18/06/2015 - 13:25

Seven’s Cooper play muddies the waters

18/06/2015 - 13:25

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The oil price recovery to more than $US60 a barrel appears to be accelerating one of the biggest corporate shuffles ever by a Western Australian company, with Seven Group getting ready to consolidate ownership of the oilfields of South Australia.

The oil price recovery to more than $US60 a barrel appears to be accelerating one of the biggest corporate shuffles ever by a Western Australian company, with Seven Group getting ready to consolidate ownership of the oilfields of South Australia.

Precisely how Seven, which is best known for its media and industrial equipment assets, orchestrates the merger of several companies with assets in the Cooper Basin is yet to be revealed, but that’s not stopping speculation that a deal is brewing.

The latest thoughts on a Seven push to unite a large part of the Cooper into a single business come from the investment bank, Credit Suisse, which reckons the action could start with a share-swap merger between Beach Energy and Drillsearch.

Seven’s 19.9 per cent stake in both Beach and Drillsearch is what gives the Perth-based company and its major shareholder, Kerry Stokes, the power to force a deal.

The logic behind consolidating the Cooper is compelling, with the gasfields of central Australia a major supplier to Sydney and Melbourne (the country’s biggest domestic gas markets) facing a potentially severe shortage of gas that will drive the price higher.

Meeting the future gas needs of south-east Australia was also behind Seven’s original move into the region, with its acquisition of control of the Bass Strait gas producer, Nexus Energy.

Credit Suisse said most observers of events in the Cooper have been expecting a consolidation play, with the only uncertainties being who would drive it and when it would happen.

“The arrival of Seven Group on the Beach and Drillsearch share registers could prove to be the platform for things to actually happen,” the bank said in a note published yesterday.

Credit Suisse likened what’s happening at Beach and Drillsearch with how Seven arranged the 2011 merger of WA Newspapers Holdings and Seven Media to create Seven West Media.

That comparison is interesting, because it can be argued that Seven West has not been a strong performer and might become weaker in the future, if the thoughts of another investment bank are correct.

In a research report circulated last week, Goldman Sachs dropped its advice on Seven West to sell, thanks largely to a decline in free-to-air television advertising and a poor profit outlook.

“The headwinds we see ahead for advertising are likely to drive a lower growth television environment. We see those same headwinds as likely to drive an intensifying battle for audience, placing upward pressure on content costs,” the report said.

Seven West’s print assets are also under pressure, Goldman Sachs said.

“We expect Seven West’s print earnings (newspapers and magazines) to fall from $111.6 million in financial 2014 to $34.2 million in 2019, a five-year compound annual growth rate of minus 21 per sent,” it said.

It’s when you combine the thoughts of Credit Suisse in the oil sector with the thoughts of Goldman Sachs in the media industry that a picture of Seven’s dramatic makeover becomes clearer.

Essentially, Seven and the Stokes family are repositioning business interests away from low (or no) growth sectors into a business that offers the potential for rapid growth and fatter profits.

Media, as is widely known, has become a highly competitive industry thanks to the rise of internet publishing and broadcasting. Industrial equipment, such as the Caterpillar equipment sold and serviced by Seven’s WesTrac division, has entered a period of low growth thanks to the slowdown in Australia’s resources sector and China’s construction sector.

The answer to those challenges, from what an outsider can see, is to take whatever profits can be gleaned from media and equipment and reinvest them in Seven’s fast-growing third leg – oil and gas.

If oil and gas prices continue to recover from their sharp decline caused by a flood of production by Saudi Arabia and the US, then Seven will emerge a significant winner from its Cooper play.

But for investors in Seven there is a question to consider: what sort of company are they investing in?

Last year there was no doubt that Seven was a mixture of media and industrial equipment, plus an assortment of other investments.

Next year, as declining profits from media and industrial equipment are reinvested in oil, Seven shareholders could find themselves heavily exposed to a company with a large oil and gas division, a business with a totally different risk profile to what it has today.

The oil price recovery is attracting fresh interest in Seven but it also raises interesting questions about the future level of capital investment in media and industrial equipment, with both of those business units likely to be on short rations for some time.

For an outside investor, the changes under way at Seven make it a difficult stock to pick, especially while there is uncertainty about where future profits will be generated and where future investments will be made.

 

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