The War Over Cove

Published Wed, May 30th, 2012   Jason Simpkins, Energy Editor

Anyone who doubts natural gas will recover from its surly depths would do well to look at the bidding war that’s taking place in East Africa.

Las week, PTT Exploration & Production (PINK: PEXNY) one-upped Royal Dutch Shell (NYSE: RDS.A, RDS.B) with a $1.9 billion buyout offer for Cove Energy (PINK: CNVGF).

This is the second time the Bangkok-based PTT has raised the stakes on Shell. The first was in February after Shell offered $1.6 billion for Cove. PTT swooped in with a $1.8 billion bid, which Shell matched last month.

Having now been outbid twice, Shell has extended its offer to June 13. The company said it’s “considering its options and will make a further announcement if appropriate.”

So what makes Cove worth fighting for?

Trillions of cubic feet of natural gas buried off the eastern coast of Africa. Natural gas that one day will be used to fuel the fast-growing economies of Asia.

Cove has an 8.5% stake in Rovuma Area 1 off the coast of Mozambique, where its partner, Anadarko Petroleum (NYSE: APC), recently found as much as 30 trillion cubic feet of natural gas.

Additionally, earlier this month, Anadarko and Cove said another seven trillion to 20 trillion cubic feet of recoverable gas had been discovered in the Golfinho exploration well, which is also located in the Rovuma Basin.

Italy’s Eni SpA (NYSE: E) has also made significant discoveries near Cove’s acreage, and Shell has said it’s interested in those, too.

These discoveries are large and accessible enough to justify building a liquefied natural gas (LNG) plant onshore to freeze and export the fuel to Asia – a market whose energy demand is growing exponentially.

The War for the Pacific

Worldwide demand for natural gas for power generation is projected to rise 85% over the next 30 years, representing nearly half of total gas demand.

And the overwhelming majority of that growth is set to take place in Asia, where the economies of China, India and others are rapidly growing.

India’s gas demand alone is expected to rise to 1.5 billion cubic feet a day by 2017 from about 55 million cubic feet now, according to the country’s oil minister, S. Jaipal Reddy.

To help accommodate that demand, India’s annual LNG re-gasification capacity would increase from its current 13.5 million metric tons to 48 million metric tons by 2017.

Meanwhile, China intends to double its use of gas to 853 billion cubic feet a day, or 8% of its total energy supply, by 2015.

Given this burgeoning energy demand in Asia, Shell aims to secure long-term profits by turning East Africa into a natural gas super-hub. However, the company’s going to have to go through PTT to accomplish that.

With so much at stake, which company has the inside track on securing Cove’s assets?

Simply put, Shell does.

It’s no secret that the Mozambique government would prefer a company with LNG experience. That gives Shell – Europe’s largest energy company – the advantage over the much smaller PTT.

Still, that doesn’t make Shell a shoe-in. Mozambique has said that the sale of Cove would be subject to a 12.8% capital gains tax, so the bigger the bid, the bigger the government’s take. For that reason alone, it’s unlikely that the government would force Cove to accept a lower offer.

Cove would have to pay a $17 million breakup fee to evade the deal it signed with Shell last month, but the company has advised shareholders to accept PTT’s bid anyway, which is 9.1% higher than what Shell offered last month.

Shell could counterbid as much as 300 pence a share for the London-based Cove – up from its current 220 pence per share offer – and the bid would still be on par with what other energy companies have paid for similar assets, according to Investec oil analyst, Stuart Joyner.

For now, Shell will bide its time, hoping to leverage its government support. But another bid is likely.

If PTT wins out, it would be the largest-ever overseas takeover by a Thai company.

Cheers,

Jason Simpkins