Origin Says $8 Billion Deal Justifies Rejection of BG

By Angela Macdonald-Smith

Sept. 8 (Bloomberg) -- Origin Energy Ltd., Australia's biggest producer of natural gas from coal seams, said an $8 billion transaction with ConocoPhillips ``more than justifies'' its rejection of a hostile takeover offer from BG Group Plc.

The agreement to sell 50 percent of its coal-seam gas unit to Houston-based ConocoPhillips forms part of an independent valuation of Origin that is about double the A$15.37 a share offered by BG, Origin Chairman Kevin McCann said today. Origin surged 13 percent to a record in Sydney trading.

ConocoPhillips, the second-biggest U.S. oil refiner, will make an initial $5 billion payment to Sydney-based Origin to buy into the venture, which will process coal-seam gas into liquefied natural gas for export to Asia. Origin last month urged shareholders to reject BG's A$13.5 billion offer, saying the gas partnership would yield more value.

``This is a massive deal and the sum that ConocoPhillips is prepared to pay really puts a firm valuation under Origin,'' said Gavin Wendt, a senior resources analyst at Fat Prophets Funds Management in Sydney. ``It makes it impossible now for BG with its current offer.''

Origin, which is also Australia's second-biggest electricity and gas retailer, rose A$2.00 to A$17.65 on the Australian stock exchange, after earlier reaching as high as A$19.99. The shares closed 15 percent higher than BG's offer.

`A Gap Called Daylight'

BG is reviewing the documents available on the ConocoPhillips-Origin transaction and will comment further ``in due course,'' said Rob Millhouse, a spokesman for the Reading, England-based company in Australia. BG rose 3.3 percent to 1,067 pence at 8:17 a.m. in London.

An assessment Origin commissioned from Grant Samuel & Associates Pty values the company at between A$28.55 and A$30.71 a share, the Australian company said today in a statement to the exchange. Assuming the transaction with ConocoPhillips is completed, Grant Samuel valued Origin's coal-seam gas unit at between A$18.70 and A$19.49 a share, as much as 27 percent higher than BG's offer for all of the company.

``There is a substantial gap called daylight between that valuation and the BG bid,'' Origin Managing Director Grant King told reporters in Sydney at a briefing on the ConocoPhillips transaction. The valuation ``highlights the inadequacy of BG's offer,'' Chairman McCann said.

The ConocoPhillips investment represents an up-front payment of A$6 per share to Origin, with potentially a further A$3 per share cash to come from subsequent installments for half of the coal-seam gas unit, said John Colnan at Shaw Stockbroking Ltd. in Sydney.

Retailing, Power

Assuming Origin's energy retailing and power generation business is worth about A$10 a share, that means Origin has demonstrated its business is worth in the ``mid to high A$20s'' a share, in line with Grant Samuel's report, he said.

ConocoPhillips and Origin expect to commit in late 2010 to building a ``multi billion dollar'' LNG plant, involving two units producing 3.5 million metric tons a year, said John Lowe, executive vice president for exploration and production at the U.S. company. Shipments are due to start from a site in Queensland in 2013.

LNG demand is set to increase by 10 percent a year through 2015, more than five times projected gains in crude oil, as power producers switch to cleaner fuels, according to Citigroup Inc. ConocoPhillips is ``really excited'' about the opportunity presented by the Origin venture to meet rising LNG demand in Asia, said Lowe. ConocoPhillips' technical team is ``giddy'' about Origin's resource, totaling 42 trillion cubic feet of coal-bed methane, he said.

`Rare Opportunity'

``This is a really rare opportunity that we're really grateful for,'' Lowe said at the briefing. Credit Suisse Group is advising ConocoPhillips on the transaction.

The deal will ``transform'' Origin, which will reduce debt, return some funds to shareholders and have money available for expansion, King said. It will boost Origin's earnings per share in the year ending June 30, 2009, by more than 35 percent, or more than 55 percent on an annualized basis, he said. Origin started a process, codenamed ``Project Fridge,'' three months ago to find a partner to help develop its coal-seam gas resource.

Origin plans to start buying back as much as A$1.275 billion of its shares once the transaction is completed. It will also pay an immediate extra dividend to shareholders of 25 cents a share, doubling the 2008 distribution.

ConocoPhillips's investment values Origin's coal-seam gas resource at A$1.65 per gigajoule of proven, probable and possible resources based on an LNG project with two production units, King said.

Petronas-Santos

That's the same valuation as for an investment by Malaysia's Petroliam Nasional Bhd. in a rival LNG project in Queensland led by Santos Ltd., he said.

Origin last month used the value of the Petronas-Santos deal to justify rejecting the offer from BG. The U.K. company argued in its bid document that a more relevant valuation is the 52 cents a gigajoule that Royal Dutch Shell Plc paid in a transaction with Arrow Energy Ltd.

With the transaction, Origin and ConocoPhillips become the sixth venture proposing to build an LNG plant in Queensland state based on coal-seam gas. BG Group, Petronas and Shell are among partners in rival projects.

Origin will operate the coal-seam gas production part of the venture, while ConocoPhillips, which already runs an LNG plant in northern Australia, will manage the LNG output.

Queensland Gas

News of the transaction boosted the shares of rival coal- seam gas producers in Australia. Queensland Gas Co., BG's partner in a proposed A$8 billion LNG project, rose 30 percent to A$4.80 in Sydney, the biggest advance in 3 1/2 years. Arrow Energy rose 7.8 percent to A$3.18, while Santos rose for the first time in seven days, climbing 7.4 percent.

Origin had the outlook on its BBB+ credit rating revised to positive from stable by Standard & Poor's Ratings Service, which said the ConocoPhillips investment ``delivers greatly enhanced financial flexibility.''

Coal-seam gas, mostly comprising methane, bonds as a thin film on the surface of coal and is released when pressure is reduced, usually after water is removed. LNG is natural gas that has been chilled to liquid form, reducing it to one-six- hundredth of its original volume for transportation by ship to destinations not connected by pipeline.

To contact the reporter on this story: Angela Macdonald-Smith in Sydney at amacdonaldsm@bloomberg.net