Stephen Bartholomeusz
Origin emerges stronger
A little more than three months ago Origin Energy came within a hair’s breadth of recommending BG Group’s $13.8 billion bid. Had it done so, it may well have sold itself short by as much as 50 per cent.
The remarkable deal Origin unveiled with ConocoPhillips today to "monetise" Origin’s coal-seam gas resources in Queensland, according to Origin’s independent expert, Grant Samuel is worth between $18.70 and $19.49 per Origin share.
Had BG’s $15.50 a share offer succeeded – and it is now inconceivable that it could – the British group would have not only acquired Origin’s coal seam gas (CSG) reserves at a considerable discount to the valued implied by the ConocoPhillips deal but the rest of Origin’s extensive portfolio, valued at between $9.85 and $11.22 a share by Grant Samuel, would have been thrown in for nothing.
The deal with ConocoPhillips validates and vindicates Origin’s Grant King’s assertion – and the reason for the Origin board’s 11th hour change of heart – that the Santos deal with Malaysia’s Petronas radically changed the value of CSG and therefore of Origin’s value.
In the wake of the Santos deal, King said that if a line were drawn from its valuation of Santos’ CSG at $1.65 per gigajoule, Origin’s 10,000 petajoules of 3P (proven, probable and possible) reserves would be worth about $16.5 billion.
Conveniently, and coincidentally given the movement in the Australian dollar between transactions, the ConocoPhillips deal implies almost precisely the same value per petajoule for Origin’s gas as the Petronas deal did for Santos on the basis of a two-train LNG project. If Origin and Conoco build the four-train project they say they aspire to, Origin’s CSG would be valued at $1.88 per petajoule.
The Origin deal confirms, if confirmation were needed, the value of Queensland CSG as a feedstock for export LNG projects and of Origin’s position as the owner of the biggest reserves in the state.
ConocoPhillips, one of the world’s largest energy companies, is the leading developer and operator of CSG in the US, with decades of experience. The deal also tends to underwrite the value of Origin’s contingent resources, given that they would have to be turned into 2P reserves if a four-train facility were to be built.
The deal will transform Origin. An up-front payment of $6 billion, a carried interest in the front-end engineering and design phase of the project worth $1.2 billion and payments of $600 million each time an LNG train is approved means that ConocoPhillips is committing up to $9.6 billion for a half-share in Origin’s CSG reserves and their development.
Origin will retain a 50 per cent interest, will wipe out all its existing debt, emerge with net cash from the up-front payment and get an immediate and substantial earnings boost (a 35 per cent increase in earnings per share this financial year) as a result.
It will also have the balance sheet to fund continued expansion of its non-CSG activities, despite announcing some substantial improvements to shareholder benefits. Origin will pay a special dividend of 25 cents, equivalent to this year’s annual dividend, and use the new 50 cent a year payout as the base for its dividends going forward. It will also buy back up to $1.3 billion of its shares.
The BG offer is, of course, still afoot. It is also, however, now irrelevant. The ConocoPhillips deal and Grant Samuel’s valuation have slammed the door on the opportunity for BG unless it is prepared to contemplate a near-doubling in its offer price. There is plenty of daylight between the bottom end of the Grant Samuel and the offer price.
Whether or not Origin is required to put the deal before its shareholders, the outcome is predestined. Origin’s directors can’t contemplate recommending anything much below $28 a share for their company and without their recommendation it is improbable that BG could get anywhere close to its 50.1 per cent minimum acceptance condition. Between 35 per cent and 40 per cent of Origin’s capital is held by retail investors.
The sensible outcome would be for BG to plead changed circumstances and allow its bid to lapse quietly. Through its relationship with Queensland Gas it maintains a significant exposure to Queensland CSG.
It will, however, be cursing its luck. Had it not been for the timing of the Santos deal with Petronas it would have pulled off one of the great heists of all time.
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