PERTH Australia's Origin Energy (ORG.AX) has rejected an improved $13 billion bid from UK gas producer BG Group BG.L, saying its coal seam gas reserves alone are worth over $15 billion after doubling its resource estimate.
Origin, Australia's largest coal-seam gas producer, said it would now focus on how to get the best value from its reserves, possibly through partnerships to supply a liquefied natural gas (LNG) plant or even through a break-up of the company, which also has power generation and retail businesses.
"We're now back in the game and we will be aggressively pursuing those alternatives as quickly as we can," Chairman Kevin McCann told reporters on Friday.
Origin said it was open to talking to BG about supplying its planned LNG plant in Gladstone, Queensland, or any other offer.
"BG is welcome to come back in any way they want," McCann said. BG said it was surprised by Origin's rejection and was considering its options.
Origin said BG increased its offer to A$15.50 per share in cash, valuing it at about A$13.6 billion and up from an initial offer last month of A$14.70 a share. The new offer is 48 percent above Origin's closing share price on April 29, the day before BG announced its initial proposal.
Origin shares closed up 6.85 percent at A$15.6, after hitting a record A$16.15, signaling investors are hopeful of a higher bid. Its shares have surged around 80 percent since the start of the year.
Shares in BG, which was spun out of former UK gas monopoly British Gas in 1997, fell as much as 5.2 percent to 1,227 pence in early London trade on disappointment it may have to raise its bid further to clinch a deal.
Buying Origin would boost BG's position in the fast-growing Asia-Pacific gas market and help fill a hole in the British firm's liquefied natural gas business.
Origin raised its estimated reserves by 121 percent, in a move seen as raising the pressure on BG to lift its bid again.
Origin said its rejection was also influenced by Thursday's news that Malaysian state-owned oil firm Petronas PETR.UL had agreed to pay $2.5 billion for a 40 percent stake in an LNG plant planned by Australian energy firm Santos (STO.AX).
"It's not a surprise that Origin would turn it down. Santos' transaction yesterday has really set a new benchmark for the price of coal-seam gas," said Paul Johnston, a utilities analyst at Commsec Securities Ltd.
Santos said on Thursday the Petronas deal valued its proved and probable (2P) reserves at A$4.91 per gigajoule (GJ), or A$1.65 per GJ if using the largest estimate of the coal-seam gas reserves. <ID:nSYD302132>
Chief Executive Grant King said that using the Petronas-Santos deal as a benchmark, Origin's coal seam gas reserves, now estimated at 10,000 petajoules, alone would be worth more than A$16 billion, well above BG's offer.
Campbell McComb, investment director at Armytage Private, which holds Origin shares, said BG's new offer was reasonable.
"At A$15.50, in our eyes, that's fair value or a bit better for Origin," McComb said. "The directors in rejecting it have set themselves up with a fair bit of work to do to justify how and why they rejected it."
BLOW TO BG
Analysts said Origin's rejection was a blow to BG, which is hoping the deal will help secure the reserves it needs for a proposed Australian LNG plant fuelled by coal-seam gas.
"It's quite difficult to find such large gas fields these days and there may be other energy majors eyeing Origin's assets. BG may decide to come back with a higher offer," said an analyst who asked not to be identified.
Origin said a review showed that its largest estimate of coal-seam gas reserves, also known as proved, probable and possible (3P) reserves, had increased to 10,122 petajoules (PJ) from an earlier estimate of 4,578 PJ.
Its most likely recoverable reserves, also known as 2P reserves, jumped 91 percent to 4,715 petajoules.
BG said it thought the review was unrealistic.
Proposals by some Australian firms to use coal-seam gas as a feedstock for LNG plants have sparked interest in the sector.
"There are many very respectable organizations in the LNG business from a production and marketing perspective, but finding resources that are available to be developed on a cost-effective and timely basis is a challenge," said Origin's King.
Bidders who lost out on the joint venture with Santos included energy majors Royal Dutch Shell Plc (RDSa.L) and ConocoPhillips (COP.N).
King said other companies not involved in the Santos joint venture bid had approached Origin about tapping its reserves.
"I can assure you that those who have approached us are companies of similar standing -- people with enormous and very credible credentials in the LNG business," he said.
Origin's oil and gas production assets account for about a quarter of its revenues, and have helped to offset tighter margins in its traditional retail energy business.
Goldman Sachs and Gresham Partners are advising BG, while Macquarie is advising Origin.
(Additional reporting by Sonali Paul and Mark Potter; Editing by Louise Ireland)