Alan Kohler
BG wants free gas
BG Group’s bid for Origin Energy is beginning to look like another example of Australian institutional investors selling resources assets too cheaply to foreign buyers.
At $14.70 cash per share, the price is a 40 per cent premium to Origin’s last sale. However, Origin's share price is now sitting around $14, instead of trading above the bid price as usual, because no hedge fund is prepared to bet on a higher price. The impression you get is that it’s all over bar the shouting and Origin’s shareholders are falling over themselves to sign the acceptance forms.
Not so fast. Origin’s board should – and, I believe, will – reject BG’s first offer and the British firm will have to pay more for a board recommendation.
The bid is focused on Origin’s coal-seam gas reserves in Queensland, which BG wants to convert to LNG at a new plant in Gladstone and export to Asia. Those reserves are about to be substantially upgraded.
Moreover, the price BG is offering is well below what the existing reserves are worth.
Including debt, the enterprise value inherent in the bid price is $16.4 billion. Ivor Ries of Baillieu Stockbroking puts a value on Origin’s holding in Contact Energy (the New Zealand gas company) of $6.5 billion and on its non-coal-seam gas businesses of $7.9 billion.
That means BG is offering a bit less than $2 billion for the coal seam gas reserves, which currently total 3,500 petajoules and are likely to be increased to 4,900 PJ.
At current reserves BG is paying 57c per gigajoule (there are million gigas in a peta); on the expected increased reserves figure for 2008, it’s 40c per gigajoule. And if, as expected, reserves increase to 6,000 petajoules in two or three years, the price being offered for the gas by BG falls to zero.
The average of recent gas transactions is around 90c per gigajoule.
In other words, BG is trying to get Queensland coal-seam gas via Origin at half price or less. Fair enough: nothing wrong with that.
What would be wrong is selling it at that price.
BG bid for Origin Energy ...see what readers and experts are saying in The Conversation.
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