Stokes in calculated shift to oil

19/02/2015 - 14:25

Following the money is always the best way to see what interests a rich man because it tells you two things – what he likes as an investment for future growth, and what he sees as having reached the limits of growth.

Stokes in calculated shift to oil

Following the money is always the best way to see what interests a rich man because it tells you two things – what he likes as an investment for future growth, and what he sees as having reached the limits of growth.

In the case of local billionaire Kerry Stokes, the new interest and recipient of an increasing share of his $1.2 billion fortune is oil.

On the flipside is what appears to be a diminishing interest (if capital allocation is a guide) in his industrial equipment business, WesTrac, and his media interests held through Seven West Media.

In recent weeks, clues pointing to a reshaped Seven Group, which is 70 per cent owned by Mr Stokes and which, in turn, controls WesTrac and Seven West, have been dropped like breadcrumbs leading to a prize called oil and gas.

The official line from Seven is that it is building a portfolio of investments in the oil and gas business and does not currently have plans to mount an aggressive takeover bid for any of the oil companies in which it has acquired an interest.

Given Mr Stokes’ history of attaining control by slow constriction of his targets, there is no reason to doubt that this time it will be different.

After all, he assumed control of Seven and its television interests after years of patient accrual of shares in the target, and he did the same with WA Newspapers Holdings to create the current structure, Seven West.

The oil division appears to be under construction in much the same way.

The first move was to acquire Nexus Energy for around $200 million, but through the acquisition of the company’s debts rather than direct share purchases.

Next came the on-market purchase of a 13.8 per cent stake in Beach Energy, followed by news today that a subsidiary of Seven has amassed a 3.8 per cent stake in Drillsearch, and speculation that an interest in another oil stock, Senex Energy, has been acquired but is yet to be reported.

There is an obvious pattern in what’s happening. Seven, with the advice of its deputy chairman and former Woodside Petroleum boss, Don Voelte, is building an oil business.

What shape the oil business will take is uncertain; but there are two possibilities.

The first is to be a supplier of gas to energy hungry (and gas short) east coast capital cities such as Sydney and Melbourne. Nexus is already a supplier through the sometimes-troubled Longtom project in Bass Strait. Beach, Drillsearch and Senex are suppliers from their gas fields in the central Australian Cooper Basin.

The second part of Seven’s strategy is to act as the consolidator of the widely scattered ownership of the Cooper Basin and use it as bait for a high-priced takeover from a more traditional oil company, or to continue building the asset because selling gas to Sydney and Melbourne is good business.

There are risks, and there is a critical timing factor at work.

The obvious risk is that oil is not the investment flavour of the month; and while that situation will change as global production drops and prices recover, no-one knows when the turn will occur.

Buying oil assets today might make sense because prices are low, but there seems little doubt that they will fall further before they recover, a process which should suit Seven with its ‘patient capital’ view to investing.

Another problem is that while Mr Stokes has been an astute investor in industrial equipment and media, he has not enjoyed the same success in resources. His exposure to iron ore, first through Iron Ore Holdings and now through a big shareholding in BC Iron, has been an unhappy experience.

However, the biggest risk for Seven and Mr Stokes is that they are embarking on a courageous adventure to build an oil division just as the media and industrial equipment businesses are hit by turbulent trading conditions.

Sales of Caterpillar equipment, the lifeblood of WesTrac, have dropped in line with reduced spending by Western Australia’s iron ore industry, and Seven West has just reported a hefty loss, which was mainly asset-value write-downs but also revealed weak trading conditions in an increasingly competitive advertising market.

It is stretching the point to describe the oil adventure as a case of Seven attempting to change horses mid-stream, but there is only so much a management team can do; and there is the issue of looking for the logic of a business running a media, industrial equipment and oil divisions.

Some big companies can keep a variety of business balls in the air, but not many. Wesfarmers is the last of the listed Australian industrial conglomerates, but is looking more like a big retailer. BHP Billiton has a swag of interests, but all resources-linked.

Seven, if it goes down the road being engineered by Mr Voelte, will have three business units in three very different areas of business, and that will make for a very interesting juggling act – unless the plan goes as far as to jettison an asset or two in the name of oil.


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