BG Group plc today announced its intention to acquire all of the issued shares in Origin Energy Limited (”Origin” ASX:ORG) at A$15.50 cash per share by way of a formal off-market takeover bid. The all-cash bid capitalises Origin’s ordinary equity at approximately
A$13.8 billion (£6.7 billion) fully diluted.
The offer price represents a 48% premium to Origin’s closing price of A$10.47 on 29 April 2008 - the last full day of trading before the announcement of BG Group’s initial approach on 30 April 2008 - and a 72% premium to Origin’s 90-day Volume-Weighted Average Price (VWAP) on 29 April 2008.
BG Group’s offer price will be adjusted for any 2007/8 final dividend and any other distribution or return to Origin shareholders.
BG Group believes that its offer represents a material premium for Origin shareholders which reflects the value of Origin’s integrated energy business and its longer-term prospective coal seam gas (CSG) development. BG Group believes that a detailed and careful analysis of the technical, financial and commercial risks associated with the commercialisation of Origin’s CSG resources will confirm the attractiveness of its immediate all-cash offer.
In light of this, BG Group considers that Origin shareholders should be given the opportunity to consider its offer.
BG Group Chief Executive Frank Chapman said: “Origin has good retail, power generation and exploration and production businesses. BG Group has performed a thorough and balanced assessment of Origin’s prospects and is offering an all-cash 72% premium to the 90-day VWAP to the date immediately prior to the announcement of our initial proposal.”
“Recent transactions, analysed on a comparable basis, confirm that BG Group’s offer provides full value to Origin’s shareholders. We believe Origin shareholders have limited visibility of the risks inherent in Origin’s current reserves position and Liquefied Natural Gas (LNG) joint venture alternatives. Today, Origin does not have sufficient CSG reserves for a LNG joint venture: there are third-party contractual rights over a large number of Origin’s tenements that have not been adequately explained; and Origin’s domestic market requirements from CSG exceed the company’s currently available proven reserves.
“Furthermore, there are currently no operating CSG to LNG plants anywhere in the world; competing projects in Australia are more advanced; and many billions of dollars of capital investment would be required.”
“Under Origin’s proposed CSG joint venture, shareholders would therefore bear protracted and material technical, project execution and commercial risks; and such a project, even if successful, would be unlikely to generate any revenues until 2015 or 2016 at the earliest. We would contrast these points with the certainty of our 72% premium, all-cash offer.”
Background
On 29 April 2008, BG Group approached Origin with a confidential proposal to acquire all of the ordinary shares in Origin by way of a recommended, court-approved scheme of arrangement between Origin and its shareholders, at A$14.70 per share in cash. Origin announced details of the BG Group proposal on 30 April 2008 and negotiations between the two companies began shortly afterwards.
On 28 May 2008, Origin confirmed to BG Group that it had concluded that the amended proposal from BG Group to acquire Origin at A$15.50 cash per share should be put to Origin’s shareholders.
The amended proposal was subject to finalisation of a scheme implementation deed. Origin’s endorsement of the revised BG Group proposal at $15.50 per share also followed the receipt and consideration, by Origin and BG Group, of a draft CSG reserves report which had been commissioned by Origin. Data from this report, indicating a reserves increase, was subsequently released by Origin on 30 May 2008.
On 29 May 2008, Santos Limited (”Santos” - ASX: STO) announced a joint venture with Petronas (Petroliam Nasional Berhad). Later that same day, the Origin Board withdrew its support for BG Group’s proposal.
Origin later stated that it had decided not to put BG Group’s offer to its shareholders for two reasons:
• the updated CSG reserves report, referred to by Origin on 30 May 2008 (albeit this report was available to Origin when it endorsed the revised BG Group proposal of A$15.50 per share); and
• Origin’s view that the Santos-Petronas agreement required a revaluation of the company’s coal seam gas (CSG) reserves.
BG Group engagement with Origin shareholders
BG Group will now engage with Origin shareholders directly to explain its rationale and set out its value proposition. BG Group will include within its formal offer documentation details of its views on several relevant matters, including those set out below.
Origin’s current CSG reserves
On the basis of BG Group’s analysis since Origin’s withdrawal from negotiations, BG Group believes that Origin’s CSG reserves and resources estimates, as announced on 30 May 2008, do not present a complete and balanced assessment of the scale and risk of the company’s reserves and resources and may lead to overestimation of the gas available for an LNG export project. BG Group’s conclusions are based on factors including:
• the basis of the two consecutive step changes in Origin’s total CSG resource base - the first announced at the Macquarie Bank investment conference on 7 May 2008 and the second in Origin’s reserves report published on 30 May 2008. Both reserves upgrades were announced following BG Group’s initial approach on 29 April 2008. However, according to BG Group’s subsequent analysis, Origin’s well density is far below that of its peers and insufficient wells
appear to have been drilled to give confidence in the reserves step changes;
• BG Group expects that Origin will require at least 3 000 petajoules (PJ) from CSG reserves for its retail business and has already committed 2 200 PJ to existing domestic contracts on the basis of 1P reserves of 1 330 PJ. For a further explanation of 1P, 2P and 3P reserves, and
• Origin’s contingent obligation to transfer significant gas interests to third parties for no value.
The revised reserves estimates announced by Origin on 30 May 2008 are stated to “reflect the current equity interests in Origin CSG tenements” (BG Group emphasis). In BG Group’s view, those estimates may not make appropriate allowance for the contractual arrangements, dating back to 2002, which grant third parties a reversionary interest in a proportion of Origin’s reserves and resources. Under these contracts, up to 45% of the reserves and resources in a significant number of Origin tenements would revert to a third party after cost recovery is reached, for no payment to Origin. BG Group believes that, in the context of future longerdated contracts of supply, any re-transfer could have a potentially material impact on Origin’s production, reserves and resources. Origin has stated that one third of its CSG reserves are subject to reversion rights.
In combination, these factors represent, in BG Group’s view, a significant increase in the risks in proving up Origin’s newly-stated 3P reserves base and a material reduction in estimated 3P gas reserves potentially available for a LNG project. These factors are therefore directly relevant to the valuation of Origin’s CSG reserves.
Santos-Petronas transaction is not a directly relevant pricing benchmark for Origin
On 29 May 2008, Santos announced that Petronas had agreed to purchase a 40% stake in Santos’ integrated CSG to LNG project, with an up front payment of US$2 billion. In withdrawing its support for BG Group’s initial proposal, Origin cited the Santos-Petronas agreement. Origin later suggested the Santos-Petronas agreement could support a valuation of its CSG reserves at A$16 billion by promoting a headline valuation metric of A$1.65 per gigajoule (GJ) for all of Origin’s 3P reserves. BG Group believes this suggestion fundamentally overstates the value of Origin’s CSG assets. BG Group also considers that the Santos/Petronas agreement is not a directly relevant pricing benchmark for valuing Origin’s CSG reserves after taking into account that:
• Petronas purchased an interest in an established, integrated LNG scheme currently under development. Origin currently has no such scheme;
• Origin’s reserves position is subject to significant technical risk; the company will require substantial investment, equipment, human resources and time to prove up reserves sufficient to support domestic demand, as well as a LNG development;
• not all of Origin’s CSG reserves are available for LNG development; a significant proportion is required for downstream commitments. Furthermore, a substantial volume of reserves could be lost under the exercise of reversion rights;
• Petronas paid US$2 billion up front for 40% of the first LNG train and BG Group expects that it will have attributed value for its participation along the entire supply chain. However, even if all of the Petronas consideration is notionally allocated to the feed gas reserves required for the planned LNG train (estimated by BG Group to be 5 500 PJ), the unit price would be around A$0.95 per GJ for the first train. Additionally, an Origin LNG project would likely be two to three years behind that of Santos-Petronas; assuming a 12% cost of capital, the comparable unit price falls to around A$0.70 per GJ for the first train; and
• two days after the Santos-Petronas announcement, Shell announced it had paid A$435 million for a direct interest in Arrow’s CSG tenements. This represents a value of A$0.52 per GJ.
The substantial risks for Origin shareholders in pursuing Origin’s LNG alternatives
When Origin announced that it would not put BG Group’s A$15.50 cash per share proposal to its shareholders, Origin stated that it would seek indications of interest from third parties to accelerate the commercialisation of its gas resources. On 19 June 2008, Origin stated that it had commenced a process to invite proposals and that “various potential structures, ranging from the acquisition of CSG assets to an integrated gas processing venture, will be explored”.
In pursuing LNG joint venture alternatives, Origin and its shareholders would be required to assume significant sub-surface, technical, financial, project delivery and LNG market risks over a substantial period. Many of the requisite skills to manage these risks do not reside within Origin. BG Group also believes that the financial implications of such a course of action would be significant for a company with Origin’s financial resources. In BG Group’s view, an integrated project for a single train of LNG would cost at least US$8 billion at 2008 costs. Even if successfully delivered, such a project would be unlikely to generate new revenues until 2015 or 2016 at the earliest.
An attempt to introduce a partner with the requisite skills or capital would bring its own challenges, potentially diminish or permanently remove the premium for control in the company and, in BG Group’s view, would be unlikely to deliver a substantial direct cash return to shareholders.
Additionally, given the fact that competing LNG projects are already further advanced, the monetisation of Origin’s gas reserves risks being pushed back by the earlier delivery of other projects, realising even less value as a consequence.
Indicative timing of BG Group’s offer
BG Group expects to lodge its Bidder’s Statement within approximately two weeks and to despatch the Bidder’s Statement and offer to Origin shareholders within a further three weeks. The offer is likely to be open for two months and may be extended.
Financing
BG Group has arranged and agreed the financing of the transaction. This is in the form of cash from the Group’s own reserves, combined with a syndicated loan provided by a consortium of lead banks, consisting of Banco Santander, S.A., HSBC Bank plc, Société Générale Corporate & Investment Banking and The Royal Bank of Scotland plc.
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