No-brainer for QGC to accept BG's bra

Courier Mail
Saturday 1/11/2008 Page: 68

THE rise and rise of Queensland Gas peaked this week as it fetched the biggest takeover bid in Queensland corporate history. British energy giant BG Group offered $5.75 a share in cash which valued QGC, which listed just eight years ago, at $5.6 billion. The bid cruised past Queensland's previous acquisition record set in 2003 when Swiss miner Xstrata bought MIM Holdings for $4.93 billion.

The offer price was far from QGC's record closing high price of $6.22, set in May. But amid the carnage on global stockmarkets, the offer is still an alluring 80 per cent premium on QGC's battered share price of $3.20 before the deal was announced. And QGC's directors wasted no time in urging shareholders to cash in quick on the healthy value being put on the potential seen for its vast coal seam gas resources as a feedstock for liquefied natural gas to feed thirsty Asian energy markets.

The process of converting CSG into LNG is far from mature and as costs have spiralled, and debt markets and sharemarkets have wilted as funding sources for cash hungry project developers, accepting BG Group's offer is a no-brainer for QGC. Explaining QGC's enthusiasm for BG Group's offer, QGC chief executive Richard Cottee said spiralling corporate funding costs due to the global credit crunch had increased QGC's weighted average cost of capital (WACC).

"Clearly the world has changed in the last eight weeks and it is important in capitalism to adapt to those changes," he told investors and journalists during a conference call. "Our WACC got whacked ... an 80 per cent premium is none too shabby in this market." BG Group's offer formally closes on December 15 but it said yesterday its QGC stake was now 43.9 per cent. Analysts said it was very unlikely a superior offer for QGC would emerge. The British energy giant that lost out to ConocoPhillips after bidding $13.8 billion for Origin Energy, is set to win out this time.

And analysts say QGC is a perfect fit for BG Group. BG Group will get almost the same CSG resource potential from QGC and the Queensland company's own recent acquisitions, as it would have had with Origin Energy but will pay far less cash. QGC chairman Robert Bryan said that in the eight years since QGC was listed, it prospered "beyond our most optimistic expectations", delivering very significant value to shareholders.

But he said the next phase of QGC's evolution would require a step-change in the company's skills base, organisational resources and balance sheet capacity. QGC aims to become one of the world's first large-scale producers of CSG converted into LNG. BG Group, with this purchase, has the lucrative, energy-hungry markets of the Asian region in its long-term sights. BG Group sees its global LNG supplies aided by securing new supplies from QGC's planned LNG project at Curtis Island in Gladstone harbour in central Queensland.

It says QGC's industry leading CSG skills can be extended internationally as access to conventional fossil fuel sources becomes increasingly challenging and resource companies seek partners with experience developing unconventional gas alternatives. UBS analyst Gordon Ramsay says a significant portion of QGC's market value is based on its CSG-to-LNG prospects, still in the early stage of development. He says the project faces a number of potential development and operational constraints.

These include competition for resources necessary to complete the LNG plant, movement in the Australian dollar against the US dollar and its impact on overall project costs, and managing the water and gas build-up from CSG wells. QGC this week said BG Group and QGC remained "absolutely dedicated" to ensuring the success of the Curtis LNG project. It says BG Group has the financial muscle to make happen what is one of Australia's largest capital infrastructure projects. Citi Investment Research analyst Di Brookman says BG Group's bid is a vote of confidence in the CSG-to-LNG concept even at a time when oil prices have slid to relatively low levels.

Ms Brookman says the project has a slew of risks to confront. It will be exposed to adverse movements in oil prices, LNG prices, exchange rates, interest rates, changes to fiscal terms and global monetary conditions. But she says if the project is successful, it will be a "transformational project for QGC".

Despite the recent retreat in global oil prices, she says Citi continues to believe LNG markets will remain robust as the world increasingly looks for fossil fuel-based energy with less greenhouse gas emissions than coal and oil. Gas-fired power stations produce about half the greenhouse gas emissions of conventional coalfired power plants.

Queensland Gas has about eight CSG tenements in the Surat Basin in southwestern Queensland. It has also launched a friendly takeover of LNG rival Sunshine Gas and earlier this year secured control of Roma Petroleum. Other CSG tenement owners in Queensland's Surat and Bowen basins are Origin Energy, Arrow Energy, Santos and Anglo Coal (Dawson). Analysts see scope for many more QGC and Arrow Energy success stories among the small army of exploration and development companies working up their CSG potential in Queensland and New South Wales.

Wilson HTM analyst Andrew Pedler says candidates in the sector for takeover activity usually have CSG reserves and/or production. "I don't think anyone has any doubts about the long-term CSG sector in eastern Australia and that is the kind of time horizon that BG Group and others are looking at," Mr Pedler says. "There are quite a number of mid-cap and small-cap CSG companies. Not that many are in production but many are coming through stages of testing. There will be others of the likes of the QGCs and Arrows in terms of the mid-cap producers. Its just that they have yet to pass some early hurdles."