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DJ Asian Stock Focus: Medco's Bid For Novus Opens Door

By Eric Johnston
Of DOW JONES NEWSWIRES

MELBOURNE (Dow Jones)--On Dec. 22, Medco Energi Internasional (MEDC.JK), one of
the biggest energy companies in Indonesia, interrupted the usual pre-Christmas
market lull with a hostile A$326 million bid for Novus Petroleum (NVS.AU), an
Australian midsize oil-and-gas firm.
The timing of the A$1.74-a-share offer meant that Novus's directors would have a
difficult time fending off the bid while investors were enjoying their annual
summer vacation.
Medco's bid also shone a spotlight on Australia's second-tier oil and gas stocks,
a sector that was overlooked until recently, but that many now see as ripe for
consolidation.
For years, companies including Tap Oil, Australian Worldwide Exploration and Roc
Oil have struggled under the shadow of upstream majors, often trading at a
discount to their net asset valuation, or NAV, ascribed by analysts.
But the Novus peers - with a market capitalization ranging between A$170 million
and A$510 million - are now likely takeover targets, according to Goldman Sachs
JBWere energy analyst Anthony Bishop in Melbourne. "All of these companies have
assets that would be attractive to international investors, particularly Roc Oil,
which has a number of operating interests in diverse locations," said Bishop, who
rates each company as a long-term buy.
Others point to Hardman Resources, a junior partner in Woodside Petroleum's
highly promising Chinguetti oil project, off the coast of Mauritania.
"The Australian sector is generally regarded as fairly cheap," said Oliver
Foster, an analyst specializing in oil and gas stocks at Euroz Securities in
Perth. "The potential for corporate activity going forward is looking better."
Since Medco launched its bid on Dec. 22, shares in each of these companies have
outperformed Australia's market barometer, the S&P/ASX-200 index, which has added
just 1.7%.
Australian Worldwide Exploration has gained 15%, Roc Oil rose 11%, Tap Oil
climbed 4.8% and Hardman - backed by the Chinguetti excitement - has gained 68%.

Medco Puts Sector Under Focus

While Medco offers shareholders a seemingly generous 41% premium to Novus's
average share price over the past year, directors of the Australian energy
company have urged investors to take no action, arguing the bid still undervalues
the company.
After hovering around A$1.80 after the Medco bid was launched, shares in Novus
rose to a 19-month high of A$1.93 on comments from Novus late last week that it
plans to meet with other potential buyers. Investors are betting that a rival
offer will emerge.
Still, most analyst valuations on Novus are up, around A$2 a share, a level that
would still make it a bargain for Medco. Like its peers, Novus has been trading
at a hefty discount to average NAV, a symptom of the caution investors have shown
toward the entire sector of exploration stocks.
Deutsche Bank, which ascribes an NAV on Novus of A$2.01, notes that the stock has
been trading at an average of about 22% discount to valuation since 1998, given
that its program of gas exploration in the U.S. is still in its infancy and has
yet to yield results.
But a lift in stock prices across the sector since Medco's bid shows investors
are beginning to realize midsize companies are undervalued, said portfolio
manager Ian Lang. Lang specializes in high-growth stocks with Portfolio Partners,
a unit of Aviva of the U.K.
"Medco has put the sector under focus; it has made people realize that maybe
you've got to have the share price a bit closer to valuation or you are giving
away value when someone makes a bid for it below valuation," he said. This cycle
has repeated itself for years, the fund manager noted. "Of course, if Novus gets
taken over and the sector goes back to sleep, you'll see the focus moves away
from the small ones again and there will be some good buying opportunities," Lang
said.
For a bid to be successful, Medco would need to obtain the support of Japan
trading house Mitsui, which acquired a 13% stake in Novus 16 months ago at an
average price of A$2.35 a share, well above the current offer on the table.
While Mitsui also has been cited as a possible Novus bidder, Goldman Sachs
JBWere's Bishop points out that a strong rise in the Australian dollar has turned
its Novus investment positive when translated to U.S. dollars. When converted
back to yen, Mitsui's exit price would be about even. So far, the Japanese
trading house has declined to comment about what it plans to do with its stake.
So as some investors continue to believe a rival offer could emerge, Medco, which
is keen to offset its declining reserves, may be forced to sweeten its offer to
at least what analysts contend is fair value, or higher. Given Medco is holding
surplus cash, it may be worthwhile for investors to hold out and not be too hasty
in giving away value.
-By Eric Johnston, Dow Jones Newswires; (613) 9614 2663;
[email protected]

(END) Dow Jones Newswires