Conoco’s bid for Origin

Coal seam gas in Australia is hot. Conoco just trumphed an earlier bid from BG for (50% of) Origin, sitting on some very big coal seam gas reserves. The following article provides multiple interesting points, which we shall highlight below. First the article.

ConocoPhillips and Origin Energy To Create Long-Term Australasian Natural Gas Business

  • HOUSTON, Sept. 7, 2008 — ConocoPhillips [NYSE:COP] and Origin Energy [ASX:ORG] today announced their plan to create a long-term Australasian natural gas business focused on coal bed methane production and liquefied natural gas (LNG) processing and sales.
  • The transaction is conditioned upon approval from Australia’s Foreign Investment Review Board and, if required as a result of an outstanding offer from BG to purchase all outstanding shares of Origin Energy stock, the approval of Origin Energy’s shareholders. Under the plan, ConocoPhillips would initially contribute US$5 billion to the joint venture and would carry Origin Energy for their first AU$1.15 billion in joint venture expenses. ConocoPhillips would make up to four additional payments of US$500 million to the joint venture based on project milestones, for a total possible cash acquisition investment of approximately US$8 billion at current exchange rates. As a result of these investments, ConocoPhillips would receive 50 percent equity in Origin Energy CSG Limited, which holds Origin Energy’s Queensland, Australia, coal bed methane assets.
  • The 50/50 joint venture would be comprised of coal bed methane development, operated by Origin Energy, and a liquefied natural gas project, operated by ConocoPhillips. As planned, the joint venture would market the LNG, primarily targeted to Asian markets, with ConocoPhillips leading the marketing venture for the first 10 years. The joint venture would be managed by a board of directors composed evenly of ConocoPhillips and Origin Energy representatives.The project director would be supplied by ConocoPhillips.
  • “With this investment, ConocoPhillips has gained access to the leading coal bed methane resource in Australia, comprising 8.1 million net acres. Moreover, the company has enhanced its LNG position with the creation of an additional Australian LNG hub serving Asia-Pacific markets. The joint venture leverages ConocoPhillips’ strengths and experience in project management, coal bed methane, and LNG technology, operations and marketing,” said Jim Mulva, ConocoPhillips’ Chairman and Chief Executive Officer. “This joint venture better balances ConocoPhillips’ oil and gas resource mix. In addition, the company’s long-term production growth is expected to benefit from a steady, secure source of resource additions. We look forward to working closely with Origin in delivering this valuable energy resource to customers.”
  • Origin’s Managing Director, Grant King, said, “ConocoPhillips’ investment gives confidence in the delivery of a coal bed methane-to-LNG project.The joint venture combines Origin’s extensive coal bed methane reserves and resources and operational capabilities with ConocoPhillips’ proven LNG and coal bed methane development and operating capabilities. We believe the joint venture will deliver both companies with a strong and competitive position in a rapidly growing market for LNG.”
  • Origin Energy estimates a gross resource base of 42 trillion cubic feet (tcf) of coal bed methane, including 17 tcf of prospective resources, located in the Bowen and Surat basins in Queensland. Based on this total resource, the transaction value is $0.38 per mcf. Four or more LNG trains, utilizing ConocoPhillips’ proprietary Optimized CascadeĀ® LNG technology and each processing an estimated nominal 3.5 million tons of LNG per year, are anticipated. An estimated 20,500 wells are envisioned to supply both the domestic gas market and the LNG development. The drilling and production operations will be supported by gas gathering and centralized gas processing and compression stations as well as dewatering and water treatment facilities. Initial plans for a four-train development would enable production of 23 tcf gross (11.4 tcf net) of the coal bed methane resource, with significant upside potential. Based on the resources for the four-train development plan, the transaction value is $0.70 per mcf (net). ConocoPhillips anticipates peak production of 175,000 net barrels of oil equivalent (BOE) per day in 2023, excluding effects of possible reversions. Based on Origin Energy estimates as of June 30, 2008, ConocoPhillips anticipates booking reserves of approximately 100 million BOE from this project in 2008.
  • “This project builds on ConocoPhillips’ already strong portfolio of opportunities, and we expect it to provide competitive income and cash flow per BOE. These high-quality, long-lived, low-risk resources are expected to generate long-term cash and earnings, benefiting the company’s financial performance and enhancing shareholder value,” said Mulva. “We anticipate no significant change to our ongoing disciplined dividend, capital, operating and share repurchase programs. Our debt-to-capital ratio is expected to remain in our targeted range of 20-25 percent.”
  • The transaction, which is subject to the previously mentioned Australian regulatory approval and possible approval of Origin Energy shareholders, as well as other customary conditions, is expected to close in October 2008. All necessary transaction documents have been signed by ConocoPhillips and Origin Energy, and both companies’ boards of directors have approved the transaction.
  • Credit Suisse acted as financial advisor, and Allens Arthur Robinson and Wachtell, Lipton, Rosen & Katz acted as legal counsel for ConocoPhillips on this transaction.

Interesting stuff:

  1. Some might want to take note the huge difference between gross resource base (42Tcf), prospective resources (17Tcf) and ‘anticipated’ reserves (100M BOE, basically 6Tcf).
  2. We knew coal seam gas was a lot more costly to develop (especially in Australia, where labour cost are a multiple of those in Papoa New Guinea). Wells don’t flow, they have to be treated before they do, and as a result many more wells have to be drilled and manned. But just how many wells, 20,500 is a staggering number.
  3. Yet, for a similar time frame to market, valuation of 70 cents per Mcf (yes we know, there is upside, but InterOil certainly got a lot of upside as well) provides a nice indication of what we can expect for InterOil. Raymond James values 6.9Tcf of gas at 37.5 cents, and still ends up with a $65 price target. And compare the following
  4. in 2023, peak production for Origin/Conoco’s joint venture’s 20,500 wells would be 175,000 BOE a day (5.25M BOE a month). InterOil can already flow a million BOE today, with just two wells (Elk1&4), not 20,500, and these wells have already been drilled. See the difference..

Some additional quotes from other sources:

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