Oil companies Royal Dutch Shell PLC (NYSE ADR: RDS.A) and PetroChina Co. Ltd. (NYSE ADR: PTR) yesterday (Monday) made a joint offer for Australian energy producer Arrow Energy Ltd. in yet another demonstration of how China is turning Australia into its personal commodities broker.
The $3.4 billion (A$3.26 billion) deal would give shareholders A$4.45 per share – a 28% premium from Friday's share price – and a share in a new Arrow international-business entity for each current Arrow share.
Market reaction was favorable as Arrow's prices soared 47% Monday following the news, up to A$5.11 on the Australian stock exchange (ASX).
"It's an opportunistic bid and good for Arrow shareholders," Tim Schroeders, Pengana Capital portfolio manager, told CNBC.
Shell already has a stake in Arrow, but this would be China's first entry into Australia's coal-bed methane sector. Shell owns 30% of Arrow's coal-seam-gas acreage and has a 10% stake in its international business.
The deal is indicative of two developing themes in the natural gas industry: Australia's need to consolidate competing coal-seam-gas projects and China's resource stock-piling – especially from Australia – to capitalize on historically low prices.
"On a higher level, this deal is yet another example of oil majors seeking to reposition further down the cost-curve, a position that unconventional gas potentially provides," said Alastair Syme, a London- based analyst at Nomura Holdings Inc, in Business Week.
Coal seam gas comes from stores of methane in coal seams found hundreds of feet underground, and Australia has plenty of coal-bed acreage to offer the world. The use of this unconventional natural gas source has risen in popularity due to other countries saving their conventional natural gas reserves for state-owned companies, causing a run on Australia's buried fortunes.
Australian companies are in a race to be the first to convert coal seam gas into liquefied natural gas (LNG) for export, and Queensland state has become the competition's main stage. Arrow is hoping to export LNG converted from coal seam gas to Asia by 2012.
The abundant supply in the land down under has recently stirred up merger-and-acquisition activity that has attracted the likes of energy company ConocoPhillips (NYSE: COP) and Britain's natural gas leader BG Group PLC (LSE: BG).
What may have sparked the Shell/PetroChina offer was Arrow's recent buy-out of smaller competitor Liquefied Natural Gas Ltd.'s stake in a $2-billion LNG project. Arrow was rumored to be considering selling some its precious coal-bed acreage to fund the project, which could hurt Shell's profits. That news, in addition to Arrow's recent fall in share price, has made the company an attractive purchase. Arrow was planning an initial public offering (IPO) of its international arm, but the future of that release now is unclear with another offer on the table.
China is no stranger to energy sector acquisition since last year it went on a shopping spree after commodity prices tumbled, restocking on reserves of iron ore, copper and oil.
China has found a local super store in Australia. Besides its vast supplies of resources, Australia's stable economy and easy trade route to Asia round out its attractive features. China and Australia's ties have tightened over the past ten years, with Australia's exports to China growing steadily, and China's foreign direct investment in Australia soaring.
Yet, similar deals have previously led to political tensions between the nations. In June 2009, Aussie mining company Rio Tinto PLC (NYSE ADR: RTP) halted a $19.5 million deal with the Aluminum Corp. of China (NYSE ADR: ACH), after national speculation that giving China too much control over Australia's resources would give Beijing powerful political leverage in its policies. The deal sparked controversy over Australian Prime Minister Kevin Rudd's intentions, with opponents referring to him as a "roving ambassador" for China.
PetroChina may have paired with Shell to downplay risk of a repeated bust.
The news drove shares of Arrow's rivals up, causing debate over who will be the next takeover target. Bow Energy Ltd. (ASE: BOW) was up 28%, Eastern Star Gas Ltd. (ASE: ESG) climbed 13%, and Santos Ltd. (ASE: STO) gained 3%.
"There are significant resources remaining to be consolidated in the form of companies like Eastern Star and Bow, and smaller ones," said David Wall, an analyst at Hartleys Ltd. in Perth, to Business Week.
News and Related Story Links:
Arrow Gets Bid From Shell, PetroChina
- Money Morning:
China Landing Natural Gas Deals as Prices Plummet
- Money Morning:
With Rio Tinto's Snub of Chinalco, Aussie Backlash Against China's New Capitalists Continues to Escalate
- Business Week:
Shell's Arrow Bid May Spur Australian Coal-Bed Gas Takeovers
- Financial Times:
Shell and PetroChina offer to buy Australia's Arrow