SYDNEY/TOKYO -- A wave of consolidation is sweeping across Australia's energy sector as leading players from BHP to Santos shift resources from oil and gas to greener fields like electric cars and hydrogen.
But as they gear up to fight global warming, analysts are concerned that takeover battles risk overheating corporate valuations.
Australia logged 1,180 mergers and acquisitions in January-September, according to financial information company Refinitiv. The figure is 16% higher than for the same period in 2019, before the coronavirus pandemic began, and is the highest of any January-September tally in a decade.
Companies are "preparing themselves for the energy transition," Andrew Harwood, research director at U.K.-based Wood Mackenzie, said of the trend.
They want to generate "enough cash flow to satisfy shareholders, but also to be able to accelerate their investments in sort of low carbon and alternative sources of energy," he said.
BHP Group is one example of this trend. Back in March, CEO Mike Henry bullish about the company's oil and gas portfolio. "We see there being really strong value and returns to be created for shareholders over the next decade and likely beyond that," he said.
But BHP is now spinning the business off through an all-stock merger with compatriot Woodside Petroleum amid a growing global push to decarbonize.
BHP had also planned to sell its thermal coal business for an "appropriate price," according to a source familiar with the matter. But it is struggling to find buyers for some of its assets. The company is believed to be offloading its oil and gas business now before its assets lose value, in order to shift more of its resources into fields like nickel, which is used in electric vehicle batteries, and potassium, which is used in fertilizer.
Meanwhile, Santos is merging with Papua New Guinea-based Oil Search. It expects to unlock up to $115 million in synergies a year by streamlining their investments in fossil fuels and other measures.
"Santos and Oil Search will be stronger together and will have increased scale and capacity to drive a combined disciplined, low-cost operating model and unrivaled growth opportunities over the next decade," said Santos CEO Kevin Gallagher. The companies aim to use the financial gains from the merger to fund carbon capture and storage projects and hydrogen-related projects.
Scale has historically been a challenge for Australian energy companies. Woodside, the country's largest player, made $3.6 billion in revenue in 2020 -- less than 2% of the over $180 billion earned by Exxon Mobil and BP that year.
Current trends in Australia's energy sector "will create a more resilient and efficient group of operators, with lesser numbers overall as the industry consolidates over time," according to the Macquarie Group investment bank.
Smaller companies could also benefit from consolidation among top players. They can "grow by feeding on the noncore assets" offloaded in the process, Harwood said.
But there are concerns that the acquisition market will become overheated in the quest for decarbonization. The bidding war over power transmission company AusNet Services is one example.
Gas pipeline operator APA Group offered 2.32 Australian dollars ($1.74) per share on Sept. 1. That was countered with a AU$2.50-per-share bid from Canada's Brookfield Asset Management, announced by AusNet on Sept. 20. The next day, APA sweetened its bid to AU$2.60 per share.
Electricity from newly developed solar or wind projects will require investment in power transmission infrastructure. Both APA and Brookfield anticipate rising demand from that dynamic.
"The proposal would... accelerate the [AU$20 billion] growth in electricity transmission infrastructure needed to support the decarbonization of Australia's economy, " APA said in a statement last month, indicating that it will not back down.
It is likely that more of these takeover battles will appear in sectors linked to decarbonization. There is a risk that prospective buyers will offer bids that will not be justified by future earnings, which would ultimately lead to losses for the parent.
Hydrogen power and carbon capture are next generation technology that do not offer clear pathways of recouping investments. The economic recovery from the COVID pandemic has led to tight power supplies, so Australia is expected to depend on fossil fuels for at least the short term.
The deal between BHP and Woodside indicates that the latter believes it can still profit from oil and gas fields for the time being. Green energy companies face a task of quickly developing a demonstrable growth market.