The fuel is all there, now all that's needed is a spark to ignite a potential frenzy of merger and acquisition activity in the Cooper and Eromanga Basins, Australia's premier on-shore oil and gas producing region.
The falling oil price has slashed the market values of many of the region's small and mid-tier energy producers, while the top tier energy producers like Santos Ltd (ASX: STO) and Beach Energy Ltd (ASX: BPT) are positioned to take advantage.
Santos Ltd – cashed up and looking to grow
Santos may consider acquisitions in the Cooper Basin as it aims to prevent declining reserves and leverage its existing infrastructure.
Santos declared a net reduction to Cooper Basin reserves of 8.6% in 2013 which will be bad news given the company's significant infrastructure in the region including a 66.6% stake in the Moomba gas plant.
At the same time, Santos is about to be flooded with new cash flows as the its two major joint ventures, PNG LNG and Queensland's GLNG, start contributing to production.
A lot of this cash will be ear-marked to pay down debt and reward investors with growing dividends, but there will be a definite attraction of using the cash to grow reserves and capitalise on its infrastructure efficiencies in the Cooper Basin.
Right now that could be done at a discount. Shares in Senex Energy Ltd (ASX: SXY) for example have plummeted almost 40% in the last three months, wiping almost $300 million off the company's market capitalisation. Senex is targeting reserve growth of almost 270% over the next four years, which would make a welcome addition to Santos' 2P reserves.
Origin Energy – the other contender
Another contender for Senex's assets could be Origin Energy Ltd (ASX: ORG). Origin's stake in the almost $24.7 billion APLNG project will provide it with gas processing facilitates and the company has already teamed up with Senex on two joint ventures involving spending of up to $252 million.
Beach Energy – strategically positioned
Then there is Beach Energy. Beach Energy is the largest oil producer in the Cooper Basin and is no stranger to strategic share-holdings. The company owns a 4.76% stake in Drillsearch Energy Limited (ASX: DLS) and an 18.41% stake in Cooper Energy Ltd. (ASX: COE), both of which are focused on the Cooper Basin region.
Drillsearch has seen its market capitalisation slide by 26% in the last three months to $466 million, while Beach Energy is sitting on a pile of cash (and equivalents) of $411 million. Add to this the number of brokers labelling Drillsearch a 'buy' and the prospect must look tempting.
Under current conditions a strategic acquisition by any of these three companies could make a lot of sense long term, especially targeting gas assets which will likely be in high demand in the coming years, both locally and internationally.
