More For Origin.

Despite a small fall yesterday, the markets continues to expect a higher offer for Origin Energy, either from its suitor, BG Group of Britain, or an as yet an unrevealed third party.

Origin shares eased 16c to $16.26 compared to the BG hostile offer of $15.50. Origin (ORG) shares traded through the range $16.27 to $16.49.

Certainly the reaction from analysts yesterday was that BG or someone else would have to pay more.

Merrill Lynch analysts said “We doubt that BG seriously thinks Origin investors would accept.

“By emphasizing the speculative nature of the Origin reserves upgrade, we suspect BG is softening the market up for a higher bid.”

Origin shares are above the offer price because hedge funds and smaller punters are gambling on someone else emerging with a higher offer.

They might be waiting a while, even though there has been a rise in interest in the Queensland coal seam methane industry since BG did a deal with Queensland Gas, bid for Origin and then re-bid, and Santos and Arrow did value enhancing deals worth over $3.2 billion.

The reason the market might be waiting is who will be a counter bidder. There are lots of names but few real candidates around. For example, there was every chance for the likes of Shell, (which got into bed with Arrow Energy) to approach Origin in May when it was being seduced by BG. But there were no counter offers and until Santos’ deal with Petronas emerged, it looked as though BG would win.

As part of its hostile attack, BG Group has attacked Origin’s suggestion that its coal-seam gas reserves were worth $16 billion as overstating their value, and cast doubt on any LNG project to be developed by Origin.

Some analysts reckon that BG is trying to tie up more reserves because it knows it won’t have enough gas in reserve from its deal with Queensland Gas to expand their planned Gladstone LNG plant.

Credit Suisse analysts said the BG takeover move may trigger a bidding war for Origin: its report yesterday was headlined: “Tell ‘em they’re dreamin.”

“If other parties are willing to pay up for the Origin reserves, as we expect, this will further erode the likelihood of the BG bid succeeding,” Credit Suisse analysts said.

ABN Amro said that BG had strong aspirations to have Australia as one of its major LNG exporting hubs in Asia and failure to strike a deal with Origin would result in these plans taking a major step backwards. “We still would not rule out BG coming back with a bid closer to our A$17.50 valuation, which we believe would get board approval,” ABN told its clients.

Merrill Lynch said that ” We doubt that BG seriously thinks ORG investors would accept its $15.50 hostile bid. We believe the 40% retail shareholders will follow the Board and institutions are unlikely to accept a bid pitched below last close. But by emphasising the speculative nature of the ORG reserves upgrades, we suspect BG is softening the market up for a higher bid.”

Merrill’s said “investors will side with ORG in the face of uncertainty: BG has 3 issues with market valuations re ORG, specifically: (1) the appropriate CSM multiple; (2) the validity of ORG’s reserves upgrades; & (3) the impact of reversionary rights. But we believe that Aussie investors will likely side with ORG in a valuation argument. BG has just saddled into town, whilst the ORG management team has created significant value since its IPO.

“BG acknowledges that by going hostile it has effectively ruled itself out of partnering with ORG on LNG. BG’s management have said that they are committed to acquiring the entire ORG, citing growth potential in CCGT opportunities as well as retailing.

“BG’s strategy seems to be to throw some mud at ORG’s valuation process, see if any sticks and drags down the share price. We think that only a bid near our fair value would be considered by shareholders, but this may take some time to materialise.”

JPMorgan analysts said that “We believe that in order for Origin shareholders to make an informed decision regarding the BG offer, Origin will need to provide further information regarding the reversionary clauses and the reserve upgrades”.

JP Morgan said that there is “a high probability of an increased offer from BG. Although we don’t expect BG to pay up to the $26.30 implied by the Santos/Petronas transaction, we believe Origin management will be able to extract up to $18 (circa 16% premium) per share if they decide to pursue the BG offer; or b) an alternative LNG scenario to be chosen by Origin management.”

UBS was in a similar vein: it said “ORG management need to supply detail, BG Group must issue a statement within 2 months and ORG then has 15 days to respond. We look for detail particularly on the reversionary rights. In our opinion, ORG has not been much forthcoming on that topic.

“Contrary to BG Group’s opinion that ORG’s reserves have yet to be proved, we believe BG’s real reserve issue is that it’s not clear that QGC has enough gas for the vital second train. ORG’s gas may well be the difference between BG having a great project and an average one. Further if ORG wishes it may well be able to slow the pace of development in the QGC/ORG.”

“Ultimately we think ORG’s gas could be coupled with STO’s gas, or QGC’s gas or even AOE’s gas to produce a much bigger and stronger LNG project. Although BG may question the quantity of ORG’s reserves, we think that if ORG had 20TCF of 2P proven reserves they would be worth more than BG is offering.

“On balance, for these reasons we continue to think it quite possible that an alternative party may emerge.”

This Information is provided to you by the Australasian Investment Review (AIR).
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