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Shell May Need to Increase Arrow Bid, Bernstein Says

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By James Paton

March 9 (Bloomberg) — Royal Dutch Shell Plc and PetroChina may need to increase their bid for Arrow Energy Ltd. by as much as 18 percent to A$3.9 billion ($3.5 billion) based on similar transactions in Australia, Sanford C. Bernstein & Co. said.

The oil companies may bid as much as A$5.30 a share, Neil Beveridge, a Hong Kong-based analyst at Bernstein, said in a report. Shell and PetroChina offered A$4.45 a share for Arrow’s Australian coal-seam gas business, the Brisbane-based company said yesterday. That values the deal at A$3.3 billion.

“This is relatively cheap compared to historic deals, suggesting there may be possible upside to come for Arrow shareholders,” Beveridge said in the report dated March 8.

Arrow shares rose 47 percent yesterday to A$5.11 after the announcement. The bid values Arrow at A$5 a share, given that the company’s international business is worth about A$400 million, or 55 cents a share, according to Nik Burns, an analyst at RBS Morgans. Shell said yesterday that the proposal to acquire Arrow excludes the gas explorer’s overseas assets.

The company’s shares traded at A$5.04 at 3:50 p.m. in Sydney, down 1.4 percent, compared with a gain of 0.3 percent for the benchmark S&P/ASX 200 Index.

The bid from Shell and PetroChina is one of the lowest for Australian coal-seam gas assets, according to the analyst Burns. The offer values Arrow’s proven and probable reserves at 88 Australian cents a gigajoule, compared with an average of A$1.88 a gigajoule for 20 offers made in Australia since 2005, he said.

Queensland Gas

The A$4.45-a-share proposal for Arrow’s Australian coal- seam gas assets is close to the bottom of Deutsche Bank’s valuation estimates, which range from A$4.35 a share to A$5.72 a share. “This may be an opening bid,” John Hirjee, an analyst at Deutsche Bank in Melbourne, said in a report.

Arrow’s Australian operations are worth more than A$6 a share, based on the price BG Group Plc paid for Queensland Gas in 2008, said John Young, an analyst at Wilson HTM Investment Group in Melbourne. Shell and PetroChina may need to boost their offer to a figure in the “high $5 range” to succeed, he said.

New Hope Corp., which owns almost 17 percent of Arrow, hasn’t been in contact with Arrow since the announcement or made any decisions yet, Chief Executive Officer Robert Neale said by phone today. “We’re waiting for more information.”

Phil Connole, a spokesman for Shell in Melbourne, and Mao Zefeng, a PetroChina spokesman in Hong Kong, declined to comment. Andrew Barber, a spokesman for Arrow in Brisbane, did not immediately return a phone call.

Competing Bids

Rival bids are unlikely, said most analysts, including Macquarie Group Ltd.’s Adrian Wood in Sydney.

“We believe a white knight is unlikely to emerge and force the offer price higher,” Wood said in a report today. “That said, we think Arrow has played Shell’s management well thus far, and a higher offer from Shell cannot be ruled out.”

Shell, which already owns 30 percent of Arrow’s Queensland coal-seam gas holdings, plans a liquefied natural gas project on Curtis Island off central Queensland that is expected to produce as much as 16 million metric tons of LNG a year, the Hague-based company said in a document lodged with the state government last year. An acquisition of Arrow would give Shell additional reserves to underpin LNG production units in Queensland.

In addition to the cash offer, shareholders would get stock in a new company comprising Arrow’s international business, Arrow said yesterday. Shell has an option to acquire 50 percent of the overseas business, analysts said.

Coal-seam gas is mostly methane found on the surface of coal. The gas can be extracted when pressure on the seams is reduced, usually by removing water. LNG is gas chilled to liquid form for transportation by ship to places not linked by pipelines.

–With assistance from John Duce in Hong Kong. Editors: Alex Devine, John Chacko.

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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