Origin Energy Limited has selected ConocoPhillips to invest in the joint development of a four train CSG to LNG project using Origin’s world-class CSG reserves and resources in Queensland. ConocoPhillips is a US listed company with a market capitalisation of US$125 billion and a world-leader in developing and operating Liquefied Natural Gas (”LNG”) and Coal Seam Gas (”CSG”) projects.
• Transaction provides immediate benefit to Origin’s shareholders: substantial earnings uplift; balance sheet strengthened; and $1.5 billion capital management initiative
• Independent Expert, Grant Samuel & Associates Pty Limited, values Origin’s shares at A$28.55 to $30.71
• ConocoPhillips is a leading developer and operator of LNG plants, a leader in LNG technology and the leading developer and operator of CSG in the United States
Origin’s Chairman, Mr Kevin McCann AM said “Origin is delighted to welcome ConocoPhillips, one of the world’s largest integrated energy companies, as its partner in monetising our extensive CSG reserves and resources. This outcome represents an outstanding result for Origin shareholders, with ConocoPhillips paying up to A$9.6 billion for a 50% share in a CSG to LNG joint venture.”
The transaction with ConocoPhillips is conditional on FIRB approval and any approvals necessary because of BG’s Offer.
Outstanding CSG to LNG Joint Venture
ConocoPhillips to invest up to A$9.6 billion (1) for a 50% share of a CSG to LNG Joint Venture
comprising:
- An up-front payment of US$5.0 billion (A$6.0 billion);
- Additional fixed contribution of A$1.15 billion to carry Origin’s share of costs to Final Investment Decision (FID) expected end 2010; and
- Additional payments of US$500 million (A$600 million) at the point that each of the four LNG trains is approved, to partly carry Origin’s share of costs.
On this basis the CSG 3P reserves benchmark is up to A$1.88/GJ.
ConocoPhillips will become a 50% shareholder in the company that owns all of Origin’s CSG interests. This company will develop these interests into a CSG to LNG project, providing a fully aligned partnership across the LNG value chain.
Origin will be the upstream CSG operator and ConocoPhillips will be the downstream LNG operator, with the joint-venture company to market the LNG.
The budget to FID includes expenditure necessary to complete current and planned field development and reserves maturation activities, site selection and FEED for a two-train CSG to LNG project. The first two LNG trains are planned for 3.5 mtpa each, with first LNG production by 2014.
The existing gas supply agreements in Origin’s CSG business will be part of the joint venture, including contracts to Origin Energy on their existing contractual terms. Origin will also provide a market for ramp-up gas that may be produced in the development phase of the project.
Origin’s Managing Director, Mr Grant King said “ConocoPhillips’ investment gives confidence in the delivery of a CSG to LNG project. The joint venture combines Origin’s extensive CSG reserves and resources and operational capabilities, with ConocoPhillips’ proven LNG and CSG development and operating capabilities. We believe the Joint Venture will deliver both companies with a strong and competitive position in a rapidly growing market for LNG.”
Financial Benefits and Capital Management
The CSG to LNG transaction with ConocoPhillips will transform Origin’s financial position. Following completion of the transaction, Origin will have no net interest bearing debt and a significant cash balance. This will result in an immediate and substantial increase in earnings for Origin from the interest benefit. Origin estimates the transaction will provide accretion to the average consensus underlying EPS for the 2009 financial year of over 35% assuming completion on 31 October 2008, and if the earnings impact were to be annualised, the accretion to average consensus underlying EPS is estimated at over 55% (2).
1 For all analysis of this joint venture transaction a USD/AUD exchange rate of 0.83 has been assumed.
2 The average consensus of eight international broking firms for FY 09 NPAT is $507 million, which based on current shares on issue of 881 million equates to EPS of 57.5 cps. Calculation of uplift over this EPS includes elimination of $18.6 million being 50% of the after tax earnings from Origin’s CSG business in FY 08, and addition of the after tax interest benefit resulting from receipt of the upfront payment. This calculation has been made before accounting for the impact of any capital management initiatives.
This strengthened financial position will enable Origin to fund both its future growth and undertake capital management initiatives for the benefit of shareholders.
Following completion of the transaction, Origin intends to undertake a A$1.5 billion capital management program:
- An immediate payment of an additional dividend of 25 cents per share fully franked (~A $225 million) to double the 2008 dividend, providing a new base for future dividends. Origin will now target an increased dividend payout ratio of at least 60% of underlying earnings; and
- Commence an on-market buy-back of shares of up to A$1.275 billion.
Further capital management initiatives will be considered following a review of additional near term investment opportunities available to Origin.
Independent Valuation of Origin at $28.55 to $30.71 per share
The Independent Expert, Grant Samuel & Associates Pty Limited (”Grant Samuel”), has valued Origin’s shares at A$28.55 to A$30.71 per share.
Grant Samuel’s value range for the CSG assets of Origin is A$18.70 to A$19.49 per share, assuming completion of the transaction with ConocoPhillips, and the value range for the remainder of the Origin businesses (less net debt and other items) is A$9.85 to A$11.22 per share.
ConocoPhillips’ chairman and chief executive officer, Jim Mulva said “With this investment, ConocoPhillips has gained access to the leading coal bed methane(3) resource in Australia, comprising 8.1 million net acres. Moreover, the Company has enhanced its LNG position with the creation of an additional Australian LNG hub serving Asia-Pacific markets. The joint venture leverages ConocoPhillips’ strengths and experience in project management, coal bed methane, and LNG technology, operations and marketing.
“This joint venture better balances ConocoPhillips’ oil and gas resource mix. In addition, the company’s long-term production growth is expected to benefit from a steady, secure source of resource additions. We look forward to working closely with Origin in delivering this valuable energy resource to customers” said Mr Mulva.
Origin’s Chairman, Mr Kevin McCann AM, said “Origin’s Directors commenced the CSG monetisation process shortly after rejecting BG’s approaches in late May. ConocoPhillips’ investment clearly demonstrates the value of Origin’s CSG assets. The Independent Expert’s valuation of $28.55 to $30.71 per share, which the Origin Directors support, highlights the inadequacy of BG’s offer. Accordingly, the Directors continue to unanimously recommend that shareholders reject BG’s demonstrably inadequate offer.”
Mr Grant King said “Completion of this transaction will transform Origin. We will have the financial strength to fund a decade of growth.”
(3) Coal bed methane or CBM is the term commonly used to describe coal seam gas (CSG) in the United States. The terms may be used interchangeably.
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