Friday 13th October 2000
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Overshadowed by Tuesday's announcement of the $4.6 billion sale of Fletcher Energy to Royal Dutch/Shell and Apache was an Australian sideshow in which Fletcher Energy could conceivably blow a few million bucks
The story starts in the Timor Sea north of Darwin where a consortium of oil and gas operators led by Phillips Petroleum has got together to exploit the Bayu-Undang gas and liquids reserve.
The project boasts it is world-class. Its estimated recoverable reserves of 3.4 trillion cu ft of natural gas and 400 million barrels of gas condensate give it a field life of about 25 years. The first liquids production is planned for late 2003.
One of the partners in Bayu-Undang, with an 8.8% stake, is Petroz NL, a Brisbane-based oil and gas explorer and producer with a market capitalisation of about $A100 million ($133 million).
Petroz has some fairly nifty production assets in a neighbouring Timor Sea block known as Zoca 91-12. Last year these pumped out six million barrels of oil, of which Petroz' share was 890,000 barrels bringing in revenue of $A32 million and a profit of $A10 million.
Overall the company broke even last year with net earnings of $A1.7 million following a disastrous $A22 million loss the year before.
But the Australian has a small problem - it doesn't have any cash and it needs to come up with $US120 million ($300 million) over the next few years to fund its commitment to Bayu-Undang's development programme.
Petroz has been talking to banks interested in financing the debt component of the commitment, says managing director Rod Brown. But interested though they might be the banks aren't prepared to front up any cash until the equity component has been put in place.
Enter Fletcher Energy, which has the opposite problem.
Fletcher Energy has plenty of cash but it needs production - anywhere will do - to replace the Maui gas field, which will run dry at some point over the next few years. Its exploration efforts offshore of Brunei have so far failed to justify its early enthusiasm.
It seemed a marriage made in heaven. Petroz' directors enthusiastically embraced a scheme under which Fletcher Energy would pump in $A97 million ($128 million) in exchange for a controlling 33.7% shareholding.
Fletcher Energy was granted an option to buy 29.5 million new shares, or 13%, at 43.5Ac a share. Subject to Petroz shareholders' approval it would then take a 70.5 million share placement, also at 43.5Ac.
It would also underwrite a 3:5 rights issue to raise an additional $A53.4 million, giving Petroz the cash to fund about half its Bayu-Undang commitment. The banks would then take care of the other half.
Not everybody, however, thought this was such a great deal.
First, Sir Ron Brierley's GPG jumped in, grabbing a 5% stake and declaring Fletcher Energy wasn't paying enough of a premium for control.
In classic style, GPG asserted there were irregularities involved in Fletcher Energy's exercise of its options and threatened legal action if the shareholders voted to approve the placement.
Then rival explorer Novus Petroleum weighed in with a competing offer of one Novus share for every 4.5 Petroz shares.
Novus managing director Bob Willimas unsurprisingly slagged off the Fletcher Energy plan as "offering Petroz shareholders no certainty of receiving value for their shares," whatever that might mean.
By the time the shareholders' meeting came around late last week the Petroz share price had risen to 51Ac, making both offers look weak.
At that price 4.5 Petroz shares were worth $A2.30, when Novus shares were trading at $A1.73.
The discount was a whacking 25%, while Fletcher Energy's effective entry price of 43.5Ac represented a 15% discount.
In the event, GPG didn't have to go to court as the shareholders voted Fletcher Energy's placement down. Petroz' directors had earlier recommended shareholders reject the Novus bid. For Petroz, back to square one.
The explorer's options are now holding a humungous rights issue, selling assets - that is, the producing wells in the Timor Sea - or just selling the whole company. None of these sound too value-enhancing.
Novus has said it may come back with a second offer. Fletcher Energy is keeping mum but may also come back, if it isn't too distracted by itself being sold.
What GPG's real agenda is in all this is anyone's guess.
Cynics, examining GPG's timing, will suspect the motive was pure greenmail.
Where there's a much-sought asset and one, or preferably two highly interested and deep-pocketed contenders, it's got to be worth grabbing a small but significant stake and making as much trouble as you can.
Then you just sit back and wait for someone to knock on the door and buy you off.
Kinder people will point out GPG's stance was vindicated by the majority of the other shareholders.
Even so, it leaves Petroz looking for $A150 million to fund Bayu-Undang. More urgently it has to survive a January rollover review of a $A35 million funding facility with Commonwealth Bank of Australia, of which $A10.4 million has been drawn.
Such desperation doesn't bode well for the share price although it is so far holding up well at 50Ac, around the price, timing suggests, at which GPG bought in.
If it takes a dive the raider will be nursing a loss. And that, Fletcher Energy will no doubt think, will serve it, and all those other shareholders who voted down the rescue package, jolly well right.
In the meantime, Fletcher Energy has itself to decide what to do with its $17 million stake. But that's something for Shell to worry about.
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