24/08/2015 - 06:49

Quadrant circles key prospects

24/08/2015 - 06:49

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The new owners of Quadrant Energy have spoken to Business News about how the $2.7 billion acquisition came together and their plans for the oil and gas producer.

Quadrant circles key prospects
TEAMING UP: Kate Vidgen and Len Chersky bring plenty of experience to the venture. Photo: Attila Csaszar

The new owners of Quadrant Energy have spoken to Business News about how the $2.7 billion acquisition came together and their plans for the oil and gas producer.

Len Chersky isn’t exactly sure when he got his first phone call about buying Quadrant Energy, but thinks it was Christmas Day.

“I was somewhere in north Queensland,” the Brookfield executive recalls.

Macquarie Capital’s Kate Vidgen isn’t entirely sure either.

“It might have been Christmas Eve, somewhere between Christmas Eve and Boxing Day,” Ms Vidgen told Business News.

Whatever the exact day, it was a time when most people were relaxing with family and friends.

But not these dealmakers, who were working on one of Western Australia’s largest and most innovative M&A transactions

“The timing was incredible, we were getting calls on Christmas Day saying ‘when are you going to sign, when are you going to announce this deal’,” Ms Vidgen said.

“There was incredible pressure to do it quickly.”

It was three months after that flurry of phone calls when Brookfield Asset Management and Macquarie Capital announced the 50:50 purchase of Apache Corporation’s Australian oil and gas assets.

And it was two months after that, on June 5, when the deal closed and the business was renamed Quadrant Energy.

Ms Vidgen, who is global head of principal investments for Macquarie Capital’s resources group, was appointed founding chair of Quadrant, while Mr Chersky, who is head of Brookfield Private Equity in Australia, was one of four Brookfield representatives appointed to the board.

A history of deals

They came together on this transaction in large part because of their history of deal making in WA.

“I personally competed with Kate on the Dampier gas pipeline deal 10 years ago,” recalled Mr Chersky, whose past employers included Babcock & Brown – the ill-fated investment group that famously bought Alinta in a highly leveraged deal just before the GFC.

Ms Vidgen, along with her Macquarie colleague and partner, Robert Dunlop, has extensive experience in WA.

“Robert and I worked a lot with Alinta after they were privatised,” she said.

“We were the key Macquarie people in that four or five-year ride.”

With Macquarie’s support, Alinta completed a succession of bold M&A deals during the early 2000s that took it from a small WA utility to a major player in the national energy sector, culminating in its takeover by Babcock.

Ms Vidgen and Mr Dunlop also worked on the restructured ownership of the Dampier to Bunbury gas pipeline, after Epic Energy – which bought the pipeline from the WA government – was unable to service its high debt.

“That was the genesis of our personal relationship and a broader relationship between Macquarie and Alcoa, and Alcoa is a really important part of this story,” Ms Vidgen said.

Another deal that connected the parties in the Quadrant transaction was Macquarie’s role as an adviser to Prime Infrastructure (formerly Babcock & Brown Infrastructure), which sold many of its assets to Brookfield.

“Coming to WA was very natural and this portfolio was almost a perfect fit with the individuals involved,” Ms Vidgen said.

While Macquarie does not have experience as an owner of upstream oil and gas assets, Ms Vidgen said the Quadrant deal drew on the group’s global capability in the energy sector.

Macquarie has about 500 people focused on oil and gas, including an acquisition and divestment team in Houston.

It is the third-largest gas trader in the US, one of the largest independent providers of storage globally, and it trades energy derivatives globally.

“We also happened to be helping Apache sell their Wheatstone (LNG project) interest, so all the stars aligned,” Ms Vidgen said.

The buying opportunity arose after US-based Apache decided in the middle of last year to sell its international assets, spread across Australia, Egypt and the North Sea.

Apache’s plans included spinning-off the international assets into a new company.

“One of the reasons we came in is that, while we believe the assets are high quality, when they were talking about a ‘spin co’ we just couldn’t see how a group of London investors could understand the dynamics in the WA market and value those assets appropriately,” Ms Vidgen said.

“One thing Macquarie does well is find quality assets, extract them from difficult deals, and provide capital leadership.”

New partners

Ms Vidgen said Macquarie invited Brookfield to join the deal because of its size and complexity.

“We perceived this is a great set of assets but a very hard deal, there were a lot of legacy issues, it needed to be done quickly, and needed people with significant standing with the banking group, so Brookfield was the natural partner,” she said.

The deal’s complexity was illustrated by the 19,000 documents in the data room.

Ms Vidgen said the large number of assets and shifting market environment, notably falling oil prices, added to the complexity.

To deal with this, Macquarie and Brookfield each had a dedicated team of 30 people working on the transaction.

While the key players have crossed paths on many deals, Ms Vidgen said this was the first time Macquarie has invested with Brookfield, which had extensive interests in Australia in construction, property and infrastructure.

“It’s almost two rivals who have decided this was a really hard deal but a good deal so they’ve come together,” she said.

Mr Chersky said that, after the initial approaches and a couple of weeks to “get their heads around” the deal, a very significant due diligence task lay ahead.

“We understand the market well, so we could accelerate out of the blocks pretty quickly,” he said.

Gas opportunities

Alcoa, which is one of the largest users of gas in WA, played a key role in the Quadrant purchase.

The alumina producer will make $US500 million in prepayments to Quadrant, and in return has a 12-year gas supply agreement.

It gives Alcoa certainty of supply, and gives Quadrant greater certainty over its cash flow.

Quadrant supplies 40 per cent of domestic gas in WA, and the business is planning a greater focus on that area.

“The change of philosophy from Apache to new Quadrant is a solid focus on domestic gas,” Mr Chersky said.

“We think we can sell at ever-growing volumes into that market.”

Ms Vidgen said one of the main growth opportunities was to get more mining companies switching from diesel to gas.

“There is no doubt gasification of some of the mines could reduce costs over time,” she said.

“There is an upfront investment but we think there is value there. We think there will be more demand than potentially what people see.”

This trend has recently underpinned two major projects.

APA Group is investing $140 million building the Eastern Goldfields pipeline to AngloGold’s Tropicana and Sunrise Dam gold mines. The pipeline gas will displace diesel fuel and LNG transported by road.

That followed the recent completion of Dampier to Bunbury gas pipeline owner DBP’s $183 million Fortescue River gas pipeline, which will run to TransAlta Corporation’s power station at Fortescue Metals Group’s Solomon iron ore mine.

The gas will enable TransAlta to convert from diesel to gas.

In addition, DBP has recently completed the $110 million Wheatstone Ashburton pipeline, which links Chevron’s Wheatstone gas project with the main Dampier to Bunbury trunk line.

Mr Chersky is positive about opportunities in the domgas market, despite new supplies from Wheatstone and Gorgon creating the possibility of excess supply.

“It may well happen,” he acknowledged, before adding all markets went through periods of volatility.

“We are well contracted into the future and believe there will be more demand for the gas so we are exploring and developing with confidence.”

While Quadrant has a big focus on domgas, most of its revenue comes from interests in oil projects Ningaloo Vision, Pyrenees and Stag.

Apache Corp’s accounts for the year to December 2014 showed Australian revenue of $US1.06 billion ($1.41 billion), with $US712 million from oil and $346 million from gas.

Santos relationship

One of Quadrant’s selling points is that it has a stake in three domgas production hubs – Varanus Island, Devil Creek, and Macedon.

However, it has also had a testy relationship with Santos, its partner in the Varanus and Devil Creek plants, and related gas fields such as Spar and John Brookes.

The companies are involved in three separate legal disputes, with two relating to operational disputes and the third, launched by Santos last month, relating to pre-emptive purchase rights held by Santos over the Spar project.

Ms Vidgen acknowledged there was room for improvement in terms of Quadrant’s relationship with Santos.

“One of the things Australia needs to do better is work better between joint venture partners to ensure there is no duplication and no inefficiencies,” Ms Vidgen said.

“And that is something we have set as a challenge for management.

“How can Quadrant be a leader, in actually being the best joint venture partner?

“Hopefully, that will transpose into the Santos relationship.

“Obviously they are a very good organisation and one that we can learn from and work with.”

Long-term plans

Like all private equity investors, Brookfield and Macquarie are non-committal when asked how long they plan to retain their shares in Quadrant.

Macquarie has already reduced its 50 per cent holding, with Ms Vidgen revealing that Angela Bennett’s AMB Holdings and Wesfarmers have each bought an indirect 13.7 per cent stake in Quadrant, held through a special-purpose vehicle in which Macquarie holds its share.

“We wanted to create this as a platform, and show that we can co-invest successfully with people that we have long-term relationships with,” Ms Vidgen said.

“The other reason is that we believe this is a growth vehicle, and we wanted a spread of shareholders, so that when the time comes, if the time comes, we have quite a lot of firepower to do a range of different things.”

Mr Chersky said Brookfield might eventually put Quadrant into one of its managed investment vehicles, but at the moment it’s staying on the group’s balance sheet.

“We’d love to pump more money into this vehicle if an opportunity presents itself,” he said.

The opportunity to invest more will likely be tied to Quadrant’s offshore drilling campaign, which suffered a setback earlier this month.

ASX-listed Karoon Gas Australia, Quadrant’s partner in the Levitt-1 exploration well, reported that the well contained no hydrocarbons after reaching a final depth of 4,929 metres.

The failure at Levitt-1 leaves Quadrant focused on the Roc-1 prospect associated with the recent Phoenix discovery.

“One of the exciting things about Quadrant is that it has a number of key prospects in the next 12 months, for example Roc,” Ms Vidgen said.

“These will impact on the strategy, structure and capital requirements of the business. If we have success we will need to adapt quickly, so everyone is being flexible.”

 

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