PERTH - Royal Dutch Shell and PetroChina jointly bid more than $3 billion for Australia's Arrow Energy , marking a Chinese firm's first foray in the country's burgeoning coal-seam gas sector and sending Arrow's shares soaring by nearly half.
Arrow said on Monday that the bid from a company jointly owned by Shell and PetroChina would give shareholders A$4.45 in cash per share, plus a share in a new entity comprising Arrow's international business.
Shell confirmed it was in discussions to acquire Arrow's domestic business, but declined to say more. PetroChina said the bid was at an early stage and there was no timetable.
Coal-seam gas is natural gas trapped in seams of coal. Arrow has reserves of 6,150 petajoules of coal-seam gas, the largest in Australia.
The teamup between Shell and PetroChina was a surprise. PetroChina may have realized that it'd be difficult to do a deal on its own given the regulatory sensitivities and that fact Shell already has a 30 percent stake in Arrow's domestic assets, said Nik Burns, an analyst at RBS Morgans.
For Shell, a partnership would give them the obvious path to selling the LNG output and potentially circumvent a rival bid. So it kills two birds with one stone.
The deal could come under scrutiny as Australia has had an uneasy relationship with Chinese investments after Rio Tinto scrapped a $19.5 billion deal with Chinalco last year and regulators said they preferred state-owned companies to keep their stakes in Australia's top resource firms to no more than 15 percent.
The relationship was further strained after China arrested four Rio Tinto staff last year on charges of bribery and stealing business secrets.
This is not the first collaboration of PetroChina and Shell. The two started joint exploration of a shale-gas block in China last year.
There's enormous upside for PetroChina to acquire these reserves than to develop them. said Neil Eeveridge, senior oil analyst at Sanford Bernstein. It's a lot cheaper to buy these reserves.
Shares of Arrow surged 47 percent to a record close of A$5.11, indicating expectations of a higher bid. Trading volume topped 45 million shares, 15 times the 90-day average.
Burns of RBS Morgans said Shell/PetroChina would likely need to up their offer in order for the Arrow deal to go through.
The market is expecting a higher price. We are monitoring the situation and are waiting to we get all the details of the proposal, Robert Neale, Managing Director at New Hope Corp , told Reuters. The firm owns about 17 percent of Arrow.
Arrow's board recommended shareholders take no action on the offer, which is non-binding and conditional, and appointed Citi and UBS as financial advisers to evaluate the deal.
FORCED SHELL'S HAND
According to earlier media reports, Shell has twice proposed acquiring Arrow, which is led by CEO Nick Davies, last year but failed to make a formal bid following a run-up in Arrow's share prices. Both parties never confirmed the reports.
Its latest offer is seen to have been sparked by Arrow's decision last month to acquire full ownership of its A$2.2 billion Fisherman's Landing coal-seam gas-to-LNG project, which
gave Shell more confidence in the Australian producer, analysts said.
In particular, a potential sell-down of Arrow's stake in its domestic coal-seam gas acreage to help fund the cost of the project is believed to have forced Shell's hand.
It's an opportunistic bid, said Tim Schroeders, a portfolio manager at Pengana Capital, which does not own Arrow shares. The problem is under the indicative proposal, it's difficult to value its international business.
Shell, which plans to build a liquefied natural gas (LNG) plant fed by Arrow's coal-seam gas, already holds a 30 percent stake in Arrow's domestic coal-seam gas assets as well as a 10 percent share in its international business.
The bid is the latest move by major firms into Australia's coal-seam gas sector, after energy majors such as BG Group , ConocoPhillips and Petronas poured in about A$20 billion since 2008 into the sector, looking to convert the abundant gas resource into higher-valued LNG for export to Asia.
Surging gas prices are increasingly drawing investors to coal-seam gas, a new underutilized energy source that analysts say could meet a sizeable part of Asia's future gas needs.
(Additional reporting by Sonali Paul and Narayanan Somasundaram in SYDNEY and Suilee Wee in HONG KONG)
(Editing by Ian Geoghegan and Muralikumar Anantharaman)