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Ophir Seen Luring Shell With Africa Gas Assets: Real M&A

Ophir Seen Luring Shell in Africa Amid Cash Crunch
Royal Dutch Shell Plc predicts liquefied natural gas demand will increase to 400 million tons a year by 2020, a fourfold increase from 2000. Photographer: Andrey Rudakov/Bloomberg

Ophir Energy Plc, the U.K. explorer with natural gas assets in Africa, is turning into a takeover target for producers including Royal Dutch Shell Plc as its limited cash hampers the ability to develop finds on its own.

Shares of London-based Ophir have fallen 27 percent from their high in September after the company indicated it will be short of money needed for drilling projects this year and BG Group Plc, its partner in Tanzania, opted to slow development of a liquefied natural gas venture there. The drop, also fueled as shareholders Mittal Investments Sarl and Och-Ziff Capital Management Group sold shares, left the $2.8 billion explorer trading last week at 3.2 times its net assets, the lowest in almost a year, according to data compiled by Bloomberg.

Ophir offers buyers the chance to gain a foothold or expand in Africa with access to assets that have the potential to supply enough fuel for the continent for at least a decade. The company could attract Shell, which lost a bidding war last year for East African explorer Cove Energy Plc, according to SVM Asset Management Ltd. Chinese state-owned firms Cnooc Ltd., which has projects in Uganda, and China Petrochemical Corp., the refiner known as Sinopec Group, also could be interested, Guinness Atkinson Asset Management Inc. said.

Ophir has “got to the size where it’s going to be difficult for them to develop those assets on their own,” Will Riley, a London-based fund manager who helps oversee $330 million including Ophir shares at Guinness Atkinson, said in a telephone interview. “The stock looks reasonably valued relative to the assets it has. They are a logical takeover candidate.”

Africa Play

Ophir Chief Executive Officer Nick Cooper declined through an outside spokesman to comment on the potential for the company to become a takeover target.

Cooper, a former BG geophysicist and Goldman Sachs Group Inc. banker, has been focusing on gas projects off Equatorial Guinea and Tanzania, where Ophir plans to produce LNG for export. It has interests in areas off East Africa’s coast with an indicated resource potential of more than 40 trillion cubic feet, enough to supply the continent for a decade, based on the most recent consumption data compiled by BP Plc.

Ophir, which has yet to turn a profit and will release its 2012 results later this week, also has exploration assets in the Republic of Congo, Gabon, Madagascar and some other African nations.

Shares of Ophir, which peaked at 641 pence in September, have since declined as the company announced plans in October to spend $650 million on its 2013 drilling program, an amount exceeding its cash available for investments by about $450 million, according to Morgan Stanley.

Shareholder Sales

The stock fell further last month after BG said on Feb. 5 that it would slow development of an LNG project in Tanzania because of a lack of infrastructure and government capacity to handle large investments. The same week, Ophir investors Mittal, run by billionaire Lakshmi Mittal, and Och-Ziff sold shares representing 9 percent of the company’s outstanding stock through Credit Suisse Group AG. Separately, BlackRock Inc., the world’s largest money manager, also sold Ophir stock, according to data compiled by Bloomberg.

Ophir’s 27 percent decline from its Sept. 14 high was the second-worst during the period among stocks in the FTSE All-Share Oil and Gas Producers Index. The stock ended last week at its cheapest to book value since last March, data compiled by Bloomberg show.

“Ophir’s share price has been hurt by the fact that people know” about its funding problems, Stuart Amor, a London-based analyst at RFC Ambrian Ltd., said in a phone interview. “That makes them more susceptible to a takeover.”

Today, the explorer’s shares fell 1.1 percent to close at 461.7 pence. After the close of trading, Ophir announced a plan to raise about 553 pounds ($835 million) by selling shares and rights.

‘Attractive Target’

For energy companies seeking new reserves to increase production, “Ophir would make an attractive target in terms of its exploration portfolio,” he said.

Ophir is undertaking a drilling program involving as many as 15 wells targeting about 1 billion barrels of oil equivalent resources, it said Nov. 15. The explorer is searching for partners to share project costs, and has opened its books to energy companies seeking to perform due diligence on the African explorer.

Buying Ophir outright offers “a combination of acquiring discovered resources in Equatorial Guinea and Tanzania to potential LNG projects plus very interesting exploration potential,” said Anish Kapadia, an analyst at Tudor Pickering Holt & Co. in London, who recommends investors buy Ophir shares. “Any companies with holes in those areas in their portfolios could look at it.”

Shell Motive

Shell, which explores Tanzanian waters nearby Ophir, may be interested because of its gas reserves, said Colin McLean, CEO of Edinburgh-based SVM Asset Management, who helps manage $800 million, including Ophir shares. The Hague-based company, the world’s largest LNG supplier, has been expanding its business and last month agreed to buy LNG assets from Repsol SA.

Shell predicts LNG demand will increase to 400 million tons a year by 2020, a fourfold increase from 2000. It has been in talks with Anadarko Petroleum Corp. and Eni SpA about joining larger gas discoveries off Mozambique to the south of Tanzania.

Ross Whittam, a London-based spokesman at Shell, which has a market capitalization of $213 billion, declined to comment on a possible purchase of Ophir.

China Demand

Cnooc, which just completed a $15.1 billion takeover of Canadian explorer Nexen Inc., has joined London-based Tullow Oil Plc and Total SA of France in developing Uganda oil fields in East Africa. Cnooc, along with refiner Sinopec, may be interested in Ophir’s LNG projects, which target exports to fuel China’s economy, Guinness Atkinson’s Riley said.

Representatives for Cnooc weren’t immediately available for comment. Lv Dapeng, a Beijing-based spokesman for Sinopec, didn’t answer two calls made to his office.

Ophir is more likely to secure partners for projects rather than attract a corporate acquisition, given the investments a buyer would have to make in the company, said Stuart Joyner, an analyst at Investec Securities Ltd. in London. Any buyer would have to be prepared to provide “potentially billions of dollars” in LNG project development, he said in a phone interview.

“The data room has been open for quite some period, and they have not been able to do a deal,” Joyner said. “Industry prices for these assets are probably below the stock market valuation at the moment.”

Relative Value

Even after Ophir’s recent declines, the stock is still almost 90 percent higher than when it first started trading in July 2011. While the explorer’s price-book ratio is at the lowest level in almost a year, it’s still more than the median 1.97 for exploration and production companies with a market value larger than $1 billion, according to data compiled by Bloomberg.

As Ophir pursues its drilling projects, analysts expect the stock to rise more than 50 percent in the next year to 709.71 pence, data compiled by Bloomberg show.

“You’ve got a few catalysts coming up that we expect to drive the share price,” Al Stanton, an Edinburgh-based analyst at Royal Bank of Canada, said in a phone interview. For an acquirer, “Ophir offers material stakes in material projects.”

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