The energy and resources sector has been marked by rapid market consolidation, and a spate of activity in a number of emerging areas. Zoe Lyon reports.
Despite some fallout from the economic downturn, an avalanche of merger activity, combined with the rapid growth of a number of emerging areas, has kept energy and resources lawyers on their toes. Overall, workflows have remained relatively steady, but this masks marked dips and booms across the diverse and constantly developing sector
The energy and resources specialists Lawyers Weekly spoke to agreed that it's a prime time for M&A activity, and, though some pockets of the sector have been much busier than others, consolidation has become a notable sector-wide trend.
John Greig, co-head of Allens Arthur Robinson's energy and resources practice, says the economic downturn has been an eye-opener for some resources companies who are taking the opportunity to trim back the fat and refocus on their core operations. "A lot of people are looking at their portfolios and saying 'Let's make my life simpler, let's get rid of the non-core stuff, and let's go back to what I do best'," he says.
For other companies, the decision to divest assets has been driven by necessity - as a means of shoring up the balance sheet to ensure ongoing viability. "The downturn has focused people's minds on insolvency risks," says Freehills energy and resources group head Justin Little. "[So] the last nine months have witnessed a dramatic increase in distressed asset sales as companies attempt to manage their cash requirements through the sale of core and non-core assets."
Meanwhile, says Greig, companies which still have cash to burn - some domestic, but also some from countries such as China and India - are seizing these opportunities to pick up a bargain. "All of the reports we're getting say that there is still a lot of money out there - not so much on the debt side, but on the equity side. So when the right opportunity comes along, people are willing to buy," he says.
Other M&A work is being driven by the massive growth of the LNG industry, and the desire of companies to stake their claim in the LNG hotspots in Queensland and Western Australia.
"There's been an explosion of LNG-related work," says Little. "And what we're seeing now is not just the LNG development work, but a number of project spin-offs related to developments, so there is a lot more M&A activity that is LNG-related."
He points to the coal seam methane LNG developments in Queensland, which have led to a number of high-profile deals, as an example. These include the recent deals struck between Santos and Petronas, Shell and Arrow Energy, and ConocoPhillips and Origin Energy. "It's companies seeking to aggregate their land holdings in that region," Little explains.
Allens' Greig agrees that LNG projects will continue to be a lucrative source of work for lawyers in the field for the foreseeable future. "They're multibillion-dollar projects and they're projects that will last 30 to 50 years... so that's going to drive an awful lot of work there in the next few years," he says.
While M&A activity is strong, Greig says that the downturn has injected some caution into the market, and transactions are taking longer to complete. "There are fewer bidders around ... and those bidders that stay around are obviously keen for the asset, but they're not as likely [as in the boom times] to just stump up a large price. They're more likely to sit there and argue and negotiate for longer, so the transactions are taking longer to come to fruition," he says.
Navigating the downturn
Counteracting the strength in M&A work, says McCullough Robertson resources head Damien Clarke, IPO activity has slowed, and a number of newer projects initiated just prior to the GFC have been shelved, at least temporarily.
Greig concurs, saying that companies are still willing to take new projects through the approval process, but they're hesitant to take them further until market conditions pick up.
"So, for example, if they're currently running an [Environmental Impact Statement], they won't just cancel it then and there. They're saying 'We've invested this much so far, let's go through that process and get the approval out the other side'. So development work is continuing through to the next decision point, then people are taking a pause and making a conscious decision whether to keep on ploughing ahead or not," he says.
Freehills' Little says that projects in the mining sector have been the hardest hit and are the most likely to have been suspended. "In the mining sector, sharp falls in commodities prices have forced a number of operating mining projects to become sub-economic. This factor, and the drive to conserve cash in the face of highly constrained credit markets, has led a number of companies to announce plans to suspend or close operations," he says.
However Clarke is quietly confident that over the next six to 12 months market sentiment will pick up and - with the help of some strategic consolidation - projects will come back online.
"I think demand is going to increase and there will be a need to dust off any of the projects that were put on hold. Therefore there will be some infrastructure issues, there will be some capital issues, and there will be a need to consider appropriate mergers to get some better synergies going," he says.
Little agrees, predicting consolidation in the mid-tier mining sector over the next six to 12 months, as a means for companies to stabilise operations and get projects back up and running. "This consolidation activity will allow companies at differing stages of development to diversify production and development risk, or enter into mergers where there are compatible reserves and capital needs," he says.
Renewable energy and the CPRS
With the Federal Government proposing to extend the renewable energy target, and a bill now on the table, lawyers are expecting a growth in renewable energy projects, particularly with wind projects.
"There was a lull there for a while ... but now, with the expectation that [the renewable energy target] is going to go further, people are starting to line up, get their development sites in place, and come up with plans ..." says Allens' Greig.
Little says that while there are companies waiting on the sidelines to get involved in wind project development, they're hesitant to commit before the bill makes it through the Senate.
"I think it's fair to say that there's a bit of a 'wait and see' mentality. People need legislative certainty before they are prepared to make investment decisions, so while we're getting inquiries, the same sort of deal flow is not there in that sector as yet. But we expect that will be a growth area moving forward," he said.
Greig says there has also been an upswing in the emerging field which he describes as "exotic renewables" - projects based on geothermal or solar energy. "Not a lot of that has come to fruition yet - a lot of that is still in the development stage - but certainly there's more activity in that area.
"Most of the states now have geothermal legislation which has been released over the last couple of years, and Queensland is in the process of going from exploration legislation of geothermal to production legislation. So more and more people are looking at that area," he says.
The introduction of the CPRS is also expected to result in significant workflows for energy lawyers, although, again, legislative uncertainty is holding activity back to an extent.
"I think [the CPRS] will be a big issue," Little says. "I think companies will spend a lot of time and resources in understanding what it means for their companies, and I think across the industry the representative bodies will be really focusing on those issues."
Greig agrees: "There's still speculation with the legislation and so on, but as it's coming closer and closer people are saying 'Well I need to do a transaction, what are the implications?' So there has been a fair bit of work in that area as people come to grips with it."