While much of the attention surrounding Canada's LNG story has recently been focused on Petronas' Pacific NorthWest project, owing to its perception as the frontrunner in the race for first export, Australian oil major Woodside Petroleum just made things a lot more interesting.
In mid-December, Woodside (ASX: WPL, OTC: WOPEF), which we track in our sister publication Australian Edge, announced it would be acquiring Apache Corp's share of its stake in Canada's Kitimat LNG project. The deal includes stakes in two other energy projects in Australia, for a total value of $2.75 billion, and it's expected to close by the end of the first quarter.
Apache's 50% stake in Kitimat was part of a joint venture with Chevron Corp. The U.S.-based oil and gas producer had announced over the summer that it intended to get out of the liquefied natural gas (LNG) business, leaving its project partner Chevron with considerable uncertainty about the future of Kitimat.
The plan had been for Chevron to market the LNG, while operating the export facility and the Pacific Trail Pipeline that would feed it. Meanwhile, Apache would oversee upstream development in British Columbia's prolific Horn River and Liard shale gas plays.
These two formations consist of 644,000 acres, and Woodside's management says the Liard Basin is "arguably amongst the top shale gas resources in the world." Management believes that Woodside's share may amount to 40 trillion cubic feet of potential recoverable resource.
However, management concedes that shale-gas development is not among Woodside's core competencies, so it still needs to negotiate its operational role with Chevron.
Prior to this deal, Woodside had a Canadian LNG project of its own called Grassy Point, though B.C. Natural Gas Development Minister Rich Coleman told The Globe and Mail that he believes this project will be placed on the back burner. Woodside has said it will also be discussing the future of Grassy Point's development with Chevron.
At varying points, the Kitimat project has also been considered a contender for frontrunner status for first export. In fact, it managed to secure environmental approval from the prickly province of British Columbia well ahead of Pacific NorthWest, which finally received B.C.'s eco imprimatur in late November.
But in addition to the delay caused by Apache's decision to sell its stake, Kitimat also lacks the long-term contracts to supply Asian customers with the supercooled gas that other competitors have already secured.
Woodside's action comes at an interesting juncture, given Petronas' announcement in early December that it would be deferring its final investment decision on its $32 billion Pacific NorthWest project. The state-owned Malaysian energy giant is looking for ways to pare costs on the project to make it economically viable.
In a previous survey of its global portfolio, the firm had characterized the economics of Pacific NorthWest as "marginal" due to the high cost of skilled labor for construction and operation in Canada's energy sector.
And, of course, the collapse in crude oil prices since the summer also makes for interesting timing, especially since in the absence of a global benchmark the price of LNG is linked to crude oil.
But as David Dittman observed in the December issue of Australian Edge, Woodside may be in the best position among Australia's energy exploration and production companies, with a strong balance sheet that will allow it to buy assets now while they're cheap.
Woodside had been facing pressure from investors to deploy its cash hoard on new growth projects. But until recently, the economics didn't make sense, as the firm's disciplined management team walked away from two deals earlier in 2014 when they couldn't reach favorable terms.
But the bear market in crude has changed all that. Now more assets are on the market, cheaper than at any time since the Global Financial Crisis.
As David wrote, "Woodside has a great opportunity to grow its production because it is essentially debt-free and generating strong cash flows from LNG contracts and conventional oil projects."
In discussing the deal with Apache, Woodside CEO Peter Coleman said the firm had been patiently awaiting this moment for the past three years.
"We've been preparing ourselves--our cash commitments are low, and we have a huge amount of optionality in our balance sheet," Coleman recently said.
And now that Woodside is in the catbird seat, expect more to come.
"We have taken a disciplined and patient approach to identifying the right growth investment," Coleman said in the deal's announcement. "We are now in a position to take advantage of challenging market conditions and use cash reserves and existing debt facilities to acquire very high quality assets."
In a bear market, cash is king, not only because it offers downside protection, but also because it provides the liquidity necessary to take advantage of market dislocations.
We expect other well-capitalized energy majors to swoop in with offers for assets or firms as a whole.
Of course, as we've seen with Spanish energy giant Repsol's bid to acquire Canada's Talisman Energy (TSX: TLM, NYSE: TLM), a hold-rated constituent of our How They Rate universe, these deals might come at a premium to the current share price, but they will likely be well below the highs that prevailed prior to oil's swoon.
But if a company is truly in financial straits, a deal at a fire-sale price is still preferable to a total wipeout.
This article originally appeared in the Maple Leaf Memo column. Never miss an issue. Sign up to receive Maple Leaf Memo by email.
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