TheChek News Flow

Combination would consolidate almost all of Australia’s liquefied natural gas sector

A potential A$80bn ($52bn) merger of two of Australia’s largest oil and gas companies to create a national champion in liquefied natural gas reflects a harsh reality in the sector: without global scale, it is hard to remain relevant.

Woodside Energy and Santos said on Thursday they had opened talks over a potential deal. If completed, it would consolidate nearly all of Australia’s LNG sector into a single entity.

Talks are at a very early stage, according to multiple people with direct knowledge of the situation. They said the discussions were triggered by the need for both companies to increase their size as the market looks to consolidate and the risk of developing new projects increases due to cost, regulation and opposition to the industry.

James Byrne, an analyst with Citi, said a deal could be justified as “Woodside fixing its stagnating portfolio and Santos fixing its balance sheet”. He said a combination would create a globally relevant company listed in the US and Australia that could spread the higher risk and declining value of some projects.

However, the combined entity will still pale in size compared with major global LNG players. Woodside sold about 11.2mn tonnes of the super-chilled fuel in 2022 and Santos 5.8mn tonnes. By contrast, Shell and Total Energies, the two largest private LNG suppliers, sold 66mn tonnes and 48.1mn tonnes, respectively. A combined entity would be comparable to BP, which sold 19mn tonnes last year.

“LNG is increasingly about scale and having a large portfolio,” said Frank Harris, head of global LNG consulting at Wood Mackenzie. “People who have aspirations to be top players need scale and Woodside will be aware of that. As the industry gets bigger, to keep up, one could contend that they need more scale.”

Santos has been under pressure from investors, notably fund manager L1 Capital, to review its strategy due to the company’s poor returns compared with the global average. The company has been urged to consider a break-up of the business or a sale. Woodside has long been seen as a potential partner in the Australian industry.

Santos shares rose 6 per cent to A$7.24 on Friday, while Woodside’s fell slightly, by 0.7 per cent, to A$29.78.

A deal could come with substantial risks, including how to value flagship projects that have hit problems. Woodside’s giant Scarborough project off the coast of the Pilbara region in Western Australia has been delayed by opposition from indigenous communities, as has Santos’s Barossa gas project near the remote Tiwi Islands in the Timor Sea.

Regulators could also demand disposals of domestic Australian assets given the potentially dominant position of the combined entity in its home market. Both companies count LNG as their main product but also produce crude oil and pipeline gas from their operations.

Santos, which has also invested in carbon capture and storage assets including the Moomba gas plant in South Australia, derived more than half of its production from LNG in 2022. Woodside, which has invested in the US oil sector and has become a growing presence there, previously said it anticipated 45 per cent of its production this year would be from LNG.

There could also be an objection from the South Australia government, which could fight against any attempt to consolidate the business away from Adelaide. Santos — which stands for South Australia Northern Territory Oil Search — has been headquartered there since the 1950s, but Woodside is based in Perth.

A combination would bring together assets on both of Australia’s coasts but also grow the international presence, with the new group having assets in Alaska, Senegal and Papua New Guinea.

Russia’s invasion of Ukraine has made LNG trading extremely complex, with the slashing of pipelines leaving Europe to look elsewhere for gas supplies to meet its needs. Europe and Asia now increasingly compete for the same supply, with traders and suppliers constantly having to figure out where to send their cargo to make the best returns.

A large portfolio allows LNG companies to “find efficiencies and swap vessels around internally for [cost] savings without even having to find a partner to trade with”, said Alex Froley, LNG analyst at consultancy ICIS.

The potential deal “is a significant consolidation play in the Australian oil and gas industry”, said Felix Booth, head of LNG at energy analytics firm Vortexa. Santos’s LNG project in Papua New Guinea “will be a notable addition” to Woodside’s LNG portfolio and the mooted merger would bring improved scale and efficiency to their operations, he said.

In recent years, Woodside has also tried to expand its global footprint by signing LNG deals in North America. It has agreements with US LNG producers for long-term supplies and this week announced a 20-year LNG deal with a project in Mexico.

Woodside is “focused” on the growth of its LNG portfolio, Mark Abbotsford, executive vice-president of marketing and trading, said in a LinkedIn post after Woodside announced the Mexico deal.

“We see scale, geographical diversity and cost-competitive LNG as being critical to our future and also essential to meet continued growth in gas/LNG demand through the energy transition,” he said.

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Commodities broker eyes valuation of up to $2.8bn with it having cancelled UK IPO in 2021

UK commodities brokerage Marex has filed confidential paperwork to list in the US, snubbing London after pulling a plan two years ago to list on its home stock market.

The group is aiming to go public next year after submitting the filing to the US Securities and Exchange Commission, according to people with knowledge of the matter.

The targeted valuation is set to be between $2.2bn and $2.8bn, approximately three to four times more than its previous goal when Marex attempted to list on the London Stock Exchange in 2021, the people said.

Its move is likely to be an early test of investor appetite for new listings in the US after a tepid 2023, when falling valuations and rising market volatility deterred companies from going public. Bankers hope the market will more favourable in the first quarter of next year.

Marex’s decision to go to New York is also a blow to London after the financial services group ran an assessment of both markets for a reboot of its initial public offering. The group, which is an intermediary for deals in energy, agriculture and securities markets, blamed poor market conditions for pulling its 2021 IPO.

It also adds to numerous disappointments this year for the London stock market, which has suffered low trading volumes and struggled to attract and maintain listings.

Some companies, including Irish duo CRH and Smurfit Kappa, have quit the LSE and turned to New York because the US economy is a significant contributor to revenues and stock market valuations tend to be higher. This week Tui, the German tour operator, said it might leave London to concentrate on its main listing in Frankfurt.

Marex has been majority owned by private equity group JRJ, along with partners Trilantic Europe and BXR Group for more than a decade, which will be seeking to cash in via the listing.

The group, which puts on trades and derivatives hedges for big commodity producers and consumers, has grown in part through acquisitions since it was bought by JRJ in 2010.

It has expanded into clearing and risk and pricing technology and bought rival broker ED&F Man Capital Markets last year. The acquisition has helped its US business come to rival the size of its European business, which has traditionally provided the bulk of its revenues.

Marex more than doubled pre-tax profit in the first half of 2023 to $120mn on $1.2bn of revenues, with it citing “significant growth in our operations in North America”.

It employs about 1,800 people and is one of only eight brokers with rights to trade on the historic trading floor of the London Metal Exchange.

Vodafone, EE, Three and O2 are accused of levying ‘loyalty penalties’ on customers

The biggest UK mobile phone operators could face total damages of £3.3bn following class-action claims that they allegedly charged 5mn existing customers “loyalty penalties” over a 16-year period.

Claimant lawyers say they filed court documents at the Competition Appeals Tribunal against Vodafone, EE, Three UK and O2 last week. The claims accuse the phone companies of overcharging on as many as 28.2mn contracts by not reducing the amount customers had to pay after their minimum terms expired, despite them having effectively paid off their mobile devices.

The claim consists of individual lawsuits against each company, with damages sought of up to £1.4bn from Vodafone, up to £1.1bn from EE, up to £507mn from Three, and up to £256mn from O2.

Claimant lawyers at Charles Lyndon, a law firm, estimate that up to 4.8mn people could be affected. If the case is successful, someone who held a contract with one of the mobile operators could receive up to £1,823.

The claims are on an “opt-out” basis, which means all qualifying customers will be automatically included in the claim unless they make a choice not to join.

The alleged overcharging dates back to at least 2007 and runs up to the present day.

Justin Gutmann, a former head of research and insight at the charity Citizens Advice, who is bringing the claim said: “For too long these mobile phone companies have been using their dominance to rip off their customers by charging loyalty penalties.”

He added the practice was “exploitative” and that millions of people had been “taken advantage of”.

The legal action follows a 2018 “super-complaint” — a complaint made to regulators by designated consumer bodies, which can lead to enforcement action — to the UK Competition and Markets Authority from Citizens Advice about loyalty penalties across the mobile market and other sectors.

The CMA said at the time that the practice was “unfair and must be stopped”. In an update in 2020, the regulator said “significant progress” had been made in each market.

Communications regulator Ofcom in 2019 announced new protections for mobile customers including requirements that consumers had to be told the cost of buying handsets and airtime separately as well as a number of voluntary industry commitments.

Vodafone said it did not “yet have sufficient detail for our legal team to assess”.

BT’s EE said in a statement: “We strongly disagree with the speculative claim being brought against us,” adding that it had a “robust process” for dealing with end-of-contract notifications.

O2 — now merged with Virgin Media and jointly owned by Liberty Global and Telefónica — said there has been “no contact” with its legal team on this claim but that the company launched contracts a decade ago that “automatically and fully reduce customers’ bills once they’ve paid off their handset”.

CK Hutchison’s Three declined to comment.

The litigation against the telecoms groups is being funded by Litigation Capital Management.

Letter: Thames Water saga has echoes of Victorian-era profiteering

From Gavin Turner, Hanworth, Norfolk, UK

The Thames Water saga offers an egregious example of problems common to a number of UK privatisations — which promised new investment and competition as a spur to innovation. (“Thames Water’s £500mn injection of ‘equity’ revealed as loan from owners, Report, December 2).

But the provision of water services in London since privatisation in 1989 has been eerily reminiscent of private water supply and sewage management in the unregulated Victorian era, when profiteering and incompetence were rife — before the establishment of the publicly owned Metropolitan Water Board in 1902. Water companies are natural monopolies, unlikely to operate in a genuinely competitive market, and the initial privatisations made inadequate provision for tight regulation and heavy penalties for poor performance or profiteering.

Nineteenth-century water companies borrowed dangerously to maintain high yields for shareholders. Modern privatised utilities often pay high dividends from profit, little of which goes on infrastructure improvement; and they load companies with debt and sell on at

a considerable profit. These financial engineers are often corporations with complex webs of offshore holding companies and some pay little if any tax on their UK operations. They also seem to play constant games with Ofwat and the Environment Agency over responsibility for continuing illegal sewage discharges and fractured water mains.

The Australian finance company Macquarie led a consortium that held the “stewardship” of Thames Water for a decade, during which time it took excessive dividends for itself and fellow investors, loaded Thames Water with an astonishing debt burden of over £10bn (now increased to a crippling £15bn) and bequeathed a large pension fund deficit when it moved on to find rich pickings elsewhere. Neither government nor regulators have seemed willing or able to intervene in all this chicanery. If Thames Water should fail, government will pay a high price for its blithe lack of interest in these goings-on, and for its failure to control these canny operators.

(PS: I have taken an amateur interest in the Thames Water saga since the Macquarie takeover, but much of the detail and background comes from Nick Higham’s excellent recent study: The Mercenary River)