September 11, 2008
Failed Takeover Could Turn BG Group Toward Santos DEALTALK
By Tom Miles and Fayen Wong
BG Group of Britain could turn its sights on Santos of Australia after its hostile $11.1 billion bid for Origin Energy was rejected, but the new target may prove no less willing to succumb.BG Group gave up on Origin on Tuesday after the Australian energy company struck an $8 billion deal with the U.S. giant ConocoPhillips to jointly develop Origin's coal-seam gas reserves through a liquefied natural gas project.
In its tie-up with Conoco, Origin cited an independent assessment that valued it at as high as 30.71 Australian dollars per share, or about $24.75, nearly double BG's offer of 15.50 dollars a share.
But BG may still be interested in making a sizable acquisition in the Asia-Pacific region to dispel talk that it is in the takeover sights of the oil heavyweight Exxon Mobil as well as to support its Asian-Pacific liquefied growth ambitions, which has led to recent gas deals in Singapore and Hong Kong.
"Santos' existing portfolio seems like a good match for BG but it could be difficult for BG to mount a takeover considering how Santos' market cap has grown." said Ivor Ries, head of research at E.L. & C. Baillieu Stockbroking in Melbourne. "It may be hard for BG to buy Santos at a sensible price."
BG declined to comment on any plans, while Santos could not immediately be reached for comment.
Together with the Malaysian state oil company Petronas, Santos is planning a liquefied natural gas project worth 7.7 billion dollars in Queensland using coal-seam gas, which is methane pumped out of coal mines.
It also has oil and gas assets in Indonesia, Vietnam and the Bay of Bengal, and is a partner in an $11 billion liquefied natural gas project in Papua New Guinea led by Exxon Mobil.
Santos said in June that it may have stakes in four producing liquefied natural gas projects by 2020, giving it access to international prices for gas, which are higher than in Australia.
Having gained more than 30 percent this year, Santos has a market capitalization of more than 11 billion dollars.
Any move on Santos will have to wait until Nov. 29, when a government-imposed shareholder cap is set to expire.
The South Australia State government imposed the cap in 1979 to stop a takeover of the company amid concerns about security of gas supplies. The government last year agreed to remove the cap after Santos said it was limiting its growth.
But Santos will not be an easy takeover. In July the company appointed David Knox, a former BP executive, to lead its next phase of domestic and international expansion, a move analysts said was aimed at fending off potential takeovers.
In a presentation published Monday, just as Origin was tying the knot with Conoco, Santos touted the growth prospects of its portfolio, which includes Australian conventional natural gas as well as its international assets.
But the diverse portfolio could be its Achilles' heel.
Aiden Bradley, oil and gas analyst at ABN AMRO, said the company would be worth far more if it was broken up. In a note to clients on Aug. 28, he put the break-up value at over 28 dollars per share. Santos shares closed at 18.68 dollars on Wednesday.
It was BG's tie-up with Queensland Gas earlier this year, a deal worth 8 billion dollars, that established coal-seam gas as a credible energy source, supercharging values for companies in the sector.
Coal-seam gas projects got a further lift when Petronas paid 2.5 billion dollars for 40 percent of Santos's Gladstone liquefied natural gas project, which will be fed by coal-seam gas.
A JPMorgan analyst, Mark Greenwood, said BG could also set its sights on Queensland Gas, worth about 3 billion dollars at current share prices.
Analysts said other smaller Australian companies dealing with coal-seam gas, like Pure Energy and Bowen Energy could also be in play as BG seeks additional gas to expand its proposed liquefied natural gas plant.
Fayen Wong reported from Perth.
Originally published by Reuters.
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