Arrow Energy Ltd., owned by Royal Dutch Shell Plc (RDSA) and PetroChina Co., offered about A$520 million ($540 million) for Bow Energy Ltd. (BOW), seeking more resources to underpin a proposed liquefied natural gas project in Australia.
Arrow, a coal-seam gas explorer and producer in Queensland state, offered A$1.48 a share in cash, Brisbane-based Bow said today in a statement. That’s 67 percent more than Bow’s price of 88.5 cents in Sydney trading on Aug. 19. The shares surged 60 percent today to A$1.415 at the 4:10 p.m. close.
The bid “does significantly undervalue the stock compared with where we think it should be,” said Andrew Williams, a Melbourne-based oil and gas analyst at RBC Capital Markets, who has a price target of A$1.75 on Bow’s shares. “It still leaves scope for upside and more play to come.”
Arrow plans a fourth LNG venture on Queensland’s Curtis Island, following approvals for more than $50 billion in rival developments led by BG Group Plc (BG/), Santos Ltd. (STO) and ConocoPhillips (COP) to meet rising demand in Asia. Bow has been the subject of takeover speculation since Santos, Australia’s third-largest oil and gas producer, agreed last month to pay about A$730 million to buy the shares in Eastern Star Gas Ltd. (ESG) it didn’t already own.
Bow has been in talks to supply gas to the companies developing the LNG projects in Queensland as it targets a more than fivefold gain in reserves by next year, Chief Executive Officer John De Stefani said in an Aug. 3 interview. Bow increased its proven and probable reserves to 238 petajoules last month and aims to reach 1,250 petajoules in 2012, enough gas to support an LNG plant producing 1 million metric tons of the fuel annually over 20 years, De Stefani said.
The offer values Bow at about 6 Australian cents a gigajoule of gas reserves that may be recoverable, 33 percent less than the price Santos agreed to pay for Eastern Star and the amount Shell and PetroChina paid last year for Arrow, John Young, a Melbourne-based analyst at Wilson HTM Investment Group, estimated today. Those deals valued the targets at 9 cents a gigajoule, he said.
“Bow is still working to demonstrate conversion to 2P reserves,” from proven, probable and possible reserves, “whereas Arrow and Eastern Star were probably more advanced,” Young said, adding he thinks a rival bid is unlikely.
Dart Energy Ltd. (DTE), a Sydney-listed company developing coal bed methane resources in countries including Australia, rose 6.7 percent to 56 cents in Sydney, the most in four months. Exoma Energy Ltd. (EXE), a natural gas explorer in Queensland, climbed 21 percent to 14.5 cents in Sydney, the most since July 1.
A transaction with Bow would help Arrow increase the size of its first two LNG processing units, Chief Executive Officer Andrew Faulkner said today in a statement. Arrow initially plans to produce 4 million tons of LNG a year from each of the first two units, the company said this month.
Shell is “quite happy” to wait to develop the Arrow LNG project as costs to develop ventures rise, Peter Voser, chief executive officer of The Hague-based company, told analysts in July. Arrow expects a final investment decision to proceed with its development in late 2013, Faulkner said in June.
“Shell’s public statements indicate that they didn’t mind being last, and they were willing to wait,” RBC’s Williams said. “Now it looks as though they may want to accelerate it. It’s a clear signal there is an LNG opportunity out there.”
Bow recommends that shareholders take no action at this stage, the company said in the statement.
“It makes sense for both companies to explore business opportunities given the proximity of both companies’ coal-seam gas assets and the complementary nature of our businesses,” Arrow’s Faulkner said. “Arrow has the technical capability, capital resources and guaranteed market that may assist Bow Energy realize the potential of its assets.”
Conoco and Sydney-based partner Origin Energy Ltd. (ORG) last month approved the first phase of a $20 billion project in Queensland. Santos said in January its venture would cost $16 billion, while BG in October said it would invest $15 billion.
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