Shell, PetroChina Make $3 Billion Arrow Energy Offer

Royal Dutch Shell Plc and PetroChina Co. made an offer worth more than A$3.3 billion ($3 billion) to acquire Arrow Energy Ltd., the holder of Australia’s biggest coal-seam gas acreage, triggering a record gain in the shares.

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Arrow investors would receive A$4.45 a share in cash, 28 percent more than the March 5 close, plus stock in a new company made up of Arrow’s international division, the Brisbane-based energy company said in a statement today. The cash component of the offer values the company at A$3.3 billion based on the company’s 733 million shares outstanding.

Arrow rose as much as 47 percent to A$5.13 in Sydney, indicating investors may expect a higher bid. The acquisition would give Shell and PetroChina supplies of fuel that burns cleaner than coal and oil as countries seek to cut emissions of gases blamed for global warming. The offer compares with BG Group Plc’s A$5.2 billion purchase of Queensland Gas Co. in 2008 after a A$13.5 billion offer for Origin Energy Ltd. failed.

“The market is telling you they want more,” Robert Millner, chairman of Arrow shareholder Queensland-based New Hope Corp., said by phone today. New Hope, which owns almost 17 percent of Arrow, is “monitoring the situation to see how we’ll proceed.”

Arrow has acquired 100 percent of the A$2.2 billion Fisherman’s Landing project in Queensland, one of more than a dozen proposed liquefied natural gas ventures in Australia aiming to tap rising Asian demand. An increase in reserves along with the decline in Arrow’s shares since August made the company a more attractive takeover candidate, said Nik Burns, an analyst at RBS Morgans in Melbourne.

Higher Bid

“It seems a very opportunistic bid from Shell,” he said by phone today. “I wouldn’t be surprised if ultimately a higher bid would have to be put on the table to ensure the deal got over the line,” said Burns.

PetroChina and Shell may have to increase their offer, Burns said, adding that $5 a share may be a “fair price.”

Arrow’s board has recommended “shareholders take no action in relation to their Arrow shares,” the company said. The Australian gas explorer said it has named Citigroup and UBS AG as financial advisers and Mallesons as legal advisers.

Shell confirmed today it is in talks to acquire Arrow, excluding its international assets. The discussions may or may not lead to an agreement, Shell said. PetroChina Chairman Jiang Jiemin confirmed the company is joining the bid when asked in Beijing today. Arrow said it had received an offer from a company jointly owned by Shell and PetroChina.

Takeover Speculation

Arrow said Aug. 13 that talks with companies about its coal-seam gas assets included discussions about a potential takeover, but that it hadn’t received an offer. Speculation of a takeover offer contributed to a 55 percent increase in Arrow’s shares last year.

The stock gained 46 percent to A$5.08 in Sydney trading at 2:38 p.m. after earlier climbing to A$5.13, the highest value on record.

Shell, which has a 30 percent stake in Arrow’s coal-seam gas holdings in Queensland and a 10 percent interest in its international unit, made a A$3 billion offer for Arrow last year, with talks ending in stalemate, the Sunday Telegraph reported in August.

Buying Arrow would give Shell gas to feed multiple LNG production units, the analyst Burns said. The possibility of Arrow selling a stake in Fisherman’s Landing may have added to Shell’s reasons for seeking a bid, he said.

Arrow said last month it is considering selling a stake and taking on debt or offering shares to help finance the Fisherman’s Landing project.

“Arrow needs to raise significant funds, and that may require an equity sell-down, potentially introducing a third party that Shell may not have liked,” Burns said. Burns predicted Feb. 12 that Shell would consider a takeover offer.

Arrow’s international unit is drilling in India, China, Indonesia and Vietnam, and Arrow aims to boost gas production tenfold by 2015. It may offer as much as 20 percent of that division in a share sale in the second half of 2010, Arrow said Feb. 17.

BG Group

Queensland’s government is expecting as much as A$50 billion of investment in the state’s coal-seam gas resources as companies including U.K.-based BG Group and ConocoPhillips vie to export the fuel to Asia.

China plans to triple the use of gas to about 10 percent of energy consumption by 2020 to reduce reliance on coal.

“The gas industry is relatively underdeveloped and it has become an increasingly important source of energy in China,” Shi Yan, an energy analyst at UOB-Kay Hian Ltd. in Shanghai, said today. “It appears that this bid is in its early stages, but it’s part of China’s efforts to secure supply.”

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