April 24, 2012, 10:32 p.m. EDT
By Alexis Flynn
– Shell’s recommended cash offer values Cove at GBP1.12 billion
– Cove is junior partner in a potentially huge natural gas field off Mozambique
– Rival bidder, Thailand’s PTT E&P, says it is considering its options
LONDON (MarketWatch) — Royal Dutch Shell PLC RDS.A +1.05% said Tuesday it had agreed a GBP1.12 billion all-cash deal to buy Cove Energy, a junior partner in a potentially huge natural-gas field off the Mozambique coast, leaving rival bidder PTT Exploration & Production PCL to consider its options.
Although Shell’s offer only matches Thai state-controlled oil firm PTT E&P’s earlier bid, Cove’s board has recommended it to shareholders, arguing that the Anglo-Dutch major’s expertise in gas exploration, production and most critically, exports, set it apart from its rival suitors.
Interest in Cove, a modestly-sized exploration company listed on London’s junior exchange, has been fueled by its access to one of the world’s most promising gas areas. With an 8.5% stake in a gas field offshore Mozambique owned and operated by Anadarko Petroleum Corp. APC +0.85% , buying Cove is a speedy way for energy firms to get a foothold in the region.
When Shell in February made an opening GBP992.4 million bid for Cove, the move was hailed as a logical step for the world’s biggest shipper of liquefied natural gas. With an estimated 30 trillion cubic feet contained in the Rovuma field, and nearby finds by Italy’s Eni SpA (E) potentially holding twice that amount, there could be enough gas to justify the construction of an LNG facility to supply high-demand Asian markets.
Like Shell, PTT E&P has put developing LNG at the heart of its investment plans. The Thai firm has been seeking overseas LNG assets as part of efforts to meet its ambitious 2020 sales target of 900,000 barrels of oil equivalent a day against a backdrop of limited new domestic resources.
Shell’s latest offer, which is some 12% higher than its opening bid, equals PTT E&P’s 220 pence a share proposed offer. However, a subsequent move by Mozambique to levy a 12.8% capital gains tax on any sale has clouded what had appeared to be a straightforward bidding war. Because Shell’s confirmed offer takes full account of the tax, it effectively trumps PTT E&P.
“Shell’s final bid needs to be seen in the light of the tax issue” said a person close to Cove’s board. When the cost of paying the capital gains tax on the deal–around GBP140 million–is taken into account, the Shell offer actually translates to around 240 pence, the person explained.
Although the formal sale process has now closed, competing offers can still be made, and the Cove shares will now likely trade to a slight premium on the hope that PTT E&P will trump Shell, Investec Securities analyst Stuart Joyner said. It raised its target share price for Cove to the bid level of 220 pence, with a hold recommendation.
Cove shares rose nearly 5% in the wake of Shell’s new bid, spending much of Tuesday around the 227 pence a share level, suggesting some investors are holding out for PTT E&P to return with another offer.
“There is potentially room for a higher bid, even though it looks like we’re getting to the end game,” said Richard Hurowitz, chief executive of New York-based hedge fund Octavian Advisors, which owns approximately 1.3% of Cove. “It’s a world-class asset,” said Hurowitz.
PTT E&P Chief Executive Anon Sirisaengtaksin, speaking to Dow Jones Newswires, declined to comment on whether the company will propose a higher offer. Last month, India’s Oil and Natural Gas Corp. and Gail (India) Ltd. said they were also mulling a possible bid for Cove.
Mozambique’s desire to develop its massive hydrocarbon resource in as efficient and sustainable way as possible is a major consideration in which firm ultimately triumphs.
“This is a deal between Cove and the other companies, but yes, it is subject to government approval,” said an official at Mozambique’s Ministry of Mineral Resources, who asked to remain unnamed. “It is a private deal, but the successful company would ideally be one with a strong international presence, with a proven track record of reliability and technical strength.”
At 1351 GMT, Cove Energy shares were up 4.6%, or 10 pence, at 227 pence, while Royal Dutch Shell’s B shares were up 0.3%, or 8 pence, at 2,188 pence. The FTSE-100 index was up 0.3%.
(Oranan Paweewun in Bangkok contributed to this article.)