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Arrow’s distressed sale to Shell and PetroChina

March 9th, 2010 · 1 Comment

But it still shows coalseam gas is hot, even though these projects have to drill, treat, and man thousands of wells…

Shell’s Arrow Bid May Spur Australian Coal-Bed Gas Takeovers

James Paton for Bloomberg.

March 9 (Bloomberg) — Royal Dutch Shell Plc and PetroChina Co.’s A$3.3 billion ($3 billion) bid for Arrow Energy Ltd. may spur more takeovers of Australian producers of coal-bed gas, a growing source of supply for Asian energy importers.

Eastern Star Gas Ltd., a coal-seam gas developer in the Australian state of New South Wales, climbed almost 13 percent to 81 cents in Sydney yesterday after Arrow reported the bid. Bow Energy Ltd. rose 28 percent. Santos Ltd., Australia’s third- largest oil and gas producer, is another potential target, said David Wall, an analyst at Hartleys Ltd. in Perth.

Projects that pump natural gas from Australia’s coal seams for export by ship to Asia, the world’s fastest-growing region, offer relatively low-cost resources in a politically stable country, analysts said. International oil companies bring the balance-sheet strength to finance the pipelines and liquefied natural gas plants needed for exports.

“There are significant resources remaining to be consolidated in the form of companies like Eastern Star and Bow, and smaller ones,” Wall said in an interview yesterday.

In the northeast state of Queensland alone, producers including BG Group Plc and ConocoPhillips plan to invest as much as A$50 billion developing coal-bed methane. Arrow said last month it was considering selling shares or taking on debt to finance the A$2.2 billion Fisherman’s Landing LNG project.

“Shell’s move on Arrow has been at least partly prompted by Arrow’s own funding constraints,” Alastair Syme, a London- based analyst at Nomura Holdings Inc. said in a note yesterday. “On a higher level, this deal is yet another example of oil majors seeking to reposition further down the cost-curve, a position that unconventional gas potentially provides.”

Unconventional Gas

Coal-bed methane, gas in shale and tight gas held between rocks are together known as unconventional gas resources. These deposits can break even with oil prices between $30 and $50 a barrel, making them more profitable than alternatives such as deepwater oil and gas or Canadian tar sands, according to Syme.

Exxon Mobil Corp., the world’s most profitable oil and gas company, agreed in December to pay $30 billion for XTO Energy Inc., which became the largest U.S. gas producer exploiting shale and tight gas deposits. European oil majors Statoil ASA, Total SA and BP Plc have bought into U.S. shale-gas joint ventures. In Australia, BG and Conoco have already bought coal-bed producers.

Increase Price

Shell, which already owns a 30 percent stake in Arrow’s Queensland coal-bed holdings, may have to increase its price to win over shareholders. The offer values Arrow’s reserves at less than half of what BG paid for Queensland Gas Co. in 2008, and a quarter what Origin Energy Ltd. received from selling a stake in a venture to ConocoPhillips, RBS Morgans analyst Nik Burns said. Arrow surged 47 percent as investors bet the bid may be raised.

“Ultimately Arrow would probably like to be bought out, but it’s about achieving the best possible price,” said Burns, who predicted on Feb. 12 that Shell may bid for Arrow. “It’s going to be a difficult call by the Arrow board. Shell is the logical acquirer.”

Investors would get A$4.45 for each Arrow share in cash, 28 percent more than the March 5 close, plus stock in a new company made up of Arrow’s international division, the Brisbane-based company said yesterday. Shell said separately that Arrow’s overseas assets are excluded from the negotiations.

The offer came from a company jointly owned by Shell and PetroChina, according to Arrow’s statement. PetroChina Chairman Jiang Jiemin yesterday confirmed his company is joining the bid.

Queensland Gas

The offer values Arrow’s proven and probable reserves at 88 Australian cents a gigajoule, Burns at RBS Morgans said. BG Group’s Queensland Gas acquisition was valued at about A$2 a gigajoule, while Origin’s sale of a stake in its Gladstone project was worth about A$4 a gigajoule, he said.

Shell plans an LNG project on Curtis Island off the central Queensland coast that is expected to produce as much as 16 million metric tons of LNG a year and have four processing units, the company said in a document lodged with the state government last year. Arrow has said that its added reserves may help feed Shell’s LNG venture.

Santos will make a final investment decision on the coal- bed gas-supplied Gladstone LNG project in Queensland this year. The A$11.5 billion company produces 25 percent of the country’s coal-seam gas, according to its Web site.

Eastern Star, with a market value at yesterday’s close of A$732 million, has a 65 percent holding in the Narrabi coal seam gas project northwest of Sydney where Santos is a partner. Bow Energy explores for coal-seam gas in Queensland.

Matthew Doman, a spokesman for Santos, said the company doesn’t comment on speculation. Robert Williams, whose Sydney- based firm, Farrington National, represents Eastern Star Gas, said he would refer a request to Managing Director David Casey. A message left on the main telephone line after office hours for Bow Energy wasn’t immediately returned.

Tags: Natural Gas

1 response so far ↓

  • 1 persistentone // Mar 10, 2010 at 1:25 am

    This isn’t the start of a buying binge for Australian coal-seam gas. This is simply a tactical move by Shell for its long time partner in Australia, when that partner happened to need funding for some large projects. Shell saw this as a way to expand ownership in those projects for less than it might otherwise cost them.