Another day, and another “unconventional gas” deal. The latest is a $3.4bn joint offer by Royal Dutch Shell and PetroChina for Australia’s Arrow Energy.
Arrow announced on Monday it had received an indicative proposal worth A$4.45 a share in cash, or A$3.7bn ($3.4bn), from a vehicle jointly owned by Shell and PetroChina.
Shell – which agreed in mid-2008 to buy 30 per cent of Arrow’s coal-bed gas assets – and PetroChina have also offered Arrow shareholders a stake in a new entity to hold the international operations, thought to be worth a further A$400m-A$500m.
Arrow shares jumped a record 45 per cent to A$5.03 by midday in Sydney – as traders bet that bidders will have to raise their offer.
Indeed, the fact that management are opposing the offer, suggests a counter bid is likely, say analysts at Merrill Lynch.
The offer (A$4.45/sh, a c30% premium to Friday’s closing price) puts Arrow at an implied A$0.54/gigajoule (GJ). Whilst this is ahead of the A$0.4/GJ paid by BG for Pure Energy last year, it is still below the A$0.7-0.8/GJ range seen in previous transactions in the region (eg, BG-QGC, COP-Origin).
This together with the fact that Arrow management has already opposed the offer leads us to believe that there is still room for Shell/PetroChina to increase the bid.
All in, we see its opportunistic move on Arrow as a positive even if it had to moderately raise the offer as it allows Shell to leapfrog the competition in the competitive Australian LNG market at a reasonable price.
One potential glitch, however, might be the sensitivities Down Under about China’s growing interest in buying up Australian natural resources companies. Although all has been relatively quiet recently, the reverberations from a string of deals - successful and otherwise – last year are still being felt.
Not only does the offer highlight the push by Shell and PetroChina to dominate Australia’s coal-bed methane gas sector. It also puts the focus on Australia’s emergence as a leader in unconventional gas – even as analysts predict a wave of consolidation in the sector amid too many competing projects.
Even so, as the FT notes in a separate analysis, the boom in the domestic US shale gas industry – another form of unconventional gas – comes just as Australia is set to secure its path to becoming the world’s biggest exporter of unconventional gas.
Arrow, which last year announced IPO plans for its international unit in 2010, has been leading that charge via some projects in Australia’s northeast state of Queensland that are investing billions of dollars to convert reserves of coal-bed methane into liquefied natural gas.
But, say analysts, it reached the stage where Arrow would either have to embark on massive capital-raising to further develop its coal-seam methane assets – beyond what an IPO could garner – or turn to outside partners or rather, acquirers.
Here’s Merrill Lynch again:
Given the challenges that Arrow’s project still faces (eg, funding, offtake), we see the Shell/PetroChina JV potentially clearing significant hurdles and accelerating development. We see the JV as having advantages over Arrow:
(1) synergies: Shell already has a competing project in the area (Curtis Island LNG) and the combination of the projects potentially offers material cost savings – Arrow has estimated around A$2.2bn capex to complete the 1.5MTPA project;
(2) offtake: the Chinese market is the natural destination for Australian LNG and by partnering with PetroChina, Shell has ensured a significant offtaker for the project.
As Stephen Bartholomeusz at BusinessSpectator notes on Monday, it was concerns about a possible big capital raising that had earlier sparked a sharp sell-off in Arrow’s shares, as the company considered selling down its 70 per cent interest in its Queensland gas acreage.
In a clear sign of confidence, however, Arrow is already planning the first shipments of LNG extracted from the reserves to Asia in 2012, according to the FT, in race against rival projects being developed by the UK’s BG Group, a joint venture between ConocoPhillips and Australia’s Origin Energy, and another between Australia’s Santos and Petronas of Malaysia.
Shell has been eyeing Arrow for nearly two years and last August, is believed to have made an unsuccessful offer worth about A$3bn.
That, says the FT, followed Shell’s agreement with Arrow in mid-2008 to jointly develop projects in Australia and international markets. At that time, Shell agreed to invest up to A$776m to buy 30 per cent of Arrow’s coal-bed methane acreage in Queensland and 10 per cent of its international assets, including sites in China, India, Indonesia and Vietnam. Shell also secured a five-year option to acquire up to 50 per cent of individual Arrow projects.
But, as Bartholomeusz notes, the ambitions of Arrow’s supportive partner has “turned it from ally to predator”.
China, meanwhile, has a well-flagged interest in securing long-term gas supplies and has made its interest clear in Australia’s coal-bed methane industry.
Arrow’s board, signalling its belief in more upside to be revealed on the Shell/PetroChina bid, has recommended that shareholders “take no action in relation to their Arrow shares”.
So it’s really a case of “watch this space”.
Related links:
Coal-bed methane: Industry whose time has come – FT
Shell, Petrochina, bid for Arrow - WSJ
Coal-seam gas producers: new masters of the universe? – PeakEnergy
In-depth: Oil – FT.com