THE SPECTATORS Snowball effect Bartholomeusz: AGL moves into position
Trading halts for three companies this morning is a strong signal that the latest bout of consolidation of the coal seam gas sector is about to get underway. Unlike the flurry of large-scale activity throughout this year, however, this time the action is moving into NSW.
The securities of AGL, Sydney Gas and AJ Lucas Group were all placed in trading halts this morning: AGL’s and AJ Lucas’s because they are both involved in discussions concerning a "material transaction". Sydney Gas is in a trading halt "in relation to a takeover bid." AJ Lucas became Sydney Gas’s major shareholder, with about 20 per cent of its capital, this year.
As the joint venture partner of Sydney Gas in its Hunter Valley and Camden and Sydney projects, AGL already has its foot on the group’s key resources.
Sydney Gas is potentially of real strategic consequence for AGL, the largest supplier of gas into Sydney and Newcastle.
There is an expectation of an increasing shortfall of gas for the Sydney market over the next decade that coal seam gas is expected to meet. With the more deeply explored and developed Queensland coal seam gas fields earmarked for the plethora of export LNG plants on the drawing boards, NSW gas will come into increasing focus.
Sydney Gas’s reserves and prospects are located close to the NSW electricity grid and the main gas transmission pipelines into Newcastle and Sydney. It already has long-term contracts to supply AGL. The joint venture partners have talked about an ambition of supplying up to 20 per cent of the existing NSW gas market by 2015 from its resources at Camden and the Hunter Valley and up to 50 per cent beyond 2015.
AGL, having sold its stake in Queensland Gas Company to BG Group for $1.2 billion and its oil and gas interest in Papua New Guinea for $1.1 billion this year is well placed for expansion. As part of the BG deal AGL was granted options over more than 1000 petajoules of Queensland gas reserves and exploration acreage, options that would cost $856 million to exercise.
Sydney Gas wouldn’t be a major move for AGL. It has a market capitalisation of only about $110 million, although the spate of coal seam gas transactions – including Arrow Energy’s $551 million bid for Pure Energy this week – says that market prices aren’t much of a guide to takeover values in the sector. Arrow offered about $5.40 a share for Pure when the target’s shares had been trading at less than $1 only about six weeks ago.
In the current environment there is likely to be significant consolidation of the smaller and more weakly-funded players in coal seam gas as the Queensland LNG players look to secure the resources needed to under-pin two-train LNG projects and the bigger players move to pre-empt the likely positive (for producers) eventual impact of the LNG projects on domestic gas prices.
There are vast amounts of gas in the Sydney Basin so the prospect of rising gas prices and shortfalls in supply ought to see what has until now been a Queensland-focused land-grab spill into NSW.
There are some transmission constraints in supplying Queensland gas into NSW and there would be benefits for the sector in displacing Queensland gas contracted to NSW customers – freeing it up for the LNG plants – with local production.
AGK Price at posting:
$15.45 Sentiment: Buy Disclosure: Held
