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Shell’s Arrow Bid May Spur Coal-Bed Gas Takeovers

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March 09, 2010, 1:55 AM EST
By James Paton

March 9 (Bloomberg) — Royal Dutch Shell Plc and PetroChina Co.’s A$3.3 billion ($3 billion) bid for Arrow Energy Ltd. may spur more takeovers of Australian producers of coal-bed gas, a growing source of supply for Asian energy importers.

Eastern Star Gas Ltd., a coal-seam gas developer in the Australian state of New South Wales, climbed almost 13 percent to 81 cents in Sydney yesterday after Arrow reported the bid. Bow Energy Ltd. rose 28 percent.

“Of course we’re open to discussions,” Eastern Star Managing Director David Casey said by phone from Houston, where he met investors today. “But at this stage the best thing for shareholders is continuing to book additional reserves and moving forward with our commercialization strategy.”

Projects that pump natural gas from Australia’s coal seams for export by ship to Asia, the world’s fastest-growing region, offer relatively low-cost resources in a politically stable country, analysts said. International oil companies bring the balance-sheet strength to finance the pipelines and liquefied natural gas plants needed for exports.

“There are significant resources remaining to be consolidated in the form of companies like Eastern Star and Bow, and smaller ones,” David Wall, an analyst at Hartleys Ltd. in Perth, said in an interview yesterday. Santos Ltd., Australia’s third-largest oil and gas producer, is another potential target, Wall said.

In the northeast state of Queensland alone, producers including BG Group Plc and ConocoPhillips plan to invest as much as A$50 billion developing coal-bed methane. Arrow said last month it was considering selling shares or taking on debt to finance the A$2.2 billion Fisherman’s Landing LNG project.

‘Funding Constraints’

“Shell’s move on Arrow has been at least partly prompted by Arrow’s own funding constraints,” Alastair Syme, a London- based analyst at Nomura Holdings Inc. said in a note yesterday. “This deal is yet another example of oil majors seeking to reposition further down the cost-curve, a position that unconventional gas potentially provides.”

Coal-bed methane, gas in shale and tight gas held between rocks are together known as unconventional gas resources. These deposits can break even with oil prices between $30 and $50 a barrel, making them more profitable than alternatives such as deepwater oil and gas or Canadian tar sands, according to Syme.

Arrow shares fell 1.8 percent to A$5.02 today after surging 47 percent yesterday. Eastern Star declined 1.9 percent and Bow Energy closed 2.8 percent lower compared with a 0.3 percent gain in the benchmark index.

‘Remain Independent’

Brisbane-based Bow Energy is focusing on boosting reserves to supply the domestic gas markets and LNG plants in Queensland rather than consolidation, Chief Executive Officer John De Stefani said by telephone today. “Our strategy is to remain independent,” he said.

Matthew Doman, a spokesman for Santos, said yesterday the company doesn’t comment on speculation.

Shell, which already owns a 30 percent stake in Arrow’s Queensland coal-bed holdings, and PetroChina may have to increase their offer by as much as 18 percent to A$3.9 billion to win over shareholders, Neil Beveridge, a Hong Kong-based analyst at Sanford C. Bernstein & Co., said in a report.

Lower Valuation

The offer values Arrow’s reserves at 88 Australian cents a gigajoule, less than the roughly A$2 a gigajoule BG paid for Queensland Gas Co. in 2008, and about A$4 a gigajoule Origin Energy Ltd. received from selling a stake in a venture to ConocoPhillips, RBS Morgans analyst Nik Burns said.

“Ultimately Arrow would probably like to be bought out, but it’s about achieving the best possible price,” said Burns, who predicted on Feb. 12 that Shell may bid for Arrow.

Investors would get A$4.45 for each Arrow share in cash, 28 percent more than the March 5 close, plus stock in a new company made up of Arrow’s international division, the company said yesterday.

The oil companies may bid as much as A$5.30 a share, said Beveridge of Bernstein.

Phil Connole, a Shell spokesman in Melbourne, Arrow spokesman Andrew Barber in Brisbane and Mao Zefeng of PetroChina in Hong Kong all declined to comment.

Shell plans an LNG project on Curtis Island off the central Queensland coast that is expected to produce as much as 16 million metric tons of LNG a year and have four processing units, the company said in a document lodged with the state government last year. Arrow has said that its added reserves may help feed Shell’s LNG venture.

–With reporting by Fred Pals in Amsterdam. Editors: Will Kennedy, Alex Devine.

To contact the reporter on this story: James Paton in Sydney [email protected].

To contact the editor responsible for this story: Amit Prakash at [email protected].

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