AGL Will Probably Buy Gas Field Stakes From BG, Analysts Say

By Angela Macdonald-Smith

Oct. 29 (Bloomberg) -- AGL Energy Ltd., Australia's biggest electricity and gas retailer, will probably exercise an option with BG Group Plc to buy stakes in natural gas fields for A$856 million ($552 million), analysts including Citigroup Inc. said.

Exercising the option to buy all of the Lacerta coal-seam gas field and 15 percent of the Polaris exploration license in Queensland would strengthen Sydney-based AGL's gas supplies, protecting it against rising prices, Citigroup said in an Oct. 28 report. Citigroup cut its call on AGL stock to ``hold'' from ``buy'' citing above-average performance in the past six months.

The option was announced yesterday as part of an agreement by AGL to sell its 22 percent stake in Queensland Gas Co. for A$1.18 billion to BG, which is bidding to buy all of the Brisbane-based company. The utility, which also uses gas for power generation, has a target to lift its ownership of gas output to 2,000 petajoules (1.9 trillion cubic feet). The BG deal also includes an option to buy a power plant in Queensland.

``We believe there is only a limited chance'' of AGL not exercising the two options within the four-month limit after the close of BG's bid for Queensland Gas, ABN Amro Equities Australia Ltd. said in a separate Oct. 28 report. AGL management will have about six months to study other alternative investment opportunities, it said.

AGL Energy dropped as much as 1.7 percent to A$14.13 in Sydney trading, in contrast with a gain of as much as 3.3 percent in the exchange's benchmark utilities index. The stock was at A$14.31 at 11:59 a.m. local time.

JPMorgan Chase & Co., Merrill Lynch & Co. and Credit Suisse Group each said in separate reports they expect AGL will exercise the gas purchase option. UBS AG said the price for the option ``seems a but high at first blush'' and that AGL may consider alternative investments.

Goldman Sachs JBWere Pty raised its recommendation on AGL stock to ``hold'' from ``sell.'' The transaction will strengthen AGL's cash surplus, will increase its equity gas holdings, provided the option is exercised, and AGL will be able to re- invest cash into growth investments, the firm said.

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