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Independent Expert’s Report in Relation to
Guns without Roses
M&A Division
The credit crunch has hit every corner of the global market during the last ten months, when BG Group announced its takeover bid for Queensland Gas Company on 28 October 2008. It indicates that international players’ interest on Queensland’s rich Coal Seam Gas (CSG) reserves has not been drawn back, after Conoco Philips/Origin deal is proven to be an overbid. As always as they do, management of QGC still think an Independent Expert Report is needed to reflect best interest of its shareholders. Therefore, they required Guns without Roses Pty Limit (GWR), to engage an evaluation of the deal.
First of all, it is important to look at what does BG get from its eighty percent premium offer. QGC’s 8,200 PJ 3P CSG resources are apparently the core target BG is pursuing. With this reserve on hand, BG is able to set its heart at rest at least for a moment, not worrying about the supply of its 70% owned Curtis LNG facility, which will commence production on 2013. It also will have an expert team who proved to be triumphant on exploration and production.
To specify all the benefits, we use Discounting Cash Flow method to valuate equity price of QGC, with implied its standalone value of $3.94 (Constant FCFE TV) and $4.12 (EBITDA Multiple TV) per share. We also rely on an industry rule of thumb, comparing with similar transactions and firms trading on ASX. The value range is between $4.72 and $9.39 per share, considering control premium effect and some other fudge factors. At last, the synergies to be realised from the deal is considered to be huge in terms of revenue enhancement, cost saving and financial synergies.
On the side of QGC share holders, the offer from BG is generous, as well as the “friendly” to current management and shareholders. The deal is concluded as a win-win deal as both parties will get reasonable return from the transaction. Without the combination, synergies are not to be realised. QGC shareholders will end up with its standalone value, and take more risks under current economic environment. In addition to near two hundred times return created by the management since the company went afloat, the offer is undoubtedly another surprise during the hard times.
Background
There is no requirement for an independent expert’s report pursuant to the Corporations Act, 2001 or the ASX Listing Rules in relation to the BG Proposal. However, the directors of QGC have engaged Guns without Roses (GWR) to prepare an independent expert’s report setting out whether, in its opinion, the BG Proposal is in the best interests of QGC shareholders and to state reasons for that opinion.
It is a matter for individual shareholders as to whether to buy, hold or sell shares in QGC. This is an investment decision upon which GWR does not offer an opinion. Shareholders should consult their own professional adviser in this regard.
Introduction
On 28 October 2008, BG International (AUS) announced an on market takeover bid for 100% ordinary shares of Queensland Gas Company (QGC). The bid came after the failure of BG’s six-month-long pursuit of Origin Energy Ltd (ORG), which is deemed the event that kick-started the boom in interest in Australian Coal Seam Gas (CSG) producers. Anyway, BG has now returned to the fray - this time with a $4.6 billion bid for QGC. With oil prices rising and buyers looking for cleaner-burning fuel, global LNG demand is forecast to rise to nearly 400 million tonnes per annum (mtpa) in 2020, up from 172 mtpa in 2007. Asian demand, which accounts for two third of global LNG consumption, could grow to just above 200 mtpa in2020. Other foreign playmakers such as US-based Conoco Philips, Malaysia’s state-owned Petronas, UK Oil and Gas Group have created a fertile market for M&A activity in this “Dash for Gas” game, with plans to build LNG export plants near Gladstone.
Deal Overview
The deal
Bidder:
| BG International (Aus) Investments Pty Ltd
|
| ACN 131 104 651
| To Acquire:
| 100% of ordinary shares
| Cash consideration of
| $5.70 per share
| Target:
| Queensland Gas Company Ltd
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| ABN 11 059 642 553
| Advisers:
| Financial Advisers:
|
| JP Morgan
|
| Goldman Sachs JB Were
|
| Morgan Stanley Australia Ltd
|
| Legal Adviser
|
| Mallesons Stephen Jacques
|
Table 1
2.
Consideration
This is an unconditional all cash offer of $5.75 per share, representing 80% premium over previous closing price, with the unanimous recommendation of QGC Board. It represents premium of:
·
80 per cent on QGC’s share price prior to the announcement of the Offer;
·
58 per cent based on QGC’s 30-day VWAP; and
·
34 per cent based on QGC’s 90-day VWAP.
3.
Governance and Transferability, Conditions Precedent and Finance
As stated in its Bidder’s Statement, BG Group intends to retain QGC’s people, brand, existing assets and operation, as well as the head office in Brisbane. BG has received advice from the Foreign Investment Review Board that there are no objections to BG Group’s plans. The necessary funds to pay the consideration is to be met through BG Group’s cash reserves, supplemented, as required, by BG Group’s existing committed facilities.
The Players
- The Acquirer: BG Group plc
BG Group is a leading gas major, with operations in 27 countries across five continents employing around 5,000 employees. It is a top 10 UK business, with a market capitalisation of approximately £24 billion ($61 billion) as at 24 October 2008. BG Group is engaged in the exploration, development, production, transmission, distribution and supply of natural gas, and gas-fired power generation to industrialised countries and developing markets around the world. In relation to the supply of natural gas, it distributes gas to domestic markets and also exports LNG to international markets, supported by a dedicated shipping fleet.
2.
The Target: QGC
a. Brief History
QGC is a rapidly evolving integrated energy business strategically positioned to meet rising demand for its CSG, power and water. QGC listed on ASX in August 2000 with only a market capitalisation of $16 million, which is now one of Queensland’s largest ASX listed companies with a market capitalisation of more than $2.9 billion (based on a closing price of $3.20). A list of important events since 2008 is as following:
·
In February 2008, QGC and BG Group announced an alliance to enable the annual export of 3-4 million tonnes of LNG for 20 years.
·
On 10 June 2008, QGC and Roma Petroleum announced a recommended takeover offer by QGC for all of the issued share capital in Roma Petroleum. The QGC offer for Roma Petroleum has been extended to 31 October 2008.
·
On 23 June 2008, QGC was formally admitted to the S&P/ASX 100 index.
·
On 20 August 2008, QGC and Sunshine Gas announced a recommended takeover offer by QGC for all of the issued share capital in Sunshine Gas.
·
In February 2009, QGC is expected to start supplying commercial quantities of gas to its new Condamine Power Station, which will produce 140 megawatts of electricity only utilising water produced as a by-product of CSG production.
b. Reserves
Category
| | | |
| | | | Total Proved (1P)
| | | | Total Proved + Probable (2P)
| | | | Total Proved + Probable + Possible (3P)
| | | |
Table 2
At the time of the bid announcement, total 3P reserve has reached 8,200 PJ, including 3,172 PJ 2P reserve and 749 PJ 1P reserve.
c.
Gas production
By 30 June 2008, gas production had increased to 91.1 TJ per day. During this period QGC’s production potential rose to 108.2 TJ per day (equivalent to 39.5 PJ a year). QGC / BG Group’s combined revenue from gas sales for the financial year ended 30 June 2008 was $59.6 million, from sales of 23.2 PJ of gas.
3.
Alliance history between BG and QGC
In February 2008, BG Group and QGC announced an alliance to co-operate in CSG exploration and production, marketing and an LNG export facility on the Queensland coast. April 2008, BG Group acquired a 9.9 per cent stake in QGC and a 20 per cent interest in QGC’s coal seam gas assets in the Surat Basin. BG Group and QGC are also developing the Queensland Curtis LNG Project (BG Group 70 per cent; QGC 30 per cent), to be built on Curtis Island in Gladstone. Under the terms of the agreement, BG will purchase all LNG production for a 20 year period.
Since the alliance was formed, QGC and BG Group have made good progress together. QGC has announced an increase in reserves held by QGC and BG Group. The Queensland Curtis LNG Project is being planned for capacity of up to 12 million tonnes of LNG a year, with two trains of LNG planned in the first phase of development producing 7.5 million tonnes per annum.
Rationales of the Deal
External reasons
The external environments impose crucial effects on the BG’s acquisition. Having experienced the staggering big dipper of oil price, substitute energy CSG demand is forecasted to rise to nearly 400 million tonnes per annum (mtpa) in 2020 up from 172 mtpa in 2007 (BG, 2008). Queensland’s coal seam gas industry has experienced remarkable growth over the last ten years. Hence, the acquisition of QGC provides BG a surge of interest taking advantage of the increasing global demand for gas. In addition, the global financial crisis has pulled down the oil and gas prices from their peaks substantially.
Internal reasons
BG group mainly aims to grow its strength of the reserves and resources base so as to expand its market in the Asian-Pacific region. The proposed acquisition would enlarge BG Group’s presence in Australia and broaden its business profile with the addition of QGC’s CSG business. Other than that, the proposed acquisition would provide the opportunity to create material additional value through efficiencies from the integration of QGC’s and BG Group’s assets and skills under single company ownership. Moreover, with its skills and experience in LNG project management and proven track record in the commercialisation of reserves to supply domestic gas, electricity and LNG export markets, BG desires to fill its tank by acquiring as much as reserve it can to support the estimated demand of a 20 mtpa LNG demand by next decade (BG, 2008).
Valuation
Discounting Cash flow
Notwithstanding many limitations we are not going to discuss in detail, discounted cash flow valuations are used as our primary methodology as it is most commonly used for valuation of start-up projects as well as established industrial businesses.
2.
Pro Forma Free Cash Flows
Pro Forma financial statements (Appendix A) are constructed base on 2006-2008 condensed reports (QGC Target Statement), which are post-merger data including Roma and Sunshine. In this case, 10-year pro forma financial statements from 2009-2018 with the terminal year 2018 are constructed with following assumptions (Appendix B):
·
Revenue prediction. Although the gas prices are temporarily low at the moment, according to Grant Samuel’s analysis, the price of gas would pick up from 2011(Appendix C). Revenues growth rate is thought to increase from 60% to double until the LNG project commences to operate from 2013, and then decrease gradually to 8% annually.
·
Operating cost (excluding depreciation and amortization) is to be 70% of revenue.
·
Depreciation and amortization expense is 10% of previous year’s fixed assets.
·
Cash and cash equivalent maintains 7% of revenue.
·
Other current asset is to be one third of revenue.
·
Non-current asset is considered to increase at a rate of 5%.
·
Current liability is considered to be 15% of revenue
·
30% fixed assets are financed by long term debt.
·
An inflation rate of 3%.
·
The interest rate of debt is 5.06%
·
Efficient income tax remains 30%
Using 10 year T-bond yield rate of 4.94% (Average of Nov, 2008, RBA) as proxy for risk free rate, rf, an equity ß of 1.31 (Bloomberg) and a risk premium of 6.3% suggested by Brailsford et al (2008), Re is equal to 12.17%. 5.06% of cost of debt is based on average 30 days Bank-accepted Bill on Nov, 2008, as the company has 4-year average 10% negative debt.
Re
|
| Rd=5.06%
|
| =4.94+1.31 x 6.5=13.5%
|
| WACC
| = (Re x E/V) + (Rd x (1-t) x D/V)
|
| = (13.5% x 110.4%) +[5.06% x 0.7 x (-10.4%)] =14.54%
|
Table 3
To determine the terminal value, FCFE at the terminal year (2018) is forecasted to grow in line with RBA target inflation rate of 3%. As it is absurd to use current Price to EBITDA multiple for valuation considering the stage of the industry, long term Price/EBITDA multiple will become relatively stable. A multiple of 5 x is applied for double checking purpose only. The reason will be discussed soon enough.
The standalone value indicated by the DCF calculation is $3.94 per share by constant FCF growth model, and $4.12 by EBITDA multiple model, indicating 23% and 29% premium separately over the market price, when the offer 5.75 is 80% premium over the market price.
Transaction Metrics
This methodology is most appropriate for industrial businesses with a substantial operating history and a consistent earnings trend that is sufficiently stable to be indicative of ongoing earnings potential. Oil and gas industry generally recognize that oil and gas production may deplete, and that processing plants, refineries, pipelines and other infrastructure have finite lives ranging from a few years to a few decades. Based on recent and historical experience, the oil and gas industry also recognizes that energy prices are volatile and can increase or decrease at rates not directly related to general inflation (Hawkins, 2003). CSG industry is only developed in less than a decade. Most of these firms are start-up businesses, with an erratic earnings pattern, unusual capital expenditure requirements and different developing stages. The data we collected (Appendix D) for earnings multiple analysis prove that it is quite unreliable to adopt this methodology.
2.
Industry rule of thumb
In addition to our valuation based on DCF, and a complement to the absence of multiple valuation, we have considered an industry rule of thumb, by estimating the value implied by our valuation of QGC on a $/GJ basis and comparing this to those achieved in other recent comparable transactions. The methodology is widely used in the industry, notwithstanding it is far from perfection.
In selecting an appropriate $/GJ benchmark to apply to QGC we have had regard to the implied $/GJ multiples for comparable CSG exploration and production companies and recent transactions as presented in Appendix E and F. Due to the increased acceptance of CSG, we have placed more reliance on the transactions which occurred during 2008.
The average $/GJ multiple on a 2P basis for the observed comparable companies and the transactions is 1.49 and 2.77. The average $/GJ multiple on a 3P basis is 0.53 and 1.13, respectively. We consider these multiples provide a reasonable price range achievable for certified reserves.
| Units
| Low
| High
| Low Value
| High Value
|
| PJ
| (Entities)
| (Deals)
| A$m
| A$m
| QGC’s estimated 2P reserves
| 3,172
| 1.49
| 2.77
| 4726 m
| 8786 m
| QGC’s estimated 3P reserves
| 8,200
| 0.53
| 1.13
| 4346 m
| 9266 m
| Average value
| | | | 4536 m
| 9026 m
| Shares on issue
| | | | 961 m
| 961 m
| Implied value of QGC/share
| | | | $4.72
| $9.39
|
Table 4
The implied value range of the company is between $4.72 and $9.39 per share. Apparently, considering that difference of the rule of thumb can be calculated by analysts based on limited publicly available information, the $/GJ rule of thumb does not provide strong evidence of the value of a CSG company for the reasons such as it ignores any potential upside in contingent resources, different stage of development and potential yields, and capability of operating and develop the tenements and so forth (Samuel Analysis, 2008). However, it turns out that the offer is not far from reality, as it contains a control premium comparing to the DCF analysis.
Synergies
With very little information disclosed by BG and lack of detail plan, the estimation of synergies can be very judgmental. Possible synergies of the acquisition are considered from three parts: revenue enhancement, cost reduction and financial synergies.
In the absence of a plan to change the management or moving HQ, the friendly takeover is unlikely to expend large amount of money for the restructuring, in addition to their consolidated relationship. The cost can be, however, roughly cancelled by benefits from delisting from ASX.
There will be obvious increase in market power for the merged group as they continuously improve their cooperation. Bargaining power of QGC is to be much stronger, being backed up by an international player, especially on oversea business. QGC can exploit remarkable benefits from BG’s well developed transmission and distribution network, branding and engineering excellence. The annual 3 to 4 million tonnes production from the LNG project is almost guaranteed by BG. The marriage will also benefit BG in terms of local political costs savings.
The combination will also enjoy cost savings in relation to economies of scope and learning economies, as well as elimination of common costs. Integration of supply chain eliminates conflict of interests from the two parties. Expertise and experience from each party can be shared to help both run more efficiently. Other common costs such as HQ offices and technology systems can be reduced.
The BG Offer provides compelling and tangible value for QGC Shareholders in a time of uncertainty. The global financial crisis has severely restricted the availability of finance and the cost of capital (QGC Target Statement). With a WACC of 7% (Morgan Stanley, 2008), the value of QGC can essentially make the deal a steal, comparing to QGC’s own cost of capital of 14.54%. Moreover, BG can exploit significant advantage by changing the capital structure of QGC, which is currently with 30% negative debt, making it a better target.
Summary & Recommendations
BG disappointment at missing out on the Origin deal will have been offset somewhat by purchase of QGC, if the deal can go ahead. The high price paid by Conoco/Origin deal reflected excited optimism about the CSG industry, may be another comfort to BG and incentive to pay such an unusual premium to existing shareholders.
Rationales behind the deal are with little doubt with regard to the potential compelling synergies. The ownership of more gas reserve enables BG become a leader in CSG industry in Australia and increases its presence in Asian energy market. $5.75 per share is obviously much higher than transactions a year ago, and not appealing at all under the falling of the gas price in the past a few months. However, it is a deal predicated on what happens in four or five years, when the LNG plants are up and running. It looks absurd paying at 60 times forecast sales and almost 150 times earnings. But BG is paying for potential, not functioning assets, considering the control premium and, again, the synergies.
For shareholders of QGC, we deem that BG is paying what represents fair value of the shares, as indicated in our DCF ($3.94 and $4.12) and the industry rule of thumb ($4.72 to $9.39, with control premium and synergies paid) valuations. The offer implies BG is paying at least reasonable part of the synergies to QGC. The risk of QGC will be higher without a strong experienced player behind it, especially in the current economic downturn environment. Moreover, without the combination of the two groups, synergies contributable to the premium will apparently not be realised. The price will drop if the deal is not executed. It is a win-win deal considering what will get from each party. And we conclude it is for both parties’ best interest to engage the deal.
Definitions and interpretation
·
1P, 2P, 3P Reserves means all Reserves certified to be ‘Proved’, ‘Probable’ plus ‘Possible’ in accordance with the SPE-PRMS.
·
CSG means coal seam gas, which is natural gas (mostly methane) contained within coals.
·
EBITDA means earnings before interest, tax, depreciation and amortisation.
·
FCFE means Free Cash Flow to Equity
·
GJ means Gigajoule
·
LNG means liquefied natural gas.
·
Origin means Origin Energy CSG Limited and, as applicable, its related bodies corporate.
·
PJ means petajoule (being 1 x 1015 joules of energy).
·
Reserve means a Reserve as defined in the SPE-PRMS.
·
Sunshine means Sunshine Gas Limited ACN 098 563 663.
- Tenement means an ATP, PEL, PL, PLA, PPL, PPLA, PPRL, PRL or PSL
·
VWAP means the volume weighted average price of a security.
References
BG Group, 2008, Proposed Acquisition of QGC, Analyst Presentation, London
Chris Hutton, 2008, Wilson HTM Investment Group Resources Delivering Energy
Hawkins, D, 2003, Valuation methodologies and the use of EBITDA, Energy Processing Canada
Morgan Stanley, 2008, 20 for 2012, Morgan Stanley Research, E24. [Online]http://www.e24.se/multimedia/archive/00123/D_rf_r__r_dessa_20__123251a.pdf
ORGB, 2008, Origin Energy Ltd - Target's StatementO&G Deals 2008 Annual Review Mergers and acquisitions activity within the global oil and gas market
[Online]http://www.pwc.com/gx/eng/about/ind/energy/OilGasDeals_Final_2008.pdf
QGCC, 2008, BG International (Aus) Investments Pty Ltd - Bidder's StatementQ**, 2008, Queensland Gas Company Ltd - Target's StatementSHGB, 2008, Sunshine Gas Ltd - Target's Statement
Tim Brailsford, John C. Handley and Krishnan Maheswaran Re-examination of the Historical Equity Risk Premium in Australia Accounting and Finance, 2008, vol. 48, issue 1, pages 73-97
Appendices
Appendix C: East Coast Domestic Gas Price (ex well head) Estimates ($ per GJ real 2008)
| |
| 2008 to 2010
| 2011 to 2015
| 2016 onwards
| Gas Price Path A
| $3.50
| $4.50
| $6.50
| Gas Price Path B
| $3.50
| $5.50
| $7.50
|
Source: EnergyQuest Pty Ltd (August 2008), Origin and Grant Samuel analysis
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发表于 2009-5-31 14:15
