Consolidation between Australian companies, such as the deal brewing between Neon Energy Ltd. and MEO Australia Ltd., are overdue to become a more common sight on the Australian oil and gas market, according to the CEO of one of the companies.
The merger creates a cashed up junior, with prospective assets, at a time when industry experts believe there are opportunities on the Australian market for increased merger and acquisition (M&A) activity. While a new entity with exploration and production (E&P) exposure has been established, the two companies have been open about intentions to explore more deals.
Neon chief executive officer Ken Charsinsky expects the merger to be completed in the next three or four months now that an unsolicited offer from private Australian investment company Evoworld has been voted down by the company’s shareholders.
Charsinsky said Neon’s cash position of more than $21.6 million (A$25 million), which had grown through the sale of its U.S. assets and a favorable settlement on a liability on assets in Vietnam, put it in the position to look for opportunities. “We found ourselves with quite a bit of cash but no assets so it was the perfect time to pursue opportunities that we had been working on in the background,” Charsinsky told Rigzone.
Just as Neon was going to pursue these deals it was approached with the Evoworld offer, which Charsinsky says for a variety of reasons the company did not want to pursue, even before the offer was blocked by shareholders. “With MEO, the result will be a cashed up junior with good technical team, a story, assets, and cash to do it with during a time when cash is king. We felt it was a very simple, very black and white decision from our point of view,” Charsinsky said.
Charsinsky said the deal would be executed at a time when a lot of junior oil and gas companies on the Australian Securities Exchange (ASX) have assets but no way of funding them. “We have been in the opposite situation where we have capital, and that has created the right time for us to go forward as a good company to merge with,” Charsinsky said.
“As a general matter it has been recognised that the Australian energy market has been ripe for consolidation for several years – it really should have happened a long time ago.
“I think now could be the time when we will probably see it happening more. When you have so many small companies not able to realise value from their assets because they are not able to fund them, putting two, three or even four of them together makes a lot of sense.” Johan Hedstrom, senior oil and gas analyst at Canaccord Genuity in Sydney, agreed, saying pressures such as the falling oil price and difficulty to raise capital have created M&A opportunities for junior companies with “better balance sheets”.
“At the smaller end, in like a Neon situation, there are a lot of companies that are very short of cash, and Neon was a bit of an exception there,” Hedstrom told Rigzone.
“I don’t think in my 30 years looking at the oil and gas sector that I have seen so many companies on the ASX that have a market cap below A$20 million ($17.3 million). They are basically saying that cash is going to be wasted on drilling and recent history for exploration drilling has been disappointing – there’s some merit in that argument.”
Hedstrom believes these factors will trigger more M&A to survive whereas small companies are going to “get together”. He said the Neon and MEO combination was a perfect example of a deal that made sense in this market, with “one company having the cash, the other having assets”.
“It will ensure their survival for longer and they are clearly now looking at some acquisition opportunities, most likely production assets or near development. Those sort of opportunities will be coming at the market,” Hedstrom explained.
“I think we are going to see more opportunities at the junior end, in particular. That’s where I think most of the activity is going to be.”
With the time ripe for more M&A activity between oil and gas companies, there have been signs of growth on the Australian market during 2014.
Australia’s Roc Oil Ltd. was part of a takeover tussle for much of the year, which saw it accept a deal with Chinese company Fosun International Ltd. over a merger with another Australian company, Horizon Oil Ltd. That deal, worth about $332.7 million (A$385 million), finally closed this month and saw Fosun gain oil assets in Australia, Malaysia and the North Sea.
A month ago, Drillsearch Energy Ltd. completed an acquisition of Ambassador Oil & Gas Ltd. in another takeover battle, this one with U.S. company Magnum Hunter Resources. Ambassador’s major asset was a 47.5 percent interest in the Cooper Basin exploration permit PEL 570. On a smaller scale, Australian-focused Mosman Oil & Gas Ltd. acquired unlisted junior Trident Energy Ltd to gain access to its onshore and offshore interests in the country.