Thailand's PTT E&P is in the box seat to complete a $1.9 billion takeover of Cove Energy Plc and gain access to massive gas finds off the coast of east Africa after Royal Dutch/Shell bowed out of a five-month bidding war.
Acquiring Cove will give PTT Exploration and Production exposure to the giant offshore discoveries made in East Africa in the past year. The area looks set to emerge as a major supply province and is well-situated to export into Asia.
Shell's exit from the bid fueled talk that the energy giant has found a new way to tap the market, possibly by buying a stake from another partner in the consortium, which may welcome the experience of an international oil major.
Cove owns an 8.5 percent stake in a Mozambique licence in the Rovuma offshore basin containing gas discoveries that could be a major provider of liquefied natural gas (LNG) to energy-starved Asia.
Cove's stock had been bid well above PTT's offer price of 240 pence a share in anticipation that Shell would raise its 220 pence offer.
Some analysts believe that with oil prices around historically high levels, the offers for the Cove deal were priced at a significant premium.
'In the current oil price environment, we see PTT E&P's aim to acquire the assets at an attractive valuation as a challenge,' Scott Darling, head of Asia Oil & Gas Research at Barclays said.
However, he said the fact that the project's reserve was not proven made it hard to evaluate and Barclays put fair value at anywhere between 175 pence and 395 pence.
Analysts said PTT E&P would need to invest $1 billion-$1.5 billion into the project annually over the next few years.
Cove shares, which closed at 275.5 pence last week, fell 13.6 percent on Monday to finish just shy of PTT's offer at 238.5 pence after the news.
Shell's decision is a blow to the hordes of hedge funds that bet on Shell outbidding PTT.
State-controlled PTT E&P, Asia's third-largest independent oil and gas explorer, has accesss to cash and brings strong domestic demand for future LNG contracts.
Thailand's demand for gas is rising as its economy develops. The country opened its first LNG import terminal in 2011 and plans to double capacity there to 10 million tonnes per year by 2016.
PTT E&P's newly appointed chief executive Tevin Vongvanich told Reuters in June the company plans to invest $2.6 billion in Southeast Asia over the next five years and was on track to triple production to 900,000 barrels of oil equivalent per day by 2020.
Penchan Charikasem, senior executive for corporate finance, told Reuters on Tuesday that the company had a 950 million pound ($1.5 billion) one-year bridge loan from UBS AG to back the Cove acquisition.
As part of the auction process, bids remain open until July 25.
PTT E&P is involved in 41 oil and gas exploration and development projects. It plans to boost production at existing fields with the start-up of the Montara field in Australia in late 2012.
Shell and PTT had been heading into the first formal takeover auction for a listed British company since 2008 after the bidding war.
Britain's takeover watchdog ruled on Friday that if neither suitor had declared its current offer final before 1600 GMT on Monday, an auction would start the next day. That could have involved bids submitted to daily deadlines until a winner was found.
'Shell Bidco has today decided not to revise its offer of 220 pence in cash for each share of Cove, and not take part in the auction procedure for Cove,' Shell said in a statement.
Shell gave no reason for withdrawing, but a source familiar with the bid process said it did not want to overpay and was confident it could get into east Africa gas action by other routes.
Analysts and investment bankers say Europe's largest oil and gas group has other opportunities to secure access to the gas finds off Mozambique and Tanzania that were the reason for the takeover attempt.
The consortium owning the Rovuma project would also need the expertise of an international major like Shell to help them develop and market the project, and that would mean it's likely for Shell to buy into the project from other partners in the future.
'This project is going to have a number of twists and turns in it over time. This is not going to be the end of the game,' said an investment banker who is not involved in the Cove deal.
Shell has much at stake in the LNG market, hence its strong desire to get involved in potential new supplies. U.S. explorer Anadarko has a 36.5 percent stake in the Mozambique licence, but little experience of LNG. A tie-up of some sort has long been mooted by analysts.
'I would be very surprised if they hadn't talked to everybody here,' said the source, who spoke on condition of anonymity. 'LNG is the hot stuff right now and Shell's investment committees are very aware of it. Something could well happen by the end of the year.'
Other points of entry to east Africa for Shell could include tie-ups with Italy's ENI, which has also found gas in Mozambique, or BG Group and Exxon Mobil, which have discoveries off the coast of Tanzania. ($1 = 0.6403 British pounds)
(Additional reporting by Sophie Sassard, Andrew Callus, the Asia Energy Desk, Charlie Zhu, Michael Flaherty and Pisit Changplayngam; Editing by David Cowell, Richard Chang, Muralikumar Anantharaman and Richard Pullin) Keywords: COVE OFFER/
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