What goes up ... must come down

The resources boom meant it was all about E&R in Queensland until recently, where a slowdown in projects has forced firms to look at other areas of their practice for new opportunities. Andrew Jennings reports.

The natural fluctuation of economies between periods of expansion and contraction often triggers wild swings in perspective. 

One moment the economy will be reported as buoyant with wide-eyed optimism; the next minute commentators will be saying it’s only moments from Armageddon. 

Currently, the Australian economy is neither piping hot nor glacial cold; it’s somewhat lukewarm.

Many sectors are now cooling, particularly the previously booming mining sector. 

As mixed signals continue to seep out about the health of the economy here, experts are warning that mining investment is very close to peaking as commodity prices struggle. 

Blowing up

The legal economy usually mirrors what is happening in the wider Australian economy, and things are no different at the moment, particularly in the Queensland market. 

“It’s a really good story … the proof is in the numbers, the revenue and the opportunities here,” Michael Back, head of Herbert Smith Freehills’ (HSF) Brisbane office, told Lawyers Weekly last May when speaking about the Queensland economy, particularly the resources boom.

Brisbane-based Corrs Chambers Westgarth partner Peter Schenk agreed, stating that “the demand from now onwards is a ‘once in a generation’ level of growth.” 

Fast forward six months and resources work is still king for Queensland law firms, and energy & resources (E&R) lawyers remain busy, but there is a sense among the Brisbane legal fraternity that things have come back down to earth following the giddy heights of recent years. 

With high-profile mining companies mothballing major projects in Queensland and rumblings of redundancies in E&R practices at Brisbane law firms, the question needs to be asked: Is the Queensland boom over?

“Certainly there’s a sense that it’s settling back to a more realistic and sustainable level for the next few years,” says Back. “I don’t think many people, if they’re being honest, really thought the extreme peak of 18 months ago could be maintained for a long period of time. It has come down off its peak and back to the field a bit.”

Guy Humble, managing partner at McCullough Robertson, believes the wheels of the current business cycle are turning quickly and the investment phase in the resources sector is approaching its end. He predicts that major capital expenditure to construct new mines is likely to end next year. 

“Although these assets will move into full operation, it won’t generate the same flow of work for law firms,” says Humble. “I don’t think its all doom and gloom for energy and resources in Queensland, we continue to see a significant demand from the sector, but I do see a rebalancing of activity in the next year or so.”

But HopgoodGanim’s managing partner, Bruce Humphrys, is adamant that the good times will continue to roll for firms in Queensland. 

“Some may say the boom is over because the high-profile, multi-billion-dollar stuff has stopped, but in our client grouping, the mid-to-junior level, the activity is still well and truly there, and we’re constantly finding that these sorts of outfits are consolidating at the moment,” he says, adding that the resources work the firm is doing includes exploration prior to production, fund raising, securing tenements and native title negotiations.

Humphrys admits last year was a tough one for firms in Brisbane, particularly those outside the E&R sector, but says that there are work opportunities that should remain constant for the rest of 2013. 

He expects to see enough activity in E&R, corporate advisory, M&A and capital markets to keep the firm’s lawyers busy, while employment law, litigation and insolvency should also be active. 

“We’re also finding a bit of spin-off from the resources sector in our litigation practice as companies take a bigger focus on the work that is being done and how it is accounted for,” says Humphrys.

He also warns that people in the in the E&R services industry could find 2013 a tough year. “There’s a bit of financial distress there and this points again to insolvency issues.”

Cautious optimism

The high volume of coal-mining related work firms like HSF had been doing has slowed, particularly in the areas of new projects and expansions, but there’s still plenty of work around the oil and gas sector, while Queensland firms continue to see an increase in the area of coal seam gas (CSG).

There has also been an upturn in M&A activity in Queensland recently following a very subdued 2012.

Back says HSF is quite positive about 2013, thanks in part to what he describes as “a huge amount of work” in the LNG area, with production expected to reach up to seven billion cubic metres this year.

“We see a real opportunity to act for some of the junior miners who are starting to emerge in Queensland,” he says. “There’s been a bit of amalgamation and consolidation in that area.”

Humble says he’s “cautiously optimistic” about prospects in Queensland for the coming year, agreeing with Back that there will be “significant opportunity in oil and gas”. 

Building new opportunities

Part of the re-balancing act in the Brisbane market, according to firms there, will involve directing attention towards construction and property development work, driven by the Queensland Government’s multi-billion dollar spending spree on infrastructure.

“Government-funded infrastructure spending will lead the way,” says Humble. 

In the Sunshine State, about $2.5 billion was pumped into engineering construction works between December 2011 and September 2012, up $327 million from the previous 12 months. 

Spending will be ramped up as Queensland continues to massively outstrip all other states in engineering construction over the next few years. Major infrastructure projects are already underway across the state, including the Sunshine Coast University Hospital, the Maroochydore Principal Activity Centre (PAC), Stockland’s new town centre, and the Sunshine Coast Airport redevelopment.

These massive projects being undertaken by Queensland’s Liberal National Party leader Campbell Newman is music to the ears of construction lawyers in the state. 

“After going through a fairly slow familiarisation period, the state government is moving forward with its infrastructure projects, preparing assets for future sales or privatisations,” says Back, who has headed the rapid expansion of HSF’s Brisbane office over the last few years.

“We made the deliberate decision a few years ago to really focus on a couple of sectors in Queensland — including government work — and they certainly proved to be the right decisions,” he adds. 

Hard cuts

Last September, Queensland premier Newman used a ‘state of the state’ address in Brisbane to stress the importance of his Government’s slash-and-burn budget, which confirmed the cutting of 14,000 public sector positions and a course back to a budget surplus in coming years.

“Initially, the public sector cuts had a negative impact for firms in Queensland,” says Humble. “These were decisions that needed to be made, but the mass termination in public sector jobs and the massive reduction in budgets created difficulties for the services industries because of the uncertainty it created.”

McCullough Robertson’s insolvency and insurance practice areas are currently busy, and capital raising work is picking up, while Queensland’s property market remains a concern after a feeble end to 2012. 

Meanwhile, any work with a retail flavour to it, which includes commercial property and commercial leasing, is struggling in Queensland at the moment. 

“Any practices with a heavy commercial corporate practice that is closely aligned to its commercial property practice might be finding it tough,” says Humble, who adds that McCullough Robertson’s real estate and corporate teams should have a good year. 

Back says HSF’s Brisbane operation is “in quite a fortunate position at moment” in that it has no flat spot in practice areas.

Working it out

According to Back, HSF has no plans for any redundancies in its energy & resources practice in the coming months.

The firm said it won’t be following the lead of top-tier rivals Clayton Utz and Ashurst, both of which rolled out a number of redundancies last month, with Ashurst’s E&R practice being particularly badly hit.

“I’m not expecting to see any reduction in our staff numbers,” says Back, before adding that he would be “surprised” if there were any further dramatic layoffs in the Brisbane legal market.

“Perhaps there has been a little overreaction about how dramatic the slowdown in the sector will be,” he adds.

“I don’t want to under play it either, E&R work has gone from being at an absolutely frantic pace, with a huge number of projects on the drawing board, to a number of them being mothballed.”

HopgoodGanim also has no plans to cut staff numbers. 

“There are no planned redundancies,” says Humphrys. “We prefer to reinvest in our practice and do what we do best and not take too much notice of what other firms are doing. We can see tangible evidence of growth in the areas where we’ve strategically thrown our hat into the ring.”

Meanwhile, Back is confident E&R work is not about to “fall off a cliff” as some have predicted, but says that it had already settled down to the level it will be at for the next 12 to 18 months.

One of the reasons Back is optimistic for 2013 is the positive impact of Freehills’ high-profile merger with Herbert Smith last year.

“In Brisbane, we are starting to see some real benefits from the merger, particularly in the mining sector, where we’re acting for a number of international players that are interested in acquiring junior miners here in Queensland,” he says.

“This work is solely from the merger … projects that we wouldn’t have been involved in for clients we weren’t acting for before it happened.”

International flavour

In the past, Brisbane’s legal market has been viewed as somewhat parochial by some, but this perception has changed in recent years as the city has continued to evolve and grow. 

Queensland’s capital is still home to several local firms that are looking over their shoulders as national and international firms pour into the market to make hay while the sun still shines. 

“It’s much less parochial then it used to be,” says Back. “We’re finding that a lot of the work we’re doing is mainly for international clients … so we’re competing against firms from all around the world that are keen to do work in Queensland.”

Humphrys, who says HopgoodGanim has no fear of the big international players coming into the local market, feels the raft of mergers last year has changed the legal landscape in Queensland. 

“I’d imagine this year will be a lot about bedding down these new structures as firms look to carve out a place for them themselves in the market,” he says. 

In terms of client choice, Humphrys believes it will be interesting to see how the new structures appeal to the clients and what choices and alignments they may seek.

“I think you’ll find top tiers will jettison practice areas that are not working,” he says. 

“I think you’ll find that clients are recognising there’s a blurring of the lines between the ‘old’ national law firms and mid tiers and boutiques. 

“It seems clients are instigating their own shake-up by sourcing their legal work through panel arrangements. 

“The way we compete against the international players is by staying focused on what we do best and maintaining the strong relationships we have with our long-term clients.”

In other words, Humphrys says, not getting too greedy by trying to extend the firm’s reach to a point where it’s not the firm it used to be.