AUSTRALIA’S M&A wave is set to continue next year with surging...

AUSTRALIA’S M&A wave is set to continue next year with surging Chinese winter LNG demand boosting spot and short-term LNG pricing impacting east coast domgas, providing the most positive project investment backdrop seen for some years. High east coast prices are whetting Chinese interest, fuelling M&A. RBC Capital Markets has a constructive view on energy stocks next year, believing the cycle has "hit its low" and is now entering the second full year of recovery - a sentiment which Australian oilers appear to be tapping with merger and acquisition activity surging on both sides of the country.

The firm sees global inventories dropping and oil prices starting to respond to the tightening supply-demand picture as excess capacity throughout the energy chain continues to be absorbed.
M&A has increased towards the tail end of 2017 and a number of those situations remain live into 2018.
A number of Australian east coast gas pure plays witnessed their share prices surge over the year as control bids in the sector validates the strategic nature of their assets.
RBC says the M&A is increasingly Chinese-led or backed in what the bank sees as a regional gas aggregation strategy with three regions of Australia now connected to Asian Basin markets via established LNG infrastructure.

Gladstone LNG operator Santos and AWE have both been the target of Chinese investment, which took strong positions in the former last year with Hony Capital and ENN Group taking stakes that added up to just short of the 15% test point under the Foreign Takeovers Act.
AWE, meanwhile, was targeted by China Energy Reserve and Chemical Group which upgraded its offer to take over the Waitsia operator to 73c, before being bested by Mineral Resources in a cash and share scheme offer of 83cps this week.
CERCG had even hoped to use Waitsia gas to power east coast users by shipping LNG containers around the coast, as it also supplied with Western Australian miners and remote communities.
Meanwhile Adelaide oiler Beach Energy and Origin Energy executed a large transfer of conventional exploration and production assets this year via the Lattice Energy deal which should be secured early next year.
Beach has been perhaps the most active, yesterday announcing a deal that will see it take over the Otway gas project in a clear play for increased leverage for an east coast gas market which the competition regulator believes is still paying too much.
While Shell and PetroChina finally agreeing to commercialise their massive Arrow Energy gas through Queensland Curtis LNG for both export and domgas markets is expected to alleviate things, China's latest energy use and LNG import figures appear to have blown all that out of the water, with Deutsche Bank even suggesting LNG demand could overtake supply as early as next year.

This means LNG spot will again be on the rise soon than expected, which means east coast gas prices linked to LNG via Queensland's megaprojects will also rise.

The strength of LNG demand in Asia has been a stand-out theme of 2017, with Chinese growth the strongest and traditional buyers Japan and South Korea also returning to growth, plus demand from new buyers like India, Pakistan, Vietnam and the Philippines.

Regulatory reform and government mandated coal to gas switching is driving China's domestic gas demand up by more than 20% year-on-year and LNG imports running more than 50% on the prior year.
RBC only expects those themes to continue over the next few years as gas increasingly penetrates the coal-heavy primary energy mix in China and India, which has a big stake in Queensland's coal sector, which is believed to be under threat.
While the treat of a gas shortfall on Australia's east coast has declined over 2018/19, RBC still expects prices to remain high with long-term pricing to be close to the LNG netback pricing level of A$7-9/GJ.
"Price levels are promoting investment in gas projects that result in growth being back on the agenda of Australian E&Ps after an extended period of balance sheet repair and cost out," RBC said in a client note yesterday.