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Energy deals ‘the tip of the iceberg’

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After a deal spree that catapulted Woodside Petroleum and Santos respectively into major international oil and gas players, Credit Suisse predicts both a greater focus on green energy sources and a sale of stakes in major un­developed fields. Australian energy producers are tipped to accelerate a shift to green generation sources in 2022 while legacy fossil fuel projects will be sold off as companies prioritise high-grade assets. Still, green growth will not come cheap, with companies juggling a high entry cost and potential investor scepticism over inte­grating new energy projects into legacy businesses.“In 2022 we expect an expanded focus upon energy transformation opportunity sets, and portfolio rationalisation at legacy energy assets,” Credit Suisse analyst Saul Kavonic said.“Legacy energy businesses will face the increasing dilemma of how to establish a pathway to a green future amid lofty valuations in green sectors, and equity markets that are reluctant to ­ascribe a green premium to a green division that sits within a larger legacy energy company, but are willing to ascribe green premiums to such divisions if they were stand-alone.”Santos sold its $21bn merger with Oil Search as a deal that arms it with a bigger balance sheet to navigate accelerating climate pressures, while Woodside, midway through a $40bn merger with BHP Petroleum, plans to spend $US5bn ($7bn) on hydrogen and carbon capture this decade as it seeks to pivot into clean energy. While M&A has given the Australian duo extra clout, they face competition from several of the world’s biggest energy players in the UK’s Shell and Spain’s ­Iberdrola, which are expected to compete strongly for any green assets or businesses that come to market.“The ambitions of the large multinationals with a strategic focus on Australia’s energy transition, like Shell and Iberdrola, are far from finished, and we could expect more organic and inorganic expansion across the Australian energy market,” Mr Kavonic said.While Shell is best known for oil and gas, it has identified Australia as one of six target markets where it will look to create an integrated electricity supply business with the potential to scoop up a “mass market” customer base through dealmaking.Major utility Iberdrola scooped up renewable generator Infigen last year and recently lost out to Shell for Meridian Energy’s Australian assets, signalling intent to grow its local arm.Woodside under chief executive Meg O’Neill could roll out a laundry list of oil and gas fields to sell as it looks to sharpen its portfolio, with a potential exit of long-stalled fields such as Western Australia’s Browse on the cards, along with trimming stakes in Mexico and Trinidad & Tobago.“Post merger, we expect Woodside will look beyond a Scarborough selldown and to selldowns in Trinidad and Tobago to enable joint venture alignment for development via Atlantic LNG, and at Trion to manage risk profile ahead of a final investment decision, and seek a fundamental joint venture reshuffle at Browse to allow for development via Ichthys, which could perhaps see Woodside exit Browse in its entirety,” Mr ­Kavonic said.Santos may have big carbon capture and storage projects in the pipeline, but could also make another big bet on traditional oil and gas assets through swooping on a South Australian competitor in the Kerry Stokes-controlled Beach Energy.“We think Santos’s ambition to increase in scale is not over, and further M&A targets will be sought post Oil Search merger, which could include Beach Energy in the new year,” Mr Kavonic said.More broadly, legacy assets across the commodities sector including all BHP’s coal assets could face the chopping block as climate pressures on resources companies intensifies. “Legacy fossil fuel assets will be increasingly high-graded, and we see scope for selldowns or exits from lower priority assets such as Alaska, Browse and Sunrise in the oil space and a ­divestment of all thermal and metallurgical coal assets by BHP, as ‘dirtier’ assets continue to migrate their way into ownership structures less exposed to ESG headwinds,” Mr ­Kavonic said.While consolidation in oil and gas has been the big theme this year, green and new energy businesses across hydrogen, batteries and carbon may look to list on the ASX.“New energy transition focused businesses may continue to look for monetisation and growth pathways via listings, and we could see new equity market entrants in sectors such as carbon farming, battery minerals and ­hydrogen,” Mr ­Kavonic said.Record gas and thermal coal prices in the second half of 2021 are likely to put a rocket beneath the profits of Australia’s fossil fuel giants, with the federal government’s chief resources economist, Russ Campbell, tipping the value of the nation’s gas exports to more than double in the current financial year, to $63bn.The value of thermal coal exports is also expected to double this financial year to more than $35bn, according to the most recent Resources and Energy quarterly released by Mr Campbell, despite an expected 10 per cent fall in export volumes, to 192 million tonnes.But record prices would ease when the northern hemisphere winter passed, along with the ­associated energy crisis in Europe and parts of Asia, Mr Campbell said.“Asian LNG spot prices and oil-linked contract prices are expected to moderate in 2022 and 2023, as the LNG market remains well supplied and oil prices stabilise around $US70 a barrel,” Mr Campbell said.Despite record pricing and the megamergers that have bolstered company balance sheets and catapulted Woodside and Santos onto the world stage, Mr Campbell also warned that uncertainty still surrounded the next wave of investment in the Australian energy sector.But he said the outlook was brighter in 2022 than a few years ago, when weak prices forced a swath of deferrals on final investment decisions in the oil and gas sector.



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