood Mackenzie Ltd. said last year.

Seeing Potential

Prior to Chevron’s Feb. 25 investment in Beach, Senex shares had fallen 40 percent in a year, the worst performance among exploration and production companies with market values of more than $500 million in the developed Asia Pacific region, according to data compiled by Bloomberg.

Shares of other Australian shale explorers also fared poorly. AWE Ltd., which is exploring for shale gas in Western Australia, dropped 21 percent during the same period, while Beach was down 22 percent.

Chevron’s investment in Beach shows that companies see potential where stock investors don’t, Krista Walter, an analyst at RBS Morgans Ltd., said in a phone interview from Brisbane.

“The market hadn’t really been placing too much value on this exploration acreage,” she said in a phone interview. “This shows that even before it’s commercial, there is value.”

Linc Energy Ltd., exploring for shale in the nearby Arckaringa Basin in South Australia, has been contacted by about 70 companies from North America to India to fund the development of the prospects, Chief Executive Officer Peter Bond said in an interview this week.

Gas Prices

Critical to the long-term prospects of Australia’s shale industry is the bullish outlook for natural gas prices, said Williams, the RBC analyst. If gas fetches over A$8 a gigajoule, shale explorers can justify development costs, while at A$4 a gigajoule, they probably can’t, Williams said.

Domestic gas prices on Australia’s east coast may reach A$10 a gigajoule between 2014 and 2019 after the LNG projects in Queensland begin shipments to Asia, according to Macquarie Group Ltd. East coast gas rose to a range of A$4.10 to A$5.08 in the fourth quarter of 2012 from A$2.50 to A$3.50 a year earlier, according to Adelaide-based consultants EnergyQuest.

Shale gas is “going to work, given where gas prices are going to go,” Williams said. “There’s a demand dynamic going on here.”

‘Free Option’

AWE may also appeal to buyers seeking unconventional assets, said Williams and Flynn, the lawyer at Gilbert & Tobin. The Sydney-based company has a market value of A$694 million and is exploring in the Perth Basin, a region about 300 kilometers north of Western Australia’s state capital. Shares of AWE rose 2.6 percent the day of the Chevron announcement, when Senex added 7.5 percent, its biggest gain in six months.

The proximity of the basin to Perth and tightening supply make new sources of gas in the area “commercially attractive,” according to the report last year by CSIRO. Western Australia’s gas demand is projected to double between 2010 and 2030, the state government estimates.

AWE shares have dropped so much that its unconventional assets are “essentially a free option” for investors, said Mark Greenwood, an analyst at Citigroup Inc. in Sydney.

AWE fell 1.5 percent today to A$1.31 in Sydney trading.

The company expects to consider a shale partnership in Western Australia in mid-2013 after completing some tests and may bring in a partner this year, Managing Director Bruce Clement said in a phone interview.

‘Corporate Opportunity’

“We’re aware that there is some interest in the test results,” Clement said. “We believe as a company we’re worth a lot more than what we’re trading for.”

Similarly, even after rising 13 percent since Chevron and Beach announced their agreement, Senex shares at their closing price of 67.5 cents yesterday include no value for the company’s shale gas assets, said Williams at RBC.

“The market is in wait-and-see mode,” he said. “That opens opportunity up for corporates, without a doubt.”

Citigroup’s hedge fund sales desk in Sydney in December named Senex among 19 top Australian takeover targets for 2013. Its unconventional assets “could be a company maker,” Citigroup said in a Dec. 17 report that named Royal Dutch Shell Plc, Santos and Exxon Mobil Corp. as potential buyers.

Representatives for Shell, Santos and Exxon based in Australia all declined to comment on speculation.

Still, partnerships with explorers such as Senex and AWE may be more likely than takeovers, said Benjamin Wilson, a Sydney-based analyst at JPMorgan Chase & Co.

“It’s hard to justify paying a big premium for a takeover if there is the option of getting access to the asset,” he said in a phone interview.

Chevron’s recent move highlights that buyers in the industry are willing to take the risk and has made Senex more attractive as a takeover target, said Williams at RBC.

“There’s a deal to be done,” he said. “The industry is seeing something that perhaps the market is overlooking.”

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