Origin Energy seems to have found its white knight in the large ConocoPhillips oil group from the US which will joint venture Origin’s Queensland coal seam gas reserves and shepherd them towards a multi-billion dollar export Liquefied Natural Gas project worth almost $US10 billion.
It sounds big, and the market loved it: the shares soared to an all time high of $19.99 at the opening after the news of the joint venture was announced before the market opened.
They settled back to end up $2 or over 12% higher at $17.68, well above the $15.50 a share offer from BG Group of the UK, whose bid now looks dead in the water.
Well over 28 million shares, worth over $500 million were traded in Origin yesterday. Unless BG Group can find a lot more money, or somehow change from its aggressive, hostile tack, its offer is doomed.BG shares rose in UK trading overnight as investors there concluded it wouldn’t spend billions of dollars in cash in a bid.
The joint venture has a value yesterday of $9.6 billion including the liquefied natural gas plant and associated infrastructure, including a $6 billion payment by Conoco to Origin.
As well as this up-front payment, Conoco will make additional fixed contributions of $A1.15 billion to carry Origin’s share of costs to so-called “final investment decision”, expected at the end of 2010, and additional payments of $A600 million at the point when each of the four proposed LNG trains is approved.
The joint venture proposes the development of four LNG trains, or processing plants, in Queensland, with production from the first two 3.5 million tonne per annum facilities expected by 2014.
But the proposal means there will now be at least four proposals for export LNG plants in Queensland around Gladstone.
Santos and Petronas of Malaysia will have a plant, as will Arrow Energy and Shell, while Queensland Gas and BG Group will have their already announced plant, and now Origin and Conoco will promote their multi-billion dollar proposal.
All up we could be looking at these four groups spending well over $A12 billion on these projects, with duplication, cost pressures and in fact the strong chances that costly overspending will happen.
The mooted projects scream out for some co-operation. Look at the various partners in the North West Shelf: Woodside, BHP, BP, Shell, Chevron and Japanese buyers.
There’s no reason why the four groups pushing their plans for the coal seam gas in Central Queensland can’t unite; except that BG Group has made a pest of itself by going hostile for Origin, and its local partner, Queensland Gas Co (QGC) is overtly aggressive and wants to dominate the business.
Just as the Petronas deal for 40% of Santos’ project ruined BG Group’s first, agreed bid for Origin, the Conoco deal has killed it off.
If BG (which is rumoured to be a takeover target in its own right, with Exxon Mobil tipped to make a bid in the UK) wants to succeed in Central Queensland, it and QGC will have to kiss and make up with Origin and Santos. Santos tried to bid, unsuccessfully for QGC but ran into competition and price problems. The ACCC ended up blocking the bid anyway.
AGL Energy emerged as a ‘white knight and then QGC found BG group. AGL still has more than 20% of QGC, although this is being watered down at the moment in a takeover bid QGC is making for a smaller rival in the industry, Sunshine Gas.
Origin yesterday reiterated its recommendation that shareholders reject BG’s hostile $15.50 a share cash (or $13.8 billion) takeover bid.
An independent expert report compiled by Grant Samuel & Associates Pty Ltd has valued Origin’s shares at $28.55 to $30.71 per share.
The independent expert valued the coal seam gas assets of Origin in the range of $18.70 and $19.49 per share, assuming the completion of the ConocoPhillips transaction.
"With this investment, ConocoPhillips has gained access to the leading coal bed methane resource in Australia," ConocoPhillips chairman and chief executive Jim Mulva said in a statement.
"Moreover, the company has enhanced its LNG position with the creation of an additional Australian LNG hub serving Asia-Pacific markets."
Origin has flagged a $1.5 billion capital management program involving the payment of an additional 25c dividend and the on-market buyback of shares, following the completion of the transaction.
ConocoPhillips will use its LNG expertise to be the downstream LNG operator while Origin will be the upstream coal seam gas operator, with a joint venture company being established to market the LNG.
A word of caution: coal seam gas is an accepted energy source and the technology for liberating the gas from the coal seams is now commonplace, especially in the US.
But turning it into LNG and exporting it hasn’t been done yet.
