Consultancy Wood Mackenzie has identified the energy transition as one of three key drivers that will shape future merger and acquisition activity in Australia.

Wood Mackenzie noted the Australasia market currently has a range of late-life, high carbon, and marginal assets, all struggling to attract capital as increased scrutiny on carbon emissions is set to transform the upstream corporate landscape.

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“We have reached a turning point, with new players poised to enter and many of the upstream pioneers of the region under pressure to re-shape portfolios,” said Wood Mackenzie senior analyst David Low.

“The question now is, how fast will this transformation happen?”

Net-zero ambitions

European majors are leading the charge to restructure portfolios in order to meet new business priorities and goals, including the ambition to achieve net-zero carbon emissions.

“A lighter upstream carbon footprint is essential to achieving this goal,” noted Low.

“The majors’ Australasian portfolios are up to two times more carbon-intensive compared to their global average. If energy transition targets are to be hit, this means more upstream M&A activity in region.”

Among the European majors targeting net-zero emissions are industry giants BP, Total and Shell, which all hold large liquefied natural gas assets in Australia with high carbon footprints.

However, with the companies also having ambitions to increase their global LNG portfolios, Wood Mackenzie notes they could be led to choose which is more important, hitting growth targets or emissions goals, with the two not currently seen as being mutually compatible.

However, Low also points out the majors have stressed there will be no “fire-sales” of assets if they do look to trim their portfolios, stating an unwillingness to sell if their asset values are not met.

Carbon intensity of majors in the Australasian region (2020-2025) Photo: WOOD MACKENZIE

More assets to enter the market

While the energy transition could reshape the upstream landscape over the longer term, Wood Mackenzie has also highlighted portfolio rationalisation and deleveraging of balance sheets as other factors driving the M&A market in the near-term and pushing non-core assets onto the market.

It claims those two drivers, combined with the energy transition, could see a further US$17 billion of assets in Australia enter the market, in addition to the US$10 billion already up for sale.

Among the key assets listed for sale already are Chevron’s stake in the North West Shelf joint venture, as well as ExxonMobil and BHP’s respective assets in more than 50-year old Gippsland basin joint venture.

“The goals of most upstream operators are getting simpler: squeeze maximum value from existing operations, and divest mature, non-core, onstream low-margin and/or carbon-intensive assets where possible,” Low said.

Wide range of buyers

With opportunities for mergers and acquisitions on the rise in Australia, Wood Mackenzie has identified four types of buyers - infrastructure funds and utilities, institutional investors and private equity, domestic buyers, and regional buyers.

However, Low warned that, despite the wide range of buyers, sealing deals could still prove to be a challenge in the current market conditions.

“One of the biggest challenges we see is price discovery,” he said.

“Asset prices have unsurprisingly trended down post-crash, albeit with far less overall deal-flow. The implied long-term oil price within recent transactions is around US$50 per barrel of oil price equivalent , down from around US$60 per boe in 2019.”

Wood Mackenzie also noted that as production continues to deplete and the energy transition continues to take a higher priority, it is unlikely asset valuations will increase into the future.

However, the advantage for Australia is that it still represents a politically stable OECD country, which Wood Mackenzie claims will continue to help facilitate investment from a wide range of institutional investors into the future.