$13 billion not enough for Origin: analysts

ARE the market and UK giant BG Group undervaluing Australian coal seam methane?
$13 billion not enough for Origin: analysts $13 billion not enough for Origin: analysts $13 billion not enough for Origin: analysts $13 billion not enough for Origin: analysts $13 billion not enough for Origin: analysts

According to a range of analysts, BG Group's massive $12.9 billion offer for Origin Energy undervalues the Australian company's coal seam methane assets in Queensland.

The $14.70 per share takeover bid was initially seen by many commentators, including PNN, as a credible attempt at a "knockout punch", an offer too good to refuse that would lead to a swift merger.

But analysts have set target prices ranging from $15-16.70 per share with some saying the current bid did not reflect longer-term earnings for the CSM producer.

Origin holds a wide range of assets, including conventional oil and gas, and electricity generation and retail, but its CSM assets may now be the most significant part of the business. UBS analyst Gordon Ramsay said his firm believed that BG was valuing Origin's CSM reserves at $6.5 billion, according to the Australian.

"We believe that BG may need to pay more to win control because of the hidden value of Origin's massive Queensland coal seam gas assets," the Australian Financial Review quoted EL & C Baillieu analyst Ivor Ries as saying.

Morgan Stanley's Stuart Baker told the Australian there was potential for the bid to be sweetened, while Credit Suisse said it believed a target price of $16.33 a share took into account realistic upside from CSM reserves.

But Origin's shares are currently trading just below the $14 mark, indicating that the market believes BG is offering a good price. If the analysts are correct, Origin - and perhaps several other CSM companies - have more upside than most people realise.

BG is the world's second-largest LNG trader, and its offer is widely seen as a move to secure Origin's CSM for BG's $8 billion liquefied natural gas joint venture in Gladstone, Queensland in partnership with Queensland Gas Company.

In buying Origin, BG would be guaranteeing it had enough gas for the first train at Queensland Curtis LNG, even if there were unforeseen problems in QGC's development drilling to prove up sufficient gas for the plant.

The first train is likely to be followed by one or two others.

QGC has said its Queensland Curtis LNG project would be completed sooner and with increased capacity if BG's offer for Origin succeeded, lead to speculation that if the takeover succeeds, QGC and Origin will each feed one LNG train in a two-train project.

There is also speculation that there may even be a third train, which would be a gas-gathering facility, drawing feedstock from multiple suppliers.

Origin has been cautious since announcing the bid, urging its shareholders to take no action before serious discussions are held with the UK major.

Meanwhile, BG chairman Robert Wilson is said to be considering a visit to discuss the offer with Origin.

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